Section 57(iii) interest deduction upheld where borrowing was directly linked to earning interest income and netting off was allowed.

Interest expenditure was allowable under section 57(iii) where borrowed funds had a direct nexus with the earning of interest income from loans and fixed deposits, because the expenditure was laid out wholly and exclusively for that purpose. The Revenue's reliance on Tuticorin Alkali Chemicals was rejected as inapplicable since that case concerned taxability of interest income, not deductibility of interest expenditure against such income. Netting off the related interest income and expenditure was therefore upheld, and the disallowance was deleted.

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Issues: Whether the assessee was entitled to deduct interest expenditure under section 57(iii) against interest income earned from loans and fixed deposits, and whether the Revenue's reliance on Tuticorin Alkali Chemicals was applicable.

Analysis: The assessee had borrowed funds, deployed part of them for purchase of land and part for advancing loans and keeping fixed deposits, and earned interest income from such deployments. The interest expenditure corresponding to the funds used for earning such interest income was found to have a direct nexus with the income from other sources. The test under section 57(iii) was satisfied because the expenditure was laid out wholly and exclusively for earning the relevant interest income. The decision in Tuticorin Alkali Chemicals was held to be inapplicable because that case concerned taxability of interest income, whereas the present dispute concerned allowability of interest expenditure against interest income. The allowance of netting off was supported by the principle applied in Vodafone South Ltd.

Conclusion: The interest expenditure of Rs. 2,38,71,670/- was deductible under section 57(iii), and the disallowance was rightly deleted.

Final Conclusion: The Revenue's challenge to the deletion of the disallowance failed, and the assessee's treatment of the net interest income was sustained.

Ratio Decidendi: Interest expenditure is allowable under section 57(iii) when there is a direct nexus between the borrowing and the earning of interest income, and the expenditure is laid out wholly and exclusively for that purpose.

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