I borrowed to buy shares and paid interest, but the shares paid no dividend this year. Can I still deduct the interest?
Yes, on the section as it then stood. The Supreme Court held that section 57(iii) looks to the purpose of the expenditure, not to its result. The expenditure must be laid out wholly and exclusively for the purpose of making or earning income, but nothing in the section requires that purpose to fructify into a return, and it does not say the expenditure is deductible only if income is in fact made. The plain construction of the words is that no income need actually have been earned. The Court rejected the Revenue's argument that the narrower wording of section 57(iii), compared with section 37(1), makes the deduction conditional on income arising.
Decided by the Supreme Court (Supreme Court of India - P.N. Bhagwati, V.D. Tulzapurkar and R.S. Pathak JJ; judgment by Bhagwati J) on 1978-10-04, reported as (1978) 115 ITR 519; 1979 AIR 373; 1979 SCR (1) 1047; 1979 (1) SCC 250; 1979 SCC (Tax) 43; (1979) Tax LR 123. It bears on section 57(iii), section 56, section 37(1), section 257 of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the authority for the proposition that purpose, not result, governs a deduction expressed in terms of purpose - a point that recurs wherever a section speaks of expenditure for the purpose of making or earning income. Its two supporting arguments are worth as much as the holding. The first is the anomaly: on the Revenue's reading, expenditure of Rs 1,000 would be fully deductible if a rupee of income arose, producing a loss of Rs 999, but wholly disallowed if nothing arose - an illogicality the legislature cannot have intended. The second is accounting: whatever the statute allows as proper expenditure is debited and whatever income there is, is credited, and the resulting profit or loss is struck; expenditure that is otherwise proper does not cease to be proper because there is no receipt. The Court also resolved a split, approving seven High Courts and holding the Patna and Calcutta decisions to the contrary incorrect.
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The Court said the question was purely one of law on the true construction of section 57(iii), so it did not set out the facts in detail. The two assessees were brothers. Each had borrowed money to invest in the shares of certain companies. In assessment year 1965-66, the relevant accounting year ending on 10 April 1965, each paid interest on the borrowed money but received no dividend on the shares bought with it. Each claimed deduction of the interest. The Income Tax Officer and, on appeal, the Appellate Assistant Commissioner rejected the claim on the ground that as the shares yielded no dividend in the year, the interest could not be regarded as expenditure laid out wholly and exclusively for the purpose of making or earning income chargeable under the head income from other sources. The Tribunal disagreed with the taxing authorities and upheld the claims. On the Revenue's applications, and because the High Courts were divided on the question, the Tribunal referred it directly to the Supreme Court under section 257: whether interest on money borrowed for investment in shares which had not yielded any dividend is admissible under section 57(iii).
The question was answered in favour of the assessees in both references, with costs. What section 57(iii) requires is that the expenditure 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, and that purpose must be the making or earning of income - but the section does not require the purpose to be fulfilled for the expenditure to qualify. It does not say the expenditure is deductible only if income is made or earned, and there is nothing in its language to suggest that the purpose must fructify into a benefit by way of a return in the shape of income. So it is not necessary that any income should in fact have been earned as a result of the expenditure. The Court approved the decisions of the Madras High Court in Appa Rao and Mohamed Ghouse, the Bombay High Court in Ormerods (India), the Allahabad High Court in Chhail Behari Lal, the Madhya Pradesh High Court in Dr Fida Hussain G. Abhasi, the Kerala High Court in M.N. Ramaswamy Iyer and the Orissa High Court in Gopal Chand Patnaik, and held the contrary view of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh and of the Calcutta High Court in Madanlal Sohanlal to be incorrect.
The Court placed section 57(iii) in its setting. Section 56(1) charges under income from other sources every kind of income not chargeable under the heads specified in items A to E of section 14, and sub-section (2) expressly includes dividends, so dividend on shares falls under that head; section 57 allows deductions in computing income under it, clause (iii) covering any other expenditure, not being capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning such income. The Revenue's argument was that the making or earning of income is a sine qua non, and that the legislature had deliberately used narrower words than in section 37(1), which speaks of expenditure for the purpose of the business or profession rather than for the purpose of making or earning such income. The Court answered first on the plain words: the section speaks of purpose, and purpose is not the same as result. It relied on Eastern Investments Ltd, where the corresponding section 12(2) of the 1922 Act was in identical terms and Bose J had said it is not necessary to show that the expenditure was a profitable one or that any profit was in fact earned. It then exposed the anomaly in the Revenue's position - a rupee of income would let the whole expenditure through, producing a loss, while no income would disallow it altogether - and observed that the legislature cannot have intended such illogicality. It added the accounting argument: in casting a profit and loss account for a source of income, proper expenditure is debited and income credited, and the result is struck; it makes no difference to that process whether the expenditure is one figure or another or the income is one figure or nil, and expenditure that is otherwise proper cannot cease to be proper merely because no income was received. On the comparison with section 37(1) the Court accepted that its language is a little wider, but held that this cannot cut down section 57(iii), whose language is clear and must be given its plain natural meaning rather than a narrow and constricted one contrary to that language. Lord Thankerton's statement in Hughes v Bank of New Zealand was to the same effect: expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of the trade, and it does not require the presence of a receipt on the credit side to justify the deduction of an expense.
