Law: Income Tax Act, 1961

Section: 56

Income tax--Allowable Deduction Nexus between expenditure and income has to exist. The essential condition precedent attached to the allowability of the deduction of expenditure is that it must be incurred solely for the purposes of earning that income. No other expenditure either business or profession or personal is deductible. In other words nexus between expenditure and income has to exist. This nexus need not be always direct. All the same it has to be established that the assessee had no option except to incur the expenditure in order to preserve the income earning apparatus or in other words to 'make earning of that income possible. The assessee was a partner in the firm after she ceased to be a partner she withdrew various sums from her accounts in the books of the firm for which firm charged interest from her at the rate of 9 per cent per annum. She made deposits out of the monies withdrawn by her from which she received interest at 12 per cent per annum. The assessee claimed that borrowings from the firm were for payment of advance tax and meeting the other personal expenses and as a result she was entitled to deduction of the amount of interest paid by her to the firm in determining her income from interest from deposits. Held, the interest paid was not deductible in determining the income of the assessee, which was taxable under the heading "other sources". It might be that commercial expediency demanded that borrowings from the firm should be made to keep those deposits intact but for establishing nexus not the motive but the purpose was relevant. The two viz, the expenditure and the income were, in this case, unconnected. Even according to the case of the assessee the amount was borrowed not only for the payment of advance tax but also for meeting other personal expenses. Commissioner of Income tax v. H.H. Maharani Vijaykuverba Saheb (1975) 100 I T R 67 (Bom.) ref. JUDGMENT MOHTA, J. At the instance of the assessee, the following question has been referred by the Income tax Appellate Tribunal for opinion of this Court: "Whether in the facts and circumstances of the case, the following amounts of interest paid by the assessee are deductible in…

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