Deductibility of interest on share-acquisition borrowings depends on business connection and income-earning purpose.

Interest on borrowings used to acquire shares can be deductible where the share investment is closely connected with the taxpayer's business or is made to earn dividend income. The text states that interest on shares of Western India Theatres Ltd. was treated as business expenditure because the acquisition formed an integral part of business operations, and interest on shares of Associated Bombay Cinemas Pvt. Ltd. was also treated as deductible because the borrowing was laid out wholly and exclusively for earning income. The assessee was therefore entitled to deduct the interest payments.

---

---

Issues: Whether the assessee was entitled to deduction of interest paid on borrowings used for acquiring shares of two companies for the relevant assessment years.

Analysis: The interest relating to shares of Western India Theatres Ltd. was held to be deductible as business expenditure because the share acquisition was closely connected with the assessee's business and formed an integral part of its business operations. The interest relating to shares of Associated Bombay Cinemas Pvt. Ltd. was also held deductible because the borrowings were used to acquire shares from which dividend income was expected, and the expenditure was therefore laid out wholly and exclusively for the purpose of earning income.

Conclusion: The assessee was entitled to deduction of the interest payments.

---