Deductibility of interest on share purchase price fails where the expenditure serves a mixed purpose rather than earning income alone.

Interest on unpaid purchase price of shares was held not deductible under section 57(iii) because the expenditure must be incurred wholly and exclusively for earning income. The required nexus need not be direct, and income need not actually arise, but the dominant and sole purpose must be to earn income. Here, the shares were acquired to obtain control of the company and improve its business, so the payment served a mixed purpose rather than an exclusive income-earning purpose. The deduction was therefore disallowed and the issue was answered against the assessee.

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Issues: Whether the interest paid by the assessee on unpaid purchase price of shares was deductible under section 57(iii) of the Income-tax Act, 1961 as expenditure laid out wholly and exclusively for the purpose of earning income from other sources.

Analysis: The statutory requirement under section 57(iii) is that the expenditure must be incurred wholly and exclusively for the purpose of making or earning the income. The connection between the expenditure and the income need not be direct, and income need not in fact have been earned; however, the purpose of the expenditure must be the sole purpose of earning income, not merely an indirect or incidental consequence. On the facts, the assessee acquired the shares with the object of obtaining full control over the company and improving its business, and not solely to earn income. The transaction therefore involved, at highest, a mixed purpose, which takes the expenditure outside the scope of the provision.

Conclusion: The deduction was not allowable under section 57(iii); the question was answered in the affirmative, against the assessee and in favour of the Revenue.

Ratio Decidendi: For allowance under section 57(iii), the expenditure must be incurred solely for the purpose of earning income; a mixed purpose, even if income may also be incidentally facilitated, is not sufficient.

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