- (1.) These are two references made by the Tribunal to this Court under S. 257 of the Income-tax Act, 1961 in view of a conflict in the decisions of High Courts on the question as to whether interest on monies borrowed for investment in shares in allowable expenditure under S. 57 (iii) when the shares have not yielded any return in the shape of dividend during the relevant assessment year. The preponderance of judicial opinion is in favour of the view that such interest is admissible, even though no dividend is received on the shares, but there are two High Courts which have taken a different view and hence it is necessary for this Court to set the controversy at rest by finally deciding the question. Since the question is purely one of law turning on the true interpretation of S. 57 (iii), it is not necessary to set out the facts giving rise to these two references in any detail. It would be sufficient to state that the assessees in these two references are brothers and each of them had borrowed monies for the purpose of making investment in shares of certain companies and during the assessment year 1965-66 for which the relevant accounting year ended on 10th April, 1965, each of the two assessees paid interest on the monies borrowed but did not receive any dividend on the shares purchased with those monies. Each of the two assessees made a claim for deduction of the amount of interest paid on the borrowed monies but this claim was negatived by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner on the ground that during the relevant assessment year the shares did not yield any dividend and, therefore, interest paid on the borrowed monies could not be regarded as expenditure laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head "Income From Other Sources" so as to be allowable as a permissible deduction under S. 57 (iii). The Tribunal, however, on further appeal, disagreed with the view taken by the taxing authorities and upheld the claim of each of the two assessees for deduction under S. 57 (iii). The Revenue being aggrieved by the decision of the Tribunal made an application in each case for reference of the following question of law, namely :- "Whether on the facts, and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under S. 57 (iii) - and since there was divergence of judicial opinion on this question, the Tribunal referred it directly for the opinion of this Court.
(2.) The determination of the question before us turns on the true interpretation of S. 57 (iii) and it would, therefore, be convenient to refer to that section, but before we do so, we may point out that S. 57 (iii) occurs in a fasciculus of sections under the heading 'F-Income From Other Sources'. Section 56 which is the first in this group of sections enacts in sub-sec. (1) that income of every kind which is not chargeable to tax under any of the heads specified in S. 14, Items A to E shall be chargeable to tax under the head 'Income From Other Sources' and sub-sec. (2) includes in such income various items, one of which is 'dividends'. Dividend on shares is thus income chargeable under the head 'Income From Other Sources'. Section 57 provides for certain deductions to be made in computing the income chargeable under the head "Income From Other Sources" and one of such deductions is that set out in Cl. (iii) which reads as follows : "Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." The expenditure to be deductible under S. 57 (iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The argument of the Revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The making or earning of income, said the Revenue, was a sine qua non to the admissibility of the expenditure under S. 57 (iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The Revenue relied strongly on the language of S. 37 (1) and contrasting the phraseology employed in S. 57 (iii) with that in S. 37 (1), pointed out that the Legislature had deliberately used words of narrower import in granting the deduction under S. 57 (iii). Section 37 (1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head 'Profits or gains of business or profession'. The language used in S. 37 (1) was "laid out or expended ... ... ... for the purpose of the business or profession" and not "laid out or expended.....for the purpose of making or earning such income" as set out in Section 57 (iii). The words in S. 57 (iii) being narrower, contended the Revenue, they cannot be given the same wide meaning as the words in S. 37 (1) and hence no deduction of expenditure could be claimed under S. 57 (iii) unless it was productive of income in the assessment year in question. This contention of the Revenue undoubtedly found favour with the High Court (sic) (two High Courts ) but we do not think we can accept it. Our reasons for saying so are as follows.
(3.) What S. 57 (iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of S. 57 (iii) and that purpose must be making or earning of income. Section 57 (iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of S. 57 (iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of S. 57 (iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. v. Commissioner of Income-tax, 20 ITR 1 : (AIR 1951 SC 278) where interpreting the corresponding provision in S. 12 (2) of the Income-tax Act, 1922 which was ipsissima verba in the same terms as Section 57 (iii), Bose, J., speaking on behalf of the Court observed : "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". It is indeed difficult to see how, after this observation of the Court, there can be any scope for controversy in regard to the interpretation of S. 57 (iii).;