Interest on borrowing used to acquire income-yielding land was deductible as expenditure for the purpose of the source of income.

Interest on money borrowed to acquire land from which agricultural income was earned was treated as deductible under section 5(e) of the Madras Agricultural Income-tax Act, 1955, rather than being confined to section 5(k). The Court applied the test whether the expenditure was incurred wholly and exclusively for the purpose of the land, and held that borrowing to acquire the income-yielding source, together with interest on that borrowing, was integrally connected with that purpose. The interest did not cease to be deductible merely because it discharged the assessee's personal liability as borrower. The narrower view of the Tribunal was rejected, and the full claim was allowed.

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Issues: Whether interest paid on money borrowed for acquiring land, from which agricultural income was derived, was deductible under section 5(e) of the Madras Agricultural Income-tax Act, 1955, or fell only within section 5(k) of that Act.

Analysis: The payment of interest was held not to fall within section 5(k), because the borrowed money had been used to purchase the estate and no portion of the borrowed amount had been spent on the land itself. The payment of interest in the relevant year was not capital expenditure and did not lose its character merely because it discharged a personal liability of the assessee as borrower. The controlling test under section 5(e) was whether the expenditure was incurred wholly and exclusively for the purpose of the land. Applying the principle that expenditure incurred to acquire or preserve the source of income can satisfy that test, the Court held that a loan taken to acquire the land and the interest paid on that loan were integrally connected with the purpose of the land, namely the source of taxable agricultural income. The narrower view taken by the Tribunal was rejected.

Conclusion: The interest payment was deductible under section 5(e) of the Madras Agricultural Income-tax Act, 1955, and the assessee was entitled to deduct the full amount claimed.

Ratio Decidendi: Interest on money borrowed to acquire the income-yielding source is expenditure laid out wholly and exclusively for that source, and is deductible where the governing provision is wide enough to cover expenditure incurred for the purpose of the source of income.

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