Interest nexus with income-yielding investments and feasibility costs for existing business expansion supported deductions under tax law.

Interest on borrowed funds invested in venture capital funds was deductible against income from other sources under Section 57 because the investments exceeded the borrowings, establishing a nexus with income-yielding investments. Consistent acceptance of the same claim in earlier and later years on unchanged facts supported the deduction, while repayment before year-end explained the absence of an outstanding loan. Professional expenditure for evaluating windmill power projects was also allowable as business expenditure because it related to expansion and feasibility assessment within an existing business, with no evidence of personal or non-business use. Both disallowances were deleted.

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Issues: (i) Whether interest paid on borrowed funds invested in venture capital funds was deductible against income from other sources; (ii) Whether expenditure incurred for assessing the feasibility of new windmill power projects was allowable as a business expense.

Issue (i): Whether interest paid on borrowed funds invested in venture capital funds was deductible against income from other sources.

Analysis: The borrowed funds were used for investments that generated income offered under the head income from other sources. The increase in investments exceeded the borrowed amount, establishing the requisite nexus. The interest claim on the same loan had also been accepted in the assessment year of investment and in subsequent years, with no material change in facts. The absence of an outstanding loan at the relevant year-end was explained by its repayment before that date.

Conclusion: The interest expenditure was deductible under Section 57 of the Income-tax Act, 1961. This issue is decided in favour of the assessee.

Issue (ii): Whether expenditure incurred for assessing the feasibility of new windmill power projects was allowable as a business expense.

Analysis: The professional expenditure was incurred in connection with exploring new projects in the windmill sector in which the assessee was already carrying on business. No material established that it was personal expenditure or unrelated to the business.

Conclusion: The forecasting expenditure qualified as allowable business expenditure. This issue is decided in favour of the assessee.

Final Conclusion: Both disputed disallowances were deleted, recognising the deductibility of the interest and project-feasibility expenditure.

Ratio Decidendi: Where borrowed funds are demonstrably deployed in income-yielding investments and the claim has consistently been accepted on unchanged facts, interest thereon is deductible; expenditure connected with expansion or feasibility of an existing business is allowable absent evidence of personal use.

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