Interest on borrowed funds for share investment may be deductible despite no dividend, but reference requires strict statutory compliance.

Interest on money borrowed to acquire shares was treated as deductible where the borrowing was laid out solely for the purpose of earning income, even though no dividend was actually received, because the statutory test focused on the purpose of the expenditure rather than the realised return. A reference on a second question could not be made without a duly filed application by the assessee under the prescribed statutory conditions, as compliance with the form, limitation, and other requirements was mandatory. The commentary therefore explains that deductibility may depend on the income-earning purpose of the investment, while reference competence depends on strict procedural compliance.

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Issues: (i) Whether interest paid on loans borrowed for investing in shares which yielded no dividend income was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922. (ii) Whether the second question could be referred to the High Court without a duly made application by the assessee under section 66(1) of the Indian Income-tax Act, 1922.

Issue (i): Whether interest paid on loans borrowed for investing in shares which yielded no dividend income was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922.

Analysis: The statutory requirement under section 12(2) is that the expenditure must be laid out solely for the purpose of earning income, profits or gains. The allowance does not depend on the investment actually producing income by way of dividend. Where money was borrowed and deployed for acquiring shares as an income-yielding investment, the fact that no dividend accrued does not by itself defeat the deduction. The expenditure was connected with the earning of income from the investment and was therefore within the scope of the provision.

Conclusion: Yes. The interest was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922.

Issue (ii): Whether the second question could be referred to the High Court without a duly made application by the assessee under section 66(1) of the Indian Income-tax Act, 1922.

Analysis: A reference under section 66(1) requires a valid application made within limitation and in the prescribed form, with the necessary deposit where applicable. The assessee had not made such an application for the second question, and the procedural requirements could not be dispensed with merely because the question arose from the Tribunal's order. Compliance with the statutory conditions for reference was mandatory.

Conclusion: No. The second question could not be referred without a duly made application by the assessee under section 66(1) of the Indian Income-tax Act, 1922.

Final Conclusion: The reference succeeded on the deduction issue and failed on the reference-competence issue, leaving the assessee successful only in part.

Ratio Decidendi: Interest on money borrowed for investment is deductible where the expenditure is incurred solely for the purpose of earning income, irrespective of whether the investment in fact yielded income; a reference under section 66(1) can be made only on strict compliance with the prescribed statutory application requirements.

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