Law:

Section:

Section 36(1)(iii) , read with section 57 of Income Tax Act, 1961 [Corresponding to section10(2)(iii), read with section 12(2) of the Indian Income-tax Act, 1922] - Interest on borrowed capital - Assessment year 1959-60 - Assessee-firm carrying on business as share and stock broker, claimed deduction of interest paid on overdraft against dividend income under section 12(2) which was disallowed by ITO and AAC - However, on second appeal Tribunal allowed assessee's claim - Whether mere fact that income by way of dividend was accrued and that expenditure incurred was in same manner or other related to accrual of dividend income was not sufficient to deduct said expenditure under that head - Held, yes - Whether fact that object of borrowing was to purchase shares for purposes of business, interest paid thereon could not be said to be expenditure incurred solely for purpose of making or earning dividend income and as such it could not be deducted from income from dividends but only from business income - Held, yes FACTS The assessee-firm was carrying on business as share and stock broker on a large scale. For the assessment year 1959-60, the assessee claimed deduction of interest paid on overdraft account under section 12(2) of 1922 Act against its dividend income. During the assessment year, the income earned by the assessee was form three sources income earned by it under the head "business", income earned by it under the head "securities" and income earned by it under the head "dividends". The ITO did not allow the claim of the assessee for deduction of the said amount against its dividend income. The ITO, however, allowed the said amount as deduction against the assessee's business income. On second appeal the Tribunal held that the shares in question were admittedly the stock-in-trade of the assessee. The dividends received from these shares as also the interest paid to the banks on the loans taken with the shares as security must form part of the normal business transactions of the assessee. All the same, dividend income required to be assessed under section 12 of 1922 Act so that it was necessary to separate it from the otherwise trade receipts. In arriving…

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