T.U. Mehta, J.
1. The question which is involved in this reference is whether the applicant-assessee is entitled to claim deduction as regards the payment of interest to the extent of Rs. 10,279 against the 'income from others sources' under clause (iii) of section 57 of the Income-tax Act. 1961, which is hereinafter referred to as 'the Act'. The facts of the case show that the applicant-assessee derives income from other sources in the shape of interest and dividends. The assessment with which we are concerned in this reference is for the year 1966-67. During the course of the assessment, it was found that the applicant assessee had borrowed loan from the Estate of Harivallabhadas Kalidas. During the accounting period the amount of this loan was of Rs. 5,00,055. Interest paid on this amount during the accounting period was Rs. 26,986 should be allowed as permissible deduction under clause (iii) of section 57 of the Act which says that while computing the chargeable income under the head 'income from other sources' any expenditure, not being in the nature of capital expenditure, laid out or expended wholly or exclusively for the purpose to making or earning such income, should be deducted The Income-tax Officer, who carried out the assessment worked out, on proportionate basis with reference to withdrawals, and the balance available, the interest amount of Rs. 10,279 which alone could be considered for the purpose of meeting her tax liabilities such as income-tax and wealth-tax as well as for the purpose of making annuity deposit. But this deduction was not allowed by the Income-tax Officer as, in his opinion, the case did not fall within clause (iii) of section 57 in view of the decision given by the High Court of Bombay in Bai Bhuriben Lallubhai v. Commissioner of Income-tax. Being aggrieved by this decision, the applicant-assessee approached the Appellant Tribunal. But even the Appellate Tribunal confirmed the department's view and held that the loans in question were taken for the purpose of meeting the obligations of personal character inasmuch as the loans were utilised for the purpose of paying income-tax, wealth-tax and annuity deposit liabilities According to the Tribunal, therefore, the interest paid on these loans had nothing to do with the earning of income from the other sources. One more contention before the Tribunal was that at any rate the loan amount of Rs. 26,000 and odd was taken on interest for the purpose of making annuity deposit which could earn interest to the assessee and, therefore, at least, so far as the interest paid on this loan amount is concerned, the same should be deducted under section 57(iii) of the Act. Even this contention of the assessee was rejected by the Tribunal on the ground that the deposit by way of annuity was, at the relevant time, her statutory obligation and earning of interest thereon was merely incidental and, therefore, even the interest paid on the loan amount taken for making this deposit would not be covered by clause (iii) of section 57.
2. Being aggrieved by this decision of the Tribunal the assessee has preferred this reference in which the Tribunal has referred the following question to us for our opinion :
'Whether, on the facts and in the circumstances of he case, payment of interest to the extent of Rs. 10,279 was not an admissible deduction under section 57(iii) of the Income-tax Act ?'
3. Our answer to this question is that this payment was not an admissible deduction for the reasons which follow :
The contention which is raised on behalf of the assessee by the learned Advocate-General is that during the accounting period, the assessee had to meet with income-tax liability in the amount of Rs. 2,05,063 and wealth-tax liability in the amount of Rs. 57,127. Over and above these two amounts the assessee had also to make the annuity deposit of Rs. 55,310. Thus, the total liability which the assessee was expected to discharge during the accounting period was of Rs. 3,17,500. The learned Advocate-General has Drawn our attention in this connection to annexures 'A' and 'B'. Annexure 'A' shows the income and expenditure account of the assessee for the year ending December 31, 1965, and annexures 'B' is the balance-sheet for that period. The income and expenditure account shows income only from dividends amounting to Rs. 1,98,016. After deducting the expenditure, the balance which was left at the end of the year was Rs. 1,25,159. It was contended that in annexures 'B', which is the balance-sheet, the above referred of income over expenditure is taken into account. But even so, it was not possible for the assessee to meet her tax liability of Rs. 17,500 without taking the loans. It was pointed out that had the assessee preferred not to take loans to meet her tax liabilities, the only other course open to her was to liquidate her shareholding. Had she preferred that course, she would have lost one of her sources of income and would have been liable to pay capital gains tax on the block of shares which she preferred to dispose of. On the other hand, the first course of discharging her tax liability by borrowing loans at suitable rate of interest could save her share investment, thus keeping the source of the income alive, and could also a void the payment of capital gains tax. It was thus pointed out that the assessee has been correctly guided by commercial expediency and has laid out the expenditure in the form of interest on borrowings for the purpose of earning income within the meaning of clause (iii) of section 57.
4. It was also pointed out on behalf of the assessee that the ratio of the decision in Bhuriben's case is no longer hood in view of the decisions given by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax to and Indian Aluminum Co. Ltd. v. Commissioner of Income-tax.
5. In view of these contentions the simple question which arises to be considered his whether the assessee has been able to show that payment of interest on borrowed loans was expenditure laid out for earning income from shares We finds that the contentions raised on behalf of the assessee are mostly covered by two of the decisions of this court. They are Commissioner of Income-tax v. Kasturbhai Lalbhai and Commissioner of Income-tax v. Mrs. Indumati Ratanlal. But, before referring to these decisions, we may refer to some basic principal relevant to the contentions raised on behalf of the assessee.
