Business expenditure on share-acquisition borrowings does not reduce dividend relief; section 80M applies to gross dividend income.

Interest on borrowings used to acquire shares was treated as business expenditure under section 36(1)(iii), not as expenditure incurred wholly and exclusively for earning dividend income under section 57(iii), even though the dividends were assessable under the head of income from other sources. The later insertion of section 80AA did not alter that position. On this reasoning, share transfer expenses and borrowing-related interest were not deductible against dividend receipts for section 57(iii) purposes, and deduction under section 80M was to be computed with reference to gross dividend income, without first netting out such business expenditure.

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Issues: Whether interest on borrowings used for acquisition of shares and share transfer expenses were deductible as business expenditure while computing dividend income, and whether deduction under section 80M was to be allowed with reference to gross dividend income or net dividend income.

Analysis: Dividend income may fall under the head of income from other sources, but the commercial character of the income and the purpose for which borrowings were made remain relevant in deciding the nature of the expenditure. Where funds are borrowed for investment in shares, the interest paid is attributable to the business of the assessee and is not expenditure incurred wholly and exclusively for earning dividends within the meaning of section 57(iii). The later insertion of section 80AA did not alter this position, because the interest outgo was incurred for carrying on the assessee's business and had to be deducted in computing business income under section 36(1)(iii). On that basis, deduction under section 80M could not be restricted by first reducing such business expenditure from the dividend receipts.

Conclusion: The interest on borrowings and share transfer expenses were not deductible from dividend income under section 57(iii), and deduction under section 80M was allowable with reference to gross dividend income. The Revenue's appeal failed.

Ratio Decidendi: Expenditure incurred on borrowings used for acquiring shares, though connected with dividend-earning investments, is deductible as business expenditure and not as expenditure for earning dividend income, and section 80AA does not require reduction of such expenditure before computing relief under section 80M.

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