COMMISSIONER OF INCOME TAX, WEST BENGAL III, CALCUTTA versus RAJENDRA PRASAD MOODY, CALCUTTA ETC.

Citation: [1979] 1 S.C.R. 1047 · Decided: 04-10-1978 · Supreme Court of India · Bench: P.N. BHAGWATI · Disposal: Reference answered

Judgment (excerpt)

COMMISSIONER OF INCOME TAX, WEST BENGAL III, 
A 
CALCUTTA 
v. 
RAJENDRA PRASAD MOODY, CALCUTTA ETC. 
October 4, 1978 
[P. N. BHAGWATI, V. 0. TuLZAPURKAR AND R. S. PATHAK, JJ.J 
Allowable expenditur~Whether interests on monies borrowed for invest-
ment in shares is allowable expenditure, when the shares have· not yielded any 
return in the shape of dividend during the relevant assessment year-Interpreta-
tion of Sec. 57(iii) of Income-tax .Act. 1961. 
The respondents assessees in the two references are brothers and each of them 
had borrowed monies for the purpose of making investments in shares of certain 
companies and during the assessment year 1965-66 for which the relevant account.. 
ing 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 iaterest paid on the borrowed monies but this claim was negatived by 
the Inconle 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 Source" so as to be allowable as a permissible deduction under Sec. 
57(iii). The Tribunal, ho:wever on further appeal, disagreed with the view taken 
by the Taxing Authorities and uph~d the claim of each of the two assessees for 
deduction under Sec. 57(iii). 
Answering in favour of the assessees and against the Revenue the question 
in the references the Court, 
HELD : (1) The plain and natural construction of the language of Sec. 
57(iii) of the Income Tax Act 1961 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. What Sec. 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 Sec. 57 (iii) and that purpose must 
be making or earning of income. Sec. 57(iii) does not require tl;tat 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 Sec. 57 (iii) to suggest that the 
purpose for which expenditure is made should fructify into any benefit. [1051 
' 
B-E] 
Eastel'n Investm~nts Ltd. v. Commissioner of Income-tax, 20 l.T.R. (SC) 
applied. 
(2) The contention ef the Revenue that the expenditure would disqualify for 
deduction only if no income resnlts from such expenditure in a particular assess-
ment year but, if there is some income, however small or meagre, the expenditure 
1047 
B 
c 
D 
E 
F 
G 
H 
A 
B 
c 
D 
E 
~+. 
1048 
SUPREME COURT REPORTS 
[1979] 1 s.c.R. 
would be eligible for deduction, would lead to a strange and highly anomalous 
result and the legislature could never have intended to produce such illogicality. 
Moreover when a profit and loss account is cast in respect of any 
source of 
income what is allowed by the statute as proper expenditure \vould be debited as 
an outgoing and income would be credited as a rece,ipt and the resulting income 
or loss would be determined. It wquld make no difference to this process 
whether the expenditure is x or y, or nil; whatever is the proper expenditure 
allowed by the statute would be debited. 
Equally, it would make no difference 
whether there is any income and if so, what. since whatever it be, x or y or nil 
would be credited. And the ultimate profit or loss would be found. Whatever 
is proper outgoing by way of expenditure must be debited irrespective whether 
there is receipt of income or not. That is the plain requirement of proper 
accounting and the interpretation of Sec. 57(iii) cannot be different. The deduc-
tion of the expenditure cannot, in the circumstances be held to be conditional 
upon the making or earning of t!le inrome. [1051 G, H, 1052 A-DJ 
(3) It is true that tho language of Sec. 37(i) of the Act is a littlo wider than 
that of Sec. 5(iii\. But that cannot ma.ko any difference

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