Holding

Interest on loans incurred for personal tax liabilities and annuity deposits is not deductible under section 57(iii) as the expenditure is not wholly and exclusively for the purpose of earning income.

Summary

Smt. Padmavati Jaikrishna, an individual assessee, claimed a deduction of Rs.10,275 under section 57(iii) of the Income Tax Act, 1961 for interest paid on loans taken to meet personal obligations such as income‑tax, wealth‑tax and a statutory annuity deposit. The Income Tax Officer held that only a portion of the loan was used for genuine investment and disallowed the deduction on a proportional basis. Both the Tribunal and the Gujarat High Court affirmed that the loans were incurred for personal liabilities and not wholly and exclusively for the purpose of earning income, thus falling outside the ambit of section 57(iii). On appeal, the Supreme Court reiterated that deduction under this provision is permissible only when the expenditure is laid out or expended wholly and exclusively for earning the income, a burden of proof that the assessee failed to meet. Consequently, the Court dismissed the appeal, holding that interest on such loans is not deductible.

Issues considered

Whether interest paid on loans taken to meet personal tax liabilities and a mandatory annuity deposit qualifies as a deduction under section 57(iii) of the Income Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 57(iii)

Subjects

deductionsection 57(iii)interest on loanspersonal tax liabilityannuity depositincome from other sourceswholly and exclusivelyIncome Tax Act

Judgment

SMT. PADMAVATI JAIKRISHNA A
v.
ADDL. COMMISSIONER OF INCOME .TAX.
'"'f GUJARAT AHMEDABAD

APRIL 22, 1987
B
(R.S. PATHAK, C.J. RANGANATH MISRA AND
K.N. SINGH, JJ.]
-~
Income Tax Act, 1961-Section 57(iii)-Deduction-Claim for-

- ~
Expenditure incurred should be wholly and exclusively for purpose of
earning income-Assessee to satisfy Income Tax Officer. c
The assessee, assessed as an individual, derived income from
"other sources" in the shape of interest, dividends etc, Jn the asse~·
-( ment year 1966-67 she claimed deduction of Rs,U,986 being interest
paid on loans taken by her, under s. 57(iii). ~Hhe Income Tax Act, 1961.
The Income Tax Officer fe;>u~<l ~at out of the loans real investment was D
Rs.1,250 only. He disalluw~ the claim of Rs.10,275 on proportionate
basis. 1'h':: Aepel~~~~ As~istamt Commissioner relying upon the ratio of
\he. ~cisioo ii\ lttti Bhuriben Lallubhai v. Commissioner of Income-tax,
~o.m#J,qy North Cutch and Saurashtra, [1956 ITR (XXIX) 543] dismis·
li"d the appeal of the assessee.
E
t- Before the Tribunal the assessee contended: (1) that expenditure
under the head of payment of income tax and wealth tax and annuity
-- deposits should have been taken as revenue expenditure and the claim
of interest •ll re$pect of such loans should have been admitted and (2)
,.J..) that the assessee instead of liquidating the investments which was
return-oriented, found it commercially expedient and viable to raise a F
loan Instead of disturbing the investments and, therefore, the claim
~ became admissible. The '(ribunal rejecting the contentions and dismis-
sing the appeal observed that the loans were taken for meeting her
personal obligation like payment of taxes and deposit of annuity and
these had nothing to do with the business.
G
On reference, the High Court held that at the relevant time it was
obligatory for the assessee to make the annuity deposit and the earning
~ of ipterest through such deposit was merely incidental and that the
portion of the loan was not intended to meet expenditure wholly ~md
exclusively for the purpose of earning the income and, therefore, did
H
not come under s. 57(iii) of the Act.
1167
1168 SUPREME COUR'I; REPORTS [1987] 2 S.C.R.

Dismissing the appeal of the assessee the Court,
A
HELD:l. Unless the claim comes within the purview of s. 57(iii) Y
of the Income Tax Act, 1961 it· would not be admissible as a deduc-
tion. [1170C] ·

B 2. The ~est t~ apply is that the expenditure should be wholly and
exclusively for the purpose of earning the income. [1172C]
~
Eastern 'Investments Ltd. v. Commissioner of Income-tax, West
Bengal, [1951) ITR 20 1 and Commissioner of Income-tax, West Bengal
v. Rajendra'Prasad Moody. [1978) 115 ITR 519, followed. ~ -
c 3. In order that t,he claim for deduction could~ sustained, it was
for the assessee to satisfy the Income Tax Officer that the loan, interest
fo respect of which is claimed as deduction, was laid out or expended }-
r wholly and exclusively for earning the income from out of which the
deduction was claimed. [1170F-GJ
D
4. The Income Tax Authorities as also the High Court have
cl~arly recorded a factual finding of facts that the expenditure in this
case was to meet the personal liability of payment of income-tax and
wealth-tax and annuity and that no part of the expenditure came within
the purview ofs. 57(iii) of the Act. [1171H-1172A, D]
... L.:.
-f
E
5. This Court is inclined to agree with the High Court that so far _.
as meeting the liability of income-tax and wealth-tax is concerned, it
was indeed a personal one and payment thereof cannot at all be said to
~
be expenditure laid out or expended wholly and exclusively for the
purpose of earning income. So far as annuity depos~t is concerned, the
F Tribunal and the High Court have come to the right conclusion that the
dominant purpose was not to earn income by way of interest but to meet y
the statutory liability of.making the deposit. [1172B-C]

6. Unless the loan is incurred for meeting the liability connected
with the sources itself it would ordinarily be difficult to entertain the
G claims for deduction. [1172Fl ' · ·
' '
·CIVIL APPELLATE JURISDICTION: Civil Appeal No. 65 of +--
1975.

