TMI Blog1998 (1) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... losses in respect of managing agency of UP Co-operative Society and losses of Mahadev Sugar Mills Shares? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in increasing allowable deduction by another ₹ 18,000 for each of the three years (1961-62, 1962-63 and 1963-64)? 2. We have heard Sri Rajesh Kumar Agarwal, learned standing counsel for the Commissioner and Shri P.N. Batham, learned counsel for the assessee. The relevant facts giving rise to the aforesaid questions have been stated by the Tribunal in the statement of case as under : 2. The first contention which is common to all the three years relates to the claim for deduction of interest. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment year 1961-62, the Income Tax Officer allowed the assessee deduction of interest only to the extent of ₹ 30,000 on the ground that borrowings in respect of bad debt of Tika Ram, managing agency of Dhampur Sugar Mills Ltd., payment of loss to UP Co-operative Federation, loss in Mahadev Sugar Mills, bad debts in the account of M/s Banche and an amount of ₹ 1,068 from National Air Academy were not for purposes of business or for making or earning income from any other source. For the assessment years 1962-63 the Income Tax Officer allowed interest amounting to ₹ 37,988 out of which he related the amount of ₹ 7,303 to the investment in shares and ₹ 30,685 to speculation business. For the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to the purpose which actuated the borrowing when the borrowing was first made. It was conceded that interest allowable in respect of speculation business had to be separately allocated. The departmental representative, on the other hand, relied on the orders of the authorities below and on the decision in [1935]3ITR11(Mad) . 4. In our view this question of interest in cases of this kind always bristles with problems especially when interest is paid on borrowings which are used for diverse purposes. The legal principle relevant to the determination of issue of this kind are, however, fairly clear. The unproductive and personal expenditure is first to be related to the assessees own capital. Borrowing does not cease to be bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance would still be shown in the balance sheet for set off against personal expenditure while there will be a larger debit balance in another personal account. Such a position will not be in conformity with the fact of the situation. The credit balance had ceased to exist and was converted into a huge debit balance. The borrowings had, therefore, to be seen in the fresh context of assets and liabilities existing in the relevant years of account. For all these years even the composition of loans, whether interest- bearing or non-interest-bearing had undergone considerable change. Several of the assessees investments had either been lost or had come to nothing. In the circumstances, it was not possible to apply bodily the formula adopted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items referred to earlier, therefore, represented a loss on investment account and the borrowings which were continued or which were contracted a new, on account of these losses have necessarily to be treated as borrowings related to the source of income called investment. The interest paid on these borrowings had to be treated as interest paid for making or earning income under the head investment on an approximate basis, therefore, the assessee would be entitled to a further deduction of ₹ 18,000 in each of the three years. While allocating the interest, the Income Tax Officer has held that bulk of the investments were relatable to the assessees own capital. In view of the change in the structure of assets and liabilities in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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