1. At the instance of the assessee, the following question has been referred by the Income-tax Appellate Tribunal for opinion of this court :
'Where, in the facts and circumstances of the case, the following amounts of interest paid by the assessee are deductible in determining the income of the assessee which is taxable under the heading 'Other sources' for the respective years : Assessment year Amount of interestRs.1964-65 1,7241965-66 3,4211966-67 4,190 ?'
2. Smt. Zubedabai, wife of Haji Umer Gani, the assessee, was a partner in the firm of Haji Umer Gani and Co. up to the end of March 1962. After she ceased to be a partner, she withdrew various sums from her accounts in the books of the firm, for which the firm charged interest from her at the rate of 9 per cent. per annum. She made deposit with one P. S. S. Chettiar out of the moneys withdrawn by her, from which she received interest at 12 per cent. per annum. Her income from such interest in the accounting years ending with March, 1964, March, 1965, and March 1966, which are the previous years for the three assessment years under consideration, namely, 1964-65 to 1966-67, was respectively to the tune of Rs. 13,718, Rs. 14,200 and Rs. 9,373. The assessee claimed that the borrowings from the firm were for payment of advance tax and meeting other personal expenses, and as a result she was entitled to deduction of the amount of interest paid by her to the firm in determining her income from interest on deposits. It is obvious that the income was declared under the hear 'Other sources' under s. 56 of the I.T. Act, 1961, and deduction was claimed under s. 57(iii). The ITO disallowed the claim of deduction. The assessee filed appeals to the AAC, who allowed the deduction and consequently appeals were filed.
3. The Department challenged these orders before the Tribunal. All these appeals were disposed of by a common order of the Tribunal dated February 28, 1972. The Tribunal came to the conclusion that the expenditure was not 'laid out or expended wholly and exclusively for the purpose of making or earning such income' as mentioned in s. 57(iii). The question referred arises out of this order of the Tribunal.
4. Now, there could be no manner of doubt that the income was rightly claimed under the head 'Other sources' under s. 56. The income under this head is to be computed after working out certain deductions under s. 57, and one type of such deduction is referred to in s. 57(iii). Two other provisions of the Act, namely, ss. 37 and 58, may be noticed to appreciate the import of s. 57(iii). Section 37 provides that while computing the income from a business or profession source, one of the permissible deduction is expenditure 'laid out or expended wholly or exclusively for the purpose of business or profession'. It is thus apparent that this provision about deduction contained in s. 37 is in much wider terms than the provision in s. 57(iii). Section 58(1)(a)(i) provides that notwithstanding anything contrary in s. 57, expenditure in the nature of personal expenses of the assessee shall not be deductible in computing income under the head 'Other sources'. Thus, any amount which may be deductible under s. 57 would wholly be disallowed if it falls within s. 58(1)(a)(i). Thus the essential condition precedent attached to the allowability of the deduction of expenditure under s. 57(iii) is that it must be incurred solely for the purpose of earning that income. No other expenditure, either for business or for profession or personal, is deductible. In other words, nexus between expenditure and income has to exist.
5. It is true that this nexus need not be always direct. All the same it has to be established that the assessee had not option except to incur the expenditure in order to preserve the income earning apparatus or, in other words, to make earning of that income possible. What is contended on behalf of the assessee by Shri Thakkar, the learned counsel, is that commercial expediency demanded that borrowings from the firm should be made to keep those deposits intact, for, otherwise, the deposits would have been required to be liquidated for payment of taxes and, therefore, at least to that extend deduction should have been allowed. It seems to us that this line of reasoning is not sound. If the argument is carried to its logical conclusion, the result would be ridiculous. Interest paid on any borrowings for discharging any statutory or commercial liability would be deductible, for it would always be possible to say that if those borrowings had not taken place, the income earning apparatus, including deposits such as these, would have to be liquidated, and that consequently would have resulted in loss of income. But in the scheme of s. 57(iii) this is not permissible. May be that the motive behind the borrowings was what was suggested. But for establishing a nexus, not the motive but the purpose is relevant. It is obvious that the interest on deposits would have been continued even if the advance tax was not paid. The two, namely, the expenditure and the income, are thus unconnected. Our attention was invited to the decision of this court in CIT v. H H Maharani Shri Vijaykuverba Saheb of Moravi : 100ITR67(Bom) . This was a case of liability of estate duty which was attached to a property from which income was derived. On a finding that for the purpose of maintaining or preserving the income earning apparatus, expenditure for which deduction was claimed was absolutely necessary, the nexus was held to be established and, consequently, deduction claimed was held to be allowable. In our judgment, this aspect makes all the difference. The following observations from that decision are to the point (at p. 77 of 100 ITR) :
'Since, on the facts in this case, it is clear that the borrowings were made by the trustee's avowedly for the purpose of meeting the estate duty liability which attached to the property which was the subject-matter of the trust and that too for the purpose of maintaining or preserving the erstwhile income that was being received from the corpus of the said trust, in our view, the nexus between the expenditure incurred and the earning of the income could be said to be easily established.'
6. That apart, it is pertinent to notice that even according to the assessee the amount was borrowed not only for the payment of advance tax but also for meeting other personal expenses. It has not been demonstrated as to which part or percentage of the borrowings was for meeting the personal expenses and which was for payment of discharging statutory personal liability.
7. Thus, the question is answered in the negative and in favour of the Revenue. The assessee to bear the costs of this reference.