From the Judgment and Order dated 3.12.1973 of the Gujarat
H High Court in I.T.R. No. 35of1972.
1170 SUPREME COURT REPORTS (1987] 2 S.C.R.

payment of interest to the extent of Rs. 10,27 was not an
A
admissible deduction under section 57(iii) of the Income-
tax Act?"

The High Court referred to various authorities and decided against the
assessee by concluding that at the relevant time it was obligatory for
B the assessee to make the annuity deposit and the earning of interest
through such deposit was merely incidental. The High Court further
found that the portion of the loan was not intended to meet expendi· }-

-
ture wholly and exclusively for the purpose of earning the income and
therefore did cot come under section 57(iii) of the Act.
-4
c It is not disputed by Mr. Ramchandran for the assessee that
unless the claim comes within the purview of section 57(iii) of the Act
it would not be admissible as a deduction. That section as far as rele- }.-
vant provides:

"The income chargeable under tbe head 'income froJll
D other sources' shall be computed after making tbe follow·
ing deductions, namely:-
(i) ...
(ii) ...
(iii) any other expenditure (not being in the nature of capi-
+
E
tal expenditure) laid out or expended wholly and exclu-
sively for the purpose of making or earning such income;- --
Provided ............................................
JJJi--
Explanation: ............................... ·'· .... ''
F
In order that the claim for the deduction could be sustained, it ...,
was for the assessee to satisfy the Income-tax Officer that the loan
interest in respect of which is claimed as deduction was laid out or
expended wholly and exclusively for earning the income from out of
which the deduction was claimed. There is no dispute !hat the provi-
G sion of section 57 of the Act corresponds to section 12(2) of the Act of
1922. Dealing with a claim under section 12(2) of the 1922 Act this
Court in Eastern Investments Ltd. v. Commissioner of Income-tax, +-
West Bengal, [ 1951] ITR 20 1 summarised the position of law thus:-

"On a full review of the facts it is clear that this transaction
H was voluntarily entered into in order indirectly to facilitate
PADMAVATJ v. ADDL. C.I.T. (MISRA, J.) 1171

the carrying on of the business of the company and was A
made on the ground, of commercial expediency. It there-
fore · falls within the purview of Section 12(2) of the
Income-tax Act, 1922, before its amendment ......... "

"This being an investment company, if it borrowed
money and utilised the same for its investments on which it B
earned income, the interest paid by it on the loans will
clearly be a permissible deduction under section 12(2) of
the Income-tax Act."

In Commissioner of Income-tax, West Bengal v. Rajendra Prasad
Moody, [1978] ITR 115, 519 this Court observed: c
"The determination of the question before us turns on the
true interpretation of section 57(iii) and it would, there-
fore. be convenient to refer to that section, but before we
do so, we may point out that section 57(iii) occurs in a
fasciculus of sections under the heading "F-Income from D
other sources". Section 56, which is the first in this group
of sections, enacts in sub-section ( 1) that specified in sec-
tion 14, Items A to B, shall be chargeable to tax under the
head "Income from other sources" and sub-section (2)

- includes in such income various items, one of which is
"dividends". bividend on shares is thus income charge-
able under the head "Income from other sources". Sec-
tion 57 provides for certain deductions to be made in com-
puting the income chargeable under the head "Income
from other sources" and one of such deductions is that set
E

out in clause (iii), w!iich reads as follows: .............. "
F
"The expenditure to be deductible under section
57(iii) must be laid out or expended wholly and exclu-
sively for the purpose of making or earning such inqim~
,,

In the said decision this Court clearly indicated that: G
+ "It is the purpose of the expenditure that is relevant in
determining the applicability of section 57(iii) and that
purpose must be making or earning of income."

The taxing authorities as also the High Court have clearly recorded a H
1172 SUPREME COURT REPORTS (1987] 2 S.C.R.

factual finding facts that the expenditure in this case was to meet the
A
personal liability of payment · of income-tax and wealth-tax and
annuity. From the order of the Tribunal as also the judgment of the
' .,
'
High Court it appears that the assessee had taken the ·stand that even if
the. claim relating to income-tax and wealth-tax was not admissible,
· that part of the claim relatable" to annuity deposit should have been
admitted as it fetched interest. We are inclined to agree with the High
Court that so far as meeting the liability of income-tax and wealth-tax
is concerned it was indeed a personal one and payment thereof cannot f
at all be said to be expenditure laid out or expended wholly and exclu-
sively for the purpose of earning income. So far as annuity deposit is
concerned the Tribunal and the High Court have come to ihe right
c - conclusion that the dominant purpose'was. not to earn income"by way.
of interest but to meet the statutory liability of making the deposit.
The test to apply is that the expenditure. should be wholly and exclu-
sively for the purpose of earning the income. The fact finding autho-·
rities have come to the conclusion that no part of the expenditure came '.
D within the purview.of section 57(iii~ of the Ac,t: ·
/ ' -· . ' . •': - ' :';, -,: . \ . ·. . . '. . . _'

Mr. Ramchandran then· maintained that even if there was an
indirect link between the expenditure and the income earned, the
claim would be admissible and relied upon the observations of Bose, J.
in Eastern Investments Case. No attempt has been made by the asses-
see to point out before the taxing authorities or even before the High·
E Court by placing the necessary facts to justify such a claim. 0,1 mere
assumptions such a point cannot .be allowed to _be raised here for
consideration. In fact unless.the loan is incuned for meeting the liabi-
lity connected with the sources itself. it would ordinarily be difficult to
entertain the claims for deduction. · · · - ·

This appeal has .to fail arid the order ot the High court has to be .·.·~
'affirmed .. We accordingly dismiss the"appeal but leave the parties to
bear their respective costs: , · :. - · · ·· ·
. ,. .
A:P.J. "-.. Appealdismissed.
.,;'

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