Section 57(iii) deduction denied for overdraft interest used to discharge personal tax liabilities, not to earn income.

Interest on overdrafts taken to pay income-tax and wealth-tax was held not deductible under Section 57(iii) of the Income-tax Act, 1961, because the expenditure was not laid out wholly and exclusively for earning the income against which deduction was claimed. Applying the dominant purpose test, the Court treated the borrowings as financing the assessee's personal tax liability rather than being connected with the production of interest or dividend income. The claimed interest expenditure therefore failed the statutory requirement for deduction and was disallowed in computing the assessee's income.

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Issues: Whether interest paid on overdrafts taken for payment of income-tax and wealth-tax was deductible under Section 57(iii) of the Income-tax Act, 1961.

Analysis: Deduction under Section 57(iii) is admissible only where the expenditure is laid out or expended wholly and exclusively for earning the income from which the deduction is claimed. The taxing authorities found that the overdrafts were taken to meet the assessee's personal liability for payment of income-tax and wealth-tax, and not for the purpose of earning interest or dividend. Applying the dominant purpose test, the borrowing was not connected with the production of income so as to satisfy the statutory requirement.

Conclusion: The interest paid on the overdrafts was not an allowable deduction under Section 57(iii) of the Income-tax Act, 1961, and the answer to the reference was against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue by holding that the claimed interest expenditure was not deductible in computing the assessee's income.

Ratio Decidendi: Interest on borrowings is deductible under Section 57(iii) only when the borrowing is wholly and exclusively for earning the relevant income; borrowings made to discharge personal tax liabilities do not qualify.

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