Dividend income deduction fails where overdraft interest was not incurred solely to earn dividends.

Interest on an overdraft secured by shares was not deductible from dividend income because section 12(2) of the Income-tax Act, 1922 allowed only expenditure incurred solely for earning that income. A mere nexus between borrowing, shareholding, and receipt of dividends was insufficient. As the assessee did not show that the overdraft was raised to acquire shares with the object of earning dividends, the claimed interest was too remote from the dividend income and failed the statutory exclusivity test. The deduction was therefore disallowed.

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Issues: Whether interest paid on an overdraft secured by shares was deductible from dividend income under section 12(2) of the Income-tax Act, 1922.

Analysis: Deduction under section 12(2) is available only for expenditure incurred solely for the purpose of earning dividend income. A mere connection between borrowing, shareholding, and receipt of dividends is insufficient. The assessee had not shown that the overdraft was created for purchasing shares with the object of earning dividends, and the asserted link between the interest and the dividend income was too remote. The limited deduction allowed by the Tribunal was therefore not supported by the statutory requirement that the expenditure must be exclusively incurred for earning the income.

Conclusion: The interest on the bank overdraft was not admissible as a deduction from dividend income and the question was answered against the assessee.

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