Interest deduction under section 57(iii) failed because borrowed funds were not shown to have a direct nexus with interest income.

Deduction of interest expenditure under section 57(iii) was denied because the expense must be incurred wholly and exclusively to earn the relevant income, with a direct and proximate nexus between the borrowing and the interest income. The record did not show that the borrowed funds were used only for earning interest income; instead, they were also deployed in shares and purchase of plots. In the absence of satisfactory documentary proof establishing the required nexus, the claim failed the statutory condition and the disallowance of the interest expenditure was upheld.

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Issues: Whether interest expenditure claimed as a deduction under section 57(iii) of the Income-tax Act, 1961 was allowable against interest income where the borrowed funds were also used for investment in shares and purchase of plots, and whether the resulting income computation required interference.

Analysis: Deduction under section 57(iii) is available only for expenditure incurred wholly and exclusively for the purpose of earning the relevant income. The decisive requirement is a direct and proximate nexus between the borrowed funds and the interest income sought to be earned. On the facts, the borrowing was not shown to have been used for earning interest income alone, and the record instead showed use of funds for other investments including shares and immovable property. In the absence of satisfactory documentary proof establishing the necessary nexus, the claim did not satisfy the statutory condition.

Conclusion: The disallowance of the interest expenditure was upheld and the assessee's claim under section 57(iii) was rejected.

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