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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether interest paid on unpaid interest of an earlier year is deductible as expenditure under section 57(iii) of the Income-tax Act, 1961 while computing income under the head "Income from other sources".
Analysis: The assessee had already been allowed deduction of interest on the borrowed amount in the earlier assessment year. The subsequent claim related only to interest charged on that unpaid interest. Such additional interest was not expenditure laid out wholly and exclusively for earning income from other sources, because it did not arise from the borrowing used for investment but from failure to discharge the earlier interest liability. The earlier Supreme Court decision on compound interest under the 1922 Act was treated as applicable in principle, and the Court also noted that the earlier allowance had already wiped out the liability for income-tax purposes.
Conclusion: Interest on unpaid interest of an earlier year is not allowable as a deduction under section 57(iii) of the Income-tax Act, 1961; the question was answered in favour of the Revenue and against the assessee.
Ratio Decidendi: Only expenditure directly and exclusively incurred for earning income is deductible under section 57(iii); interest levied on an unpaid interest liability is not such expenditure.
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