Deductibility of borrowing interest depends on real nexus with income; personal and tax-payment borrowings failed the test.

Interest on borrowings was held not deductible under section 12(2) of the Income-tax Act, 1922 where the loans were used for household expenses, purchase of jewellery, and payment of advance tax. The governing test stated was whether the expenditure had a real nexus, direct or indirect, with earning the fixed-deposit income and was incurred solely for that purpose. Borrowings for personal outgoings did not satisfy that nexus, and choosing to borrow instead of using existing funds did not convert a personal expense into income-earning expenditure. The advance-tax borrowing likewise did not qualify, as it was directed to meeting a statutory liability and only incidentally related to the income.

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Issues: Whether interest paid on borrowings used for household expenses, purchase of jewellery, and payment of advance tax was expenditure incurred solely for the purpose of making or earning income from fixed deposits under section 12(2) of the Income-tax Act, 1922.

Analysis: The allowable deduction under section 12(2) is confined to expenditure, not being capital in nature, incurred solely for earning the relevant income. The essential test is whether there is a real nexus, direct or indirect, between the expenditure and the earning of the income. Borrowings taken for household expenses or for purchasing jewellery had no connection with the fixed-deposit income, and the assessee's choice to borrow rather than withdraw funds did not convert a personal outlay into expenditure for earning income. As to advance tax, the borrowing was to discharge a statutory liability, and any interest received on the advance tax payment was merely incidental. The expenditure was therefore not on the ground of commercial expediency and did not facilitate the earning of the income.

Conclusion: The claim for deduction was not allowable under section 12(2); the question referred was answered in the negative.

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