6. In order to earn deduction contemplated by clause (iii) of section 57, the assessee has to prove two things, viz., (1) that the expenses in question were incurred 'for the purpose' of earning income sought to be taxed, and (2) that such expenditure was incurred 'wholly and exclusively' for the said purpose. This section is analogous to section 12(2) of the Act of 1922. The legislature has made similar provision even or the expenditure incurred for the purpose of business or profession used in section 37 has wider implications than the expression 'for the purpose of making or earning income' used in clause (iii) of section 57 as pointed our by the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. It is obvious that the purpose contemplated by clause (iii) of section 57 is more specific in character in as much as it points to a precise and specific object of making or earning income. It, therefore, follows that so long as a particular item of expenditure is not laid out with the sole object of earning or making income, the deduction contemplated by clause (iii) of section 57 cannot be earned.
7. Therefore, the pertinent question which arises to be considered is whether the interest paid by the assessee on the loans borrowed by her is expenditure incurred by her solely for the purpose of earning dividends
8. The immediate purpose of the assessee in borrowing loans was to discharge her tax liabilities because had there been no such liabilities she would not have borrowed any loan.
9. But at the time of considering whether she should pay up the tax by borrowing loans or by liquidating her shareholding she was motivated to exercise her option in such a manner that the course of action adopted by her was the the least disadvantageous to her. Therefore, her option to borrow loans was guided by a motive to to earn income and not by a purpose to earn the same. It is here that the distinction between motive and purpose assumes importance. 'Purpose' means a design of effecting something. Can it therefore be said that the assessee borrowed loans with a design to earn dividends In fact, she was already earning dividends, but for the tax liabilities loans might not have been borrowed. There is therefore not doubt that the design was to pay taxes by borrowing loans. She could have also designed to pay taxes by liquidating some of her shareholdings but she did not adopt that courses because she was motivated by business consideration. 'Motive' is a force which impels a person to adopt a particular course of action. It is highly subjective in character and con be found out mainly from a course of conduct. But purpose is more apparent and has immediate connection with the result which is brought about. Applying this test to the facts of this case we may ask a question : What was the result which was brought out by the borrowings made by the assessee Obvious answer is that she could discharge her tax liabilities. It cannot be said that the result was to save dividend income which she received from shares, because by borrowing loans she has saved her income not from one source, viz., that shareholding but, from all other sources, from which must be receiving income. Thus saving of income from the others sources is an incidental result of borrowing loans, but that incident does not supply any evidence of 'purpose'. Moreover, in order to show that the assessee has saved income only from a particular source-which in this case is her shareholding-there should be some pointed and specific evidence from which it can be deduced that there was no other income which could have been saved. There is no such evidence in this case. We can conceive cases wherein motive and purpose would coincide and get mixed up.There would also be cases wherein motive is converted into purpose. Cases where a clear nexus is established between expenditure incurred and result achieved are cases of this type. But, in this case, as discussed above, there is no such nexus and the connection between payment of interest and earning of dividends is too remote to be taken into account.
10. It is in the context of his that we shall now proceed to consider what this court has already held in two previous cases, namely, Commissioner of of Income-tax v. Kasturbhai Lalbhai. and Commissioner of Income-tax v. Mrs. Indumati Ratanlal. In Commissioner of Income-tax v. Kasturbhai Lalbhai there were two assesses who had jointly spent about Rs. 33,299 for sending out circulars and collecting proxies and claimed to deduct their shares of this amount in their respective assessments both under section 10(2)(xv) and under section 12(2) of the Act of 1922. The departmental authorities negatived this claim, but the Tribunal allowed the expenditure as a permissible deduction under section 12(2). This court held that deduction permissible under section 12(2) is expenditure incurred solely for the purpose of making or earning the income which is subjected to tax and, therefore, in order to decide whether an expenditure is a permissible deduction under section 12(2), we have to examine that nature of the expenditure. The court further observed that the purpose for which the must not confuse purpose with motive, because what section 12(2) emphasizes is the purpose for which the expenditure is incurred and the word 'purpose' does not mean motive for the transaction. Relying upon the Bombay decision in Bhuriben's case the court further held that the motive which may have operated on the minds of the assesses in making that expenditure was quite irrelevant. During the course of the assessee put reliance upon the Supreme Court decision in Eastern Investments Ltd. which was a case under section 12(2) of the Income-tax Act of 1922. In that case that Supreme Court stated certain propositions relevant to the determination of determination of deduction for the purpose of earning income. One proposition was that it is sufficient to show that money was expended 'not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business'. The assessee put reliance on these observations of the Supreme Court for the purpose of showing that if certain expenditure is made on the ground of commercial expediency and if that expenditure has resulted in making or earning income which is sought to be assessed, then, deduction of that expenditure can be legally allowed. While considering this argument this court has observed as under. 'Now, if the judgment of the Supreme Court is read literally without reference to the terms of section 12(2), it does seem to support the argument urged on behalf of the assesses. But we do not think this argument is correct. What section 12(2) says in so many terms is that the expenditure must be incurred for the purpose of earning the income and, therefore, there must be some connection or nexus between the expenditure incurred and the income earned. The connection may not be direct; even an indirect connection would be sufficient. But the expenditure in order to be admissible under section 12(2) must be incurred directly or indirectly to facilitate the earning of the income, for them only we can say that the expenditure is incurred for the purpose of earning the income. It must be remembered that the proposition quieted by the Supreme Court was taken from the decision in Atherton v. British Insulated and Helsby Cables Ltd., and that was a case relating to income from business and that is why the words used were in order indirectly to facilitate he carrying on of the business. But when the Supreme Court applied that applied that proposition in the construction of section 12(2) it must be raid in the context of that section and so it is clear that the words in their application to section 12(2) must mean 'in order indirectly to facilitate the earning of the income', vide also the difference in language between section 10(2)(xv) and section 12(2). What the third proposition, therefore, provides is that the expenditure need not be obligatory nor incurred with a view directly and immediately to result in the earning of the income but it would be sufficient if the expenditure is incurred voluntarily on the ground of commercial expediency in order indirectly to facilitate the earning of the income. There must be a connection, direct or indirect, between the expenditure incurred and the income earned.....'
