Interest deduction under section 57(iii) partly allowed, with exempt-investment portion capitalised and TDS-covered income excluded from interest computation.

Under section 57(iii), interest expenditure was deductible only to the extent laid out wholly and exclusively for earning the relevant taxable income; the portion attributable to exempt investments was disallowed and directed to be capitalised as part of the cost of shares and securities, while the balance linked to income-generating term deposits was allowed on the recorded nexus. Interest under sections 234A, 234B and 234C remained mandatory, but it had to be recomputed after excluding income subject to TDS, requiring the assessing authority to recalculate the levy on the correct taxable base.

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Issues: (i) whether the assessee was entitled to deduction of interest expenditure against income from other sources to the extent claimed after proportionate disallowance, with the disallowed interest to be treated as part of the cost of shares and securities; (ii) whether interest under sections 234A, 234B and 234C was chargeable and, if so, whether it had to be recomputed by excluding income subjected to TDS.

Issue (i): whether the assessee was entitled to deduction of interest expenditure against income from other sources to the extent claimed after proportionate disallowance, with the disallowed interest to be treated as part of the cost of shares and securities.

Analysis: The deduction claimed under section 57(iii) had to satisfy the requirement that the expenditure be laid out wholly and exclusively for earning the relevant income. On the facts, the interest relatable to the exempt-investment component could not be allowed as a revenue deduction. At the same time, the balance interest attributable to the income-generating term deposits was allowable to the extent of the nexus found by the Tribunal, following the assessee's own earlier year. The portion disallowed on account of exempt investments was directed to be capitalised as part of the cost of shares and securities.

Conclusion: The issue was decided in favour of the assessee in part and against the Revenue in part.

Issue (ii): whether interest under sections 234A, 234B and 234C was chargeable and, if so, whether it had to be recomputed by excluding income subjected to TDS.

Analysis: Interest under these provisions was treated as mandatory, so the levy itself was not deleted. However, the computation was required to exclude the income that had suffered TDS, and the assessing authority was directed to recalculate the interest accordingly.

Conclusion: The levy of interest was sustained, but the computation was directed to be redone by excluding TDS-covered income.

Final Conclusion: The assessee succeeded on the principal deduction issue and obtained consequential relief on the interest computation issue, while the Revenue's challenge failed.

Ratio Decidendi: Under section 57(iii), only expenditure incurred wholly and exclusively for earning the taxable income is deductible, and any portion attributable to exempt investments must be disallowed and may be capitalised where so directed; interest under sections 234A, 234B and 234C remains mandatory but must be computed on the correct taxable base.

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