Accrual basis deduction for interest on borrowed funds used for share investment upheld under section 57(iii).

Interest on borrowed funds used to invest in shares was held deductible on an accrual basis under section 57(iii) because the provision requires expenditure to be laid out wholly and exclusively for earning the income, not necessarily paid in cash during the year. The lender followed the mercantile system, the interest had been debited in the lender's accounts for the year, and the appellate authority was entitled to adopt that basis. The accrual treatment was found consistent with the statutory scheme, so the deduction was allowed in favour of the assessee.

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Issues: Whether interest expenditure incurred on borrowed funds used for investment in shares, though not paid in cash during the year and debited on accrual basis, was deductible under section 57(iii) of the Income-tax Act, 1961.

Analysis: The deduction under section 57(iii) is confined to expenditure laid out or expended wholly and exclusively for earning the relevant income, and the provision does not insist that the expenditure must actually be paid in cash in the relevant year. The assessee's investment in shares was made from borrowed funds, the lender followed the mercantile system, and interest had been debited for the year in the lender's accounts. In these circumstances, the appellate authority was entitled to adopt the accrual basis, and that approach was neither illegal nor contrary to the statutory scheme.

Conclusion: The interest expenditure was allowable on accrual basis under section 57(iii), and the question was answered in favour of the assessee and against the Revenue.

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