Law: Income Tax Act, 1961

Section: 57,57(iii)

Income-tax---Income from other sources--Deduction---Condition precedent for allowance---Expenditure must be with primary motive of earning income--­Purchase of shares with view to acquiring controlling interest in company--­Object was not to earn dividend---Interest on loan taken to purchase shares not deductible---Indian Income Tax Act, 1961, S.57(iii). In order to get deduction under section, 57(iii) of the Income Tax Act, 1961, the expenditure should be incurred wholly and exclusively for the purpose "of making or earning the income from other sources" In order that an expenditure may be admissible under section 57(iii) of the Act, it is necessary that the primary motive of incurring it is directly to earn income falling under the head "Income from other sources". Unlike section 37 which allows deduction of expenditure "incurred wholly and exclusively for the purposes of the business", under section 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head "Income from other sources". Where, admittedly, shares in a company were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend: Held, that the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose could not be held to be expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends. From the nature of transaction, it was clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would not be allowable as a deduction under section 57(iii) of the Act. Sarabhai Sons (P.) Ltd. v. CIT (1993) 201'ITR 464 (Guj.) fol. Chinai & Co. (Pvt.) Ltd. v. CIT (1994) 206 ITR 616 (Bom.) ref. THIS JUDGMENT DELIVERED BY: DR. B.P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion at the instance of the Revenue: "Whether, on the facts and in the circumstances of the…

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