Interest deduction under section 57(iii) denied for shares transferred on partial partition, but disallowance required recomputation.

Interest on borrowings used to acquire shares was not deductible under section 57(iii) once those shares had been allotted away on partial partition, because the expenditure must be laid out for earning income from a source still existing in the assessee's hands. The borrowed funds linked to the 1,350 partitioned shares could not support a dividend-related deduction after those shares ceased to belong to the HUF. However, the disallowance had to be recomputed because the Assessing Officer had adopted a higher interest figure than the actual interest paid and had not fully excluded the portion referable to the 8 shares retained by the HUF.

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Issues: (i) Whether interest on borrowings used to acquire shares remained deductible under section 57(iii) after the shares had gone out of the assessee-HUF's hands on partial partition. (ii) Whether the amount of interest disallowed by the Assessing Officer was excessive and the disallowance required reduction.

Issue (i): Whether interest on borrowings used to acquire shares remained deductible under section 57(iii) after the shares had gone out of the assessee-HUF's hands on partial partition.

Analysis: Deduction under section 57(iii) is available only for expenditure laid out or expended for the purpose of making or earning income, and the existence of the relevant source of income at the time of incurring the expenditure is material. The shares acquired from the borrowed funds had been specifically allotted away in partial partition, leaving no possibility of dividend income from those shares in the assessee-HUF's hands. The remaining dividend-bearing shares could not justify allowance of interest attributable to borrowings used for shares no longer held by the assessee-HUF.

Conclusion: The interest relatable to the borrowings used for the 1,350 partitioned shares was not deductible, and the revenue succeeded on this issue.

Issue (ii): Whether the amount of interest disallowed by the Assessing Officer was excessive and the disallowance required reduction.

Analysis: The actual interest paid by the assessee on the relevant borrowing account was lower than the figure adopted by the Assessing Officer. The disallowance had also to be restricted by excluding the interest attributable to the small portion of borrowing connected with the 8 shares retained by the assessee-HUF. On that basis, the allowable deficit in the interest account had to be recomputed.

Conclusion: The disallowance was excessive to the extent indicated, and the assessee succeeded in part on the cross-objection.

Final Conclusion: The assessee was not entitled to interest deduction on borrowings relatable to shares that had ceased to belong to it, but the quantum of disallowance was required to be recomputed on the basis of the actual borrowing and the limited portion attributable to the shares still retained.

Ratio Decidendi: For deduction under section 57(iii), the expenditure must be incurred for earning income from a source that exists in the assessee's hands when the expenditure is laid out, and interest on borrowings cannot be allowed for assets that have ceased to form part of the assessee's income-producing holding.

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