Direct nexus test under section 57(iii) governs lottery winnings deductions: ticket cost allowed, post-draw expenses disallowed.

Section 57(iii) allows deduction only for expenditure, other than capital outlay, laid out wholly and exclusively for earning the income, and the test requires a direct nexus with the receipt. Applied to lottery winnings treated as income from other sources, the cost of the lottery ticket was deductible because it was directly connected with acquiring the winning ticket. By contrast, court and encashment expenses incurred after the draw were only for collecting the prize and did not satisfy the statutory test, so they were not allowable. The revision under section 263 was justified to the extent it corrected the wrong allowance of post-draw expenses.

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Issues: Whether, in computing lottery winnings as income from other sources, the cost of lottery tickets and the expenses incurred for court proceedings and encashment were deductible under section 57(iii), and whether the revision under section 263 was justified.

Analysis: Lottery winnings fall under income from other sources, and section 57(iii) permits only expenditure, other than capital expenditure, laid out wholly and exclusively for the purpose of making or earning such income. The controlling test is strict: there must be a direct nexus between the expenditure and the earning of the income. On that basis, only the cost of the lottery ticket had the necessary connection with the winnings. Expenses incurred after the draw, including litigation and encashment-related expenditure, were directed only to collection of the prize and did not satisfy the statutory test. The revisionary authority was therefore correct in holding that the incorrect allowance of those expenses could be revised, but it was not right in denying the ticket cost, which was directly attributable to the acquisition of the winning ticket.

Conclusion: The deduction of the ticket cost was allowable, but the deductions claimed for court and encashment expenses were not allowable under section 57(iii). The revision was upheld to that extent and the assessee succeeded only in part.

Ratio Decidendi: Under section 57(iii), only expenditure having a direct nexus with the earning of income and incurred wholly and exclusively for that purpose is deductible; expenses incurred after income has arisen for its collection are not deductible.

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