Interest on share-acquisition borrowings deductible for other sources even without dividend income in the year

Interest on borrowings used to acquire shares was not deductible as business expenditure where the shares were unconnected with the assessee's banking and chit business and the assessee was not a dealer in shares. The same interest was, however, deductible under the head of other sources because section 12(2) allows expenditure incurred solely to earn income from that source, and actual receipt of dividend or other income in the relevant year is not required. The provision was construed as permitting deduction where the expenditure was directed to earning potential income from shares, even if no such income was realised in that year.

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Issues: (i) Whether interest paid on borrowings used to acquire shares could be deducted as business expenditure under section 10(2)(iii) or section 10(2)(xv) of the Indian Income-tax Act, 1922. (ii) Whether the same interest was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922, although no dividend or other income from shares was received in the relevant year.

Issue (i): Whether interest paid on borrowings used to acquire shares could be deducted as business expenditure under section 10(2)(iii) or section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The investments in shares were found to be unconnected with the assessee's banking and chit business. The assessee was not a dealer in shares, and the purchase of shares did not form part of its business operations. On those facts, the interest attributable to borrowings used for acquiring shares could not be treated as expenditure laid out for business purposes or as expenditure incurred wholly and exclusively for the business.

Conclusion: The claim under section 10(2)(iii) and section 10(2)(xv) failed and was against the assessee.

Issue (ii): Whether the same interest was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922, although no dividend or other income from shares was received in the relevant year.

Analysis: Section 12(2) permits allowance of expenditure, not being capital expenditure, incurred solely for the purpose of making or earning income from other sources. The allowance does not depend on the assessee having actually received income under that head in the relevant year. The interest was incurred for acquiring shares from which dividend, if received, would fall under the head 'other sources', and the absence of actual dividend did not bar the deduction. The view that the allowance is independent of actual receipt of income was accepted as the correct construction of the provision.

Conclusion: The interest was allowable under section 12(2) and the answer was in favour of the assessee.

Final Conclusion: The disallowance was upheld insofar as business deduction was claimed, but the assessee succeeded on the alternative claim under the head 'other sources', so the references were answered partly against and partly in favour of the assessee.

Ratio Decidendi: Under section 12(2), expenditure incurred solely for the purpose of earning income from other sources is deductible even if no income from that source was actually received in the relevant year.

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