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. Section 57(iii) does not require that this purpose must be fulfilled.
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Handle my notice → Ask a CA on WhatsAppYes, on the section as it then stood. The Supreme Court held that section 57(iii) looks to the purpose of the expenditure, not to its result. The expenditure must be laid out wholly and exclusively for the purpose of making or earning income, but nothing in the section requires that purpose to fructify into a return, and it does not say the expenditure is deductible only if income is in fact made. The plain construction of the words is that no income need actually have been earned. The Court rejected the Revenue's argument that the narrower wording of section 57(iii), compared with section 37(1), makes the deduction conditional on income arising. This was decided by the Supreme Court (Supreme Court of India - P.N. Bhagwati, V.D. Tulzapurkar and R.S. Pathak JJ; judgment by Bhagwati J) and bears on section 57(iii), section 56, section 37(1), section 257 of the Income Tax Act 1961. It is reported as (1978) 115 ITR 519; 1979 AIR 373; 1979 SCR (1) 1047; 1979 (1) SCC 250; 1979 SCC (Tax) 43; (1979) Tax LR 123. This is the authority for the proposition that purpose, not result, governs a deduction expressed in terms of purpose - a point that recurs wherever a section speaks of expenditure for the purpose of making or earning income. Its two supporting arguments are worth as much as the holding. The first is the anomaly: on the Revenue's reading, expenditure of Rs 1,000 would be fully deductible if a rupee of income arose, producing a loss of Rs 999, but wholly disallowed if nothing arose - an illogicality the legislature cannot have intended. The second is accounting: whatever the statute allows as proper expenditure is debited and whatever income there is, is credited, and the resulting profit or loss is struck; expenditure that is otherwise proper does not cease to be proper because there is no receipt. The Court also resolved a split, approving seven High Courts and holding the Patna and Calcutta decisions to the contrary incorrect. If it applies to you, the first step is this: Fix the purpose at the time the money was borrowed and applied, and document it; that is what the section asks about, and the absence of a return in the year is not an answer to it.
The Court said the question was purely one of law on the true construction of section 57(iii), so it did not set out the facts in detail. The two assessees were brothers. Each had borrowed money to invest in the shares of certain companies. In assessment year 1965-66, the relevant accounting year ending on 10 April 1965, each paid interest on the borrowed money but received no dividend on the shares bought with it. Each claimed deduction of the interest. The Income Tax Officer and, on appeal, the Appellate Assistant Commissioner rejected the claim on the ground that as the shares yielded no dividend in the year, the interest could not be regarded as expenditure laid out wholly and exclusively for the purpose of making or earning income chargeable under the head income from other sources. The Tribunal disagreed with the taxing authorities and upheld the claims. On the Revenue's applications, and because the High Courts were divided on the question, the Tribunal referred it directly to the Supreme Court under section 257: whether interest on money borrowed for investment in shares which had not yielded any dividend is admissible under section 57(iii). The matter was decided on 1978-10-04 by the Supreme Court (Supreme Court of India - P.N. Bhagwati, V.D. Tulzapurkar and R.S. Pathak JJ; judgment by Bhagwati J). On those facts the Supreme Court held as follows. The question was answered in favour of the assessees in both references, with costs. What section 57(iii) requires is that the expenditure 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, and that purpose must be the making or earning of income - but the section does not require the purpose to be fulfilled for the expenditure to qualify. It does not say the expenditure is deductible only if income is made or earned, and there is nothing in its language to suggest that the purpose must fructify into a benefit by way of a return in the shape of income. So it is not necessary that any income should in fact have been earned as a result of the expenditure. The Court approved the decisions of the Madras High Court in Appa Rao and Mohamed Ghouse, the Bombay High Court in Ormerods (India), the Allahabad High Court in Chhail Behari Lal, the Madhya Pradesh High Court in Dr Fida Hussain G. Abhasi, the Kerala High Court in M.N. Ramaswamy Iyer and the Orissa High Court in Gopal Chand Patnaik, and held the contrary view of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh and of the Calcutta High Court in Madanlal Sohanlal to be incorrect.
