Deductibility under Section 12: only expenditure incurred solely to earn or collect interest is allowable; establishment costs excluded.

Deductibility under Section 12 of the Income tax Act is confined to expenditure (not capital) incurred solely for making or earning income from other sources; expenditure necessary merely to maintain or keep a company alive (establishment or prospective business development costs) is not an allowable deduction against interest income. Expenditure actually incurred in earning and collecting interest may be allowed if proved; where an allowance is fixed by estimate it must represent an estimate of expenditure solely for earning and collecting the interest income.

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Issues: Whether, on the facts and in the circumstances of the case, a deduction of Rs. 6,000 was permissible under Section 12 of the Income-tax Act.

Analysis: The assessment was under the head "income from other sources" and governed by Section 12. Allowances against income chargeable under Section 12 are limited to those provided by that section, notably expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income. Expenditure properly characterised as necessary to maintain or develop a prospective business, or to "keep the company alive," is not an allowable deduction against interest income assessable under Section 12. The Tribunal's reasoning that establishment expenses necessary to keep the company alive could be allowed under Section 12 was therefore incorrect. Separately, expenditure actually incurred in earning and collecting the interest income may be allowed if proved; where the amount allowed is fixed by estimate, it must represent an estimate of expenditure solely for earning the interest income.

Conclusion: Yes. The deduction of Rs. 6,000 is permissible under Section 12 only insofar as it represents an estimated amount of expenditure actually incurred solely for the purpose of earning and collecting the interest income; the Tribunal's broader basis permitting deduction as establishment or "keeping alive" expenses is not legally sustainable.

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