Deduction of interest under section 57(iii) allowed where borrowing preserved income-yielding assets and maintained a real nexus to income.

Interest on borrowings may be deductible where the expenditure is incurred to earn income or to preserve income-yielding assets, even if income is not actually received in the relevant year, provided a real nexus exists. On the borrowings from the assessee's wife, the Tribunal treated the funds as used in an arrangement connected with equity participation, release from counter-guarantee obligations, and protection of shareholding and directorship-related income, and allowed deduction under section 57(iii). Interest on bank borrowings had already been allowed subject to quantified limits in an earlier order, and no fresh material justified interference; that allowance remained undisturbed. The departmental challenge therefore failed.

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Issues: (i) Whether the interest paid on borrowings from banks was deductible; (ii) Whether the interest paid on borrowings from the assessee's wife for keeping the amount with the company was deductible under section 57(iii).

Issue (i): Whether the interest paid on borrowings from banks was deductible.

Analysis: The Tribunal had already allowed the interest paid to banks, subject to the quantified limits recorded in its earlier order, and that part of the decision was not disturbed in the later proceedings. No fresh ground or material justified interference with that finding.

Conclusion: The interest paid to banks remained allowable, to the extent already determined by the Tribunal.

Issue (ii): Whether the interest paid on borrowings from the assessee's wife for keeping the amount with the company was deductible under section 57(iii).

Analysis: The assessee had borrowed funds to place money with the company under an arrangement connected with his commitment towards equity participation and release from counter-guarantee obligations. The deposit was intended to secure income-yielding assets and to preserve the assessee's financial position, including his shareholdings and directorship-related income. The law does not require that income must actually be earned in the relevant year; it is sufficient if the expenditure is incurred for the purpose of earning income and there is a real nexus, even if indirect, between the expenditure and the income-earning asset.

Conclusion: The interest paid to the assessee's wife was deductible under section 57(iii) and the departmental challenge failed.

Final Conclusion: The assessee succeeded on the substantive issue of deduction of interest on the borrowings used for the deposit with the company, and the departmental appeals were rejected.

Ratio Decidendi: For deduction under section 57(iii), it is enough that the expenditure is incurred for the purpose of earning income or preserving income-yielding assets, and actual receipt of income in the accounting year is not necessary if the requisite nexus is established.

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