The Court placed section 57(iii) in its setting. Section 56(1) charges under income from other sources every kind of income not chargeable under the heads specified in items A to E of section 14, and sub-section (2) expressly includes dividends, so dividend on shares falls under that head; section 57 allows deductions in computing income under it, clause (iii) covering any other expenditure, not being capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning such income. The Revenue's argument was that the making or earning of income is a sine qua non, and that the legislature had deliberately used narrower words than in section 37(1), which speaks of expenditure for the purpose of the business or profession rather than for the purpose of making or earning such income. The Court answered first on the plain words: the section speaks of purpose, and purpose is not the same as result. It relied on Eastern Investments Ltd, where the corresponding section 12(2) of the 1922 Act was in identical terms and Bose J had said it is not necessary to show that the expenditure was a profitable one or that any profit was in fact earned. It then exposed the anomaly in the Revenue's position - a rupee of income would let the whole expenditure through, producing a loss, while no income would disallow it altogether - and observed that the legislature cannot have intended such illogicality. It added the accounting argument: in casting a profit and loss account for a source of income, proper expenditure is debited and income credited, and the result is struck; it makes no difference to that process whether the expenditure is one figure or another or the income is one figure or nil, and expenditure that is otherwise proper cannot cease to be proper merely because no income was received. On the comparison with section 37(1) the Court accepted that its language is a little wider, but held that this cannot cut down section 57(iii), whose language is clear and must be given its plain natural meaning rather than a narrow and constricted one contrary to that language. Lord Thankerton's statement in Hughes v Bank of New Zealand was to the same effect: expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of the trade, and it does not require the presence of a receipt on the credit side to justify the deduction of an expense. In the words reproduced by the source cited on this page: "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. Section 57(iii) does not require that this purpose must be fulfilled."
It was decided by the Supreme Court on 1978-10-04 and is reported as (1978) 115 ITR 519; 1979 AIR 373; 1979 SCR (1) 1047; 1979 (1) SCC 250; 1979 SCC (Tax) 43; (1979) Tax LR 123. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 57(iii), section 56, section 37(1), section 257, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in favour of the assessees in both references, with costs. What section 57(iii) requires is that the expenditure 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, and that purpose must be the making or earning of income - but the section does not require the purpose to be fulfilled for the expenditure to qualify. It does not say the expenditure is deductible only if income is made or earned, and there is nothing in its language to suggest that the purpose must fructify into a benefit by way of a return in the shape of income. So it is not necessary that any income should in fact have been earned as a result of the expenditure. The Court approved the decisions of the Madras High Court in Appa Rao and Mohamed Ghouse, the Bombay High Court in Ormerods (India), the Allahabad High Court in Chhail Behari Lal, the Madhya Pradesh High Court in Dr Fida Hussain G. Abhasi, the Kerala High Court in M.N. Ramaswamy Iyer and the Orissa High Court in Gopal Chand Patnaik, and held the contrary view of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh and of the Calcutta High Court in Madanlal Sohanlal to be incorrect. It arises in Deductions & Disallowances matters, on section 57(iii), section 56, section 37(1), section 257 of the Income Tax Act 1961, and was decided by Supreme Court of India - P.N. Bhagwati, V.D. Tulzapurkar and R.S. Pathak JJ; judgment by Bhagwati J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not accept the argument that a deduction framed in terms of purpose requires the income actually to arise in the same year. Check what now governs interest against dividend income before claiming in full - there are later provisions restricting expenditure related to income that does not form part of total income, and a specific cap on interest deductible against dividend, neither of which existed when this case was decided. Where the section you are arguing under uses the wider for the purpose of the business formula, note that the Court treated section 37(1) as a little wider, so this case is an a fortiori argument there.
Still good law. I read the full judgment to its answer on the references. I checked no later authority or statutory history in this session. The construction - purpose rather than result - is still the way section 57(iii) and provisions in similar terms are read. But the practical outcome on borrowings to buy shares has been overtaken, and a reader must not use this case without dealing with what came after. I state from my own knowledge, unverified here, that a provision was later inserted disallowing expenditure incurred in relation to income which does not form part of total income, which mattered while dividend was exempt in shareholders' hands, and that a proviso now limits the deduction against dividend income to a percentage of that dividend. Which of those applies depends on the year. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The library had carried a second page for this same judgment at /caselaw/case/cit-v-rajendra-prasad-moody-interest-allowed-though-no-dividend/; the two have been merged and that address now redirects here. The Court deliberately did not set out the facts in detail, saying the question was purely one of law, so the judgment records nothing about the amounts borrowed, the interest paid, the companies invested in, or why no dividend was declared - all of which would matter if the genuineness of the purpose were in issue. It also did not consider what happens where shares are bought with no realistic prospect of dividend, or where the dominant purpose is capital appreciation rather than income; the purpose was assumed. The batch line lists section 36(1)(iii), which the judgment does not discuss. The later provisions noted in the validity field are from my own knowledge and were not checked against the statute. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in favour of the assessees in both references, with costs. What section 57(iii) requires is that the expenditure 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, and that purpose must be the making or earning of income - but the section does not require the purpose to be fulfilled for the expenditure to qualify. It does not say the expenditure is deductible only if income is made or earned, and there is nothing in its language to suggest that the purpose must fructify into a benefit by way of a return in the shape of income. So it is not necessary that any income should in fact have been earned as a result of the expenditure. The Court approved the decisions of the Madras High Court in Appa Rao and Mohamed Ghouse, the Bombay High Court in Ormerods (India), the Allahabad High Court in Chhail Behari Lal, the Madhya Pradesh High Court in Dr Fida Hussain G. Abhasi, the Kerala High Court in M.N. Ramaswamy Iyer and the Orissa High Court in Gopal Chand Patnaik, and held the contrary view of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh and of the Calcutta High Court in Madanlal Sohanlal to be incorrect.
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