Expenditure linked to exempt dividend income is not deductible where section 14A bars claims under section 57(iii).

Interest on borrowings used to acquire shares was held not deductible where the resulting dividend income was exempt. Section 57(iii) allows only expenditure incurred wholly and exclusively for income chargeable under the head "Income from other sources", while section 14A bars deduction of expenditure incurred in relation to income that does not form part of total income. The argument that dividend was indirectly taxed at the company level did not override the statutory prohibition, and a possible future capital gains claim was irrelevant for the year in question. The disallowance of the interest expenditure was therefore sustained.

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Issues: Whether interest paid on borrowings used for investment in shares, giving rise to exempt dividend income, was allowable as a deduction under section 57(iii) of the Income-tax Act, 1961 in view of section 14A.

Analysis: Deduction under section 57(iii) is available only for expenditure laid out wholly and exclusively for earning income chargeable under the head "Income from other sources". Dividend income in the present case was exempt under section 10(33) read with section 115-O of the Income-tax Act, 1961. Section 14A, inserted with retrospective effect, expressly bars allowance of expenditure incurred in relation to income which does not form part of total income. The contention that dividend was indirectly taxed at the company level did not displace the statutory prohibition, and the alternative plea based on possible capital gains on future sale of shares was academic for the year under consideration.

Conclusion: The interest expenditure referable to the borrowings for investment in shares was not allowable as a deduction. The disallowance made by the Assessing Officer was restored and the assessee's claim was rejected.

Ratio Decidendi: Expenditure incurred in relation to exempt income cannot be deducted against taxable income, and section 14A prohibits such deduction notwithstanding a claim under section 57(iii).

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