Section 57(iii)

Section 57(iii) — the law in short

What the courts have decided on section 57(iii), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• L.K. Trust v CIT Supreme CourtHelps taxpayer
  I borrowed from a bank to buy shares, but the money passed through a group company before the shares were bought. The department says the borrowing was not for my business. Can it disallow my interest under s.36(1)(iii)?
  No, not on the reasoning the High Court gave. The Supreme Court set aside a Karnataka High Court order that had disallowed interest because the borrowed money was ultimately used for the benefit of the assessee's subsidiary rather than for the assessee's own business, and held that the borrowed funds must be looked at from the point of view of commercial expediency. It declared the assessee entitled to deduct the interest paid on the capital of Rs 3,80,00,000 borrowed from the Corporation Bank, and agreed with the Tribunal's interpretation of s.36(1)(iii).
• CIT v V.P. Gopinathan Supreme CourtHelps department
  I borrowed from the same bank against my fixed deposit. Can I be taxed only on the interest earned less the interest I paid on that loan?
  No. The Supreme Court held that the interest received on the fixed deposit is income in the depositor's hands in full, and can be reduced only if some provision of law allows it. There is none here. It makes no difference in law that the loan came from the same bank in which the deposit was placed; if the loan had been from another bank nobody would suggest the income shrank. The Kerala High Court's view that this was a case of mutuality was set aside and the questions were answered in favour of the Revenue.
• Smt. Padmavati Jaikrishna v Addl. CIT Supreme CourtHelps departmentValidity unconfirmed
  I borrowed rather than sell my shares, and used the money to pay my income-tax and wealth-tax and to make the compulsory annuity deposit. The interest on that borrowing has been disallowed under s.57(iii). Was that right?
  Yes, it was right. Interest on money borrowed to discharge a personal liability such as income-tax and wealth-tax is not expenditure laid out wholly and exclusively for the purpose of making or earning the income, and even where the borrowing produced some interest — the annuity deposit did fetch interest — the deduction fails because the dominant purpose was to meet a statutory liability and not to earn income.
• CIT v Rajendra Prasad Moody Supreme CourtHelps taxpayer
  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.
• PCIT v IL & FS Energy Development Company Ltd High CourtHelps taxpayerSuperseded by amendment
  The officer relies on CBDT Circular 5/2014 to disallow under s.14A although I earned no exempt income at all in the year. Does the Circular carry it?
  For years before the Finance Act 2022 Explanation, no. The Delhi High Court held that Circular No. 5/2014 cannot override the express provisions of s.14A read with Rule 8D, because Rule 8D(1) speaks of income not forming part of total income 'for such previous year' — so if no exempt income was earned in the year, no disallowance arises. That position has since been altered prospectively by statute, and the entry must be read with that.
• Jay Metal Industries Pvt. Ltd. v CIT High CourtCuts both waysValidity unconfirmed
  I let a fully furnished, centrally air-conditioned office with a generator on a single lease and claimed the thirty per cent standard deduction under s.24(a). The Assessing Officer has taxed the whole rent as income from other sources. Can I still get some deduction?
  The Delhi High Court held that the lease was composite, that the rent answered the description in s.56(2)(iii), and that the standard deduction under s.24(a) was therefore not available. But it did not leave the assessee with nothing: it directed that while giving appeal effect the Assessing Officer grant the benefit of s.57 — recorded in the judgment as s.57(iii) — in respect of the deduction corresponding to the letting, the Revenue not having disputed that the assessee had never claimed depreciation.
• Punjab State Cooperative Federation of House Building Societies Ltd v CIT-II High CourtHelps departmentValidity unconfirmed
  We lost on s.80P before the Tribunal. Can we raise the s.57 cost of funds point for the first time in the High Court, and does interest we charge our own employees qualify under s.80P(2)(a)(i)?
  No on both counts, on this decision. The Punjab and Haryana High Court refused to entertain questions on s.57(iii) and on deduction of costs against interest assessed under s.56 because no such plea had been argued before the Tribunal, holding that they did not arise from the Tribunal's order and raised no substantial question of law. It also upheld the Tribunal's view that s.80P(2)(a)(i) is available only in respect of the society's core activities, so that interest from other banks and interest received from employees who are not members does not qualify.
• Bharti Bhushan Jindal v ACIT ITATHelps departmentValidity unconfirmed
  I lend money on the side and offer the interest as income from other sources. Four borrowers have not repaid and I have written the principal off. Can I deduct it under s.57(iii), or as a bad debt?
  Neither. The Chandigarh Bench held that the principal advanced is a capital outflow, and s.57(iii) expressly excludes expenditure in the nature of capital expenditure, so a write-off of the principal cannot be deducted from interest assessed under s.56. The bad-debt route under s.36 also failed, because the amount written off had never been taken into account in computing income in any earlier year — only the interest had been offered.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.