Set-off of interest on share acquisition borrowings was allowed despite no dividend income under the Income-tax Act.

Interest on money borrowed specifically to acquire shares was treated as allowable against other income under the statutory set-off provisions, even though the shares did not yield dividend income in the relevant years. The analysis focused on the purpose of the borrowing and the application of section 24(1) read with section 12(2) of the Income-tax Act, rather than on any ulterior motive or the fact that the shares were regarded as investments. On that construction, the absence of dividend did not defeat the deduction, and the borrowing remained linked to earning income or profits.

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Issues: Whether interest paid on moneys borrowed for the purchase of shares that did not yield dividend income could be set off against other income under section 24(1) of the Income-tax Act, having regard to section 12(2).

Analysis: The reference turned on the construction of the charging and deduction provisions dealing with income from other sources and the statutory right of set-off. The borrowed funds were found to have been specifically utilised for acquiring shares, and the absence of dividend income in the relevant years did not by itself negate the applicability of section 12(2). The decisive question was the legal purpose of the borrowing, not any ulterior motive or convenience to third parties. The finding that the shares were treated as investments did not displace the conclusion that the borrowing was for earning income or profits. On that basis, the interest paid on the borrowings was held to be allowable for set-off against other income.

Conclusion: The answer was in the affirmative. Interest on the borrowings used to purchase the shares could be set off against other income under section 24(1) read with section 12(2) of the Income-tax Act, and the assessee succeeded.

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