11. Ultimately this court has held that the matter must be viewed in the light of the principles of commercial trading and commercial expediency and if the expenditure is incurred on consideration of commercial expediency in order directly or indirectly to facilitate the earning of the income, it would be expenditure for the purpose of earning income within the meaning of section 12(2). Now, even if this test is applied, the question which would still remain to be considered is whether the assessee has been able to show that the borrowings in question were made only with a view to make earning of dividends as stated by her.
12. In Commissioner of Income-tax v. Indumati Ratanlal, this court has considered a question which directly arose under the provisions of clause (iii) of section 57 of the Act. That question was with regard to the deduction of interest on money borrowed the assessee in that case was that if money had not been borrowed that assessee would have had to sell some of the shares for payment of estate duty-since she had no other moneys of her own-and in that event, she would have lost the dividend on those shares, and it was for the purpose of earning such dividend that the moneys were borrowed and interest paid by her. This argument was quite similar to the argument which is advanced in this case on behalf of the assessee. Dealing with this argument this court has observed as under :
'Now this reasoning does, prima facie, appear to be attractive but it is fallacious in that it confuses the purpose of the borrowing with the motive. It may be that the assessee's motive in borrowing moneys for payment of estate duty was to save the shares and dividend accruing from them but that is not a relevant consideration. What we are concerned with for the purpose of section 57(iii) is not the motive but the purpose of the borrowing and we must see what was the purpose for which the moneys were borrowed by the assessee. It is undoubtedly true that if moneys had not been borrowed by the assessee but the assessee had chosen to sell the shares and pay the estate duty out of the sale proceeds, her income form dividend would have been reduced but the it does not, therefore follow that the purpose for which she borrowed moneys was to maintain or preserve the shares and help her to earn dividend on the shares. The moneys were borrowed by the assessee in order to discharge her personal liability and hid purpose had obviously no connection, direct or indirect with the earning of dividend on the shares. As a matter of fact, apart from shares, the deceased husband of the assessee also left an immovable property and if the argument of the assessee were valid, it could equally be said that the purpose of borrowing moneys was to earn income from the immovable property, for if moneys had not been borrowed, the assessee would have had to sell the immovable property and that would have caused loss of income from the immovable property. On this argument what would be the purpose of borrowing moneys Would it be to earn dividend on the shares or to earn income from the immovable property or if there were any other income-producing asset of the assessee, to earn income from such asset The question clearly exposes the fallacy of the argument and shows that there is no connection, direct or indirect, between the borrowing of the moneys and the earning of the income.
If the arguments of the assessee were pressed to its logical conclusion, the result would be that whenever money are borrowed for payment of any liability, it would always be possible to say, save in the rare case where money sufficient to meet the liability are lying idle with the assessee without earning any interest, that if the moneys had not been borrowed, some income producing asset of the assessee, which would include even cash lying on interest, would have had to be sold or realised, and that would have meant loss of income and, therefore, interest paid on borrowed moneys is for the purpose of earning such income as is deductible against it.'
13. From these observations, therefore, it is clear that the distinction which the Bombay High Court made in Bhuriben's case between motive and purpose is well recognized by this court, and therefore, unless it is found that a particular item of interest had some sort of nexus between it and the income in question the deduction contemplated by clause (iii) of section 57 cannot be allowed.
14. The question is whether the ratio of the above two decision of this court is, in any manner, affected by the decision given by the Supreme Court in Indian Aluminum Co. Ltd. The question which was considered by the Supreme Court in that case was whether the expenditure incurred by an assessee in one capacity can be deducted from the income earned by him in another capacity. In that case the court was concerned with the provisions of section 10(2)(XV) of the Income-tax Act, 1922. From the reported judgment it is found that in the English decision of Strong & Co., of Ramsey Ltd. v. Woodifield, view was taken that expenditure cannot be deduction if it is to some other vocation, or fell on the trader in some character other than that of trader. Thus, in that case, deduction was not allowed because the capacity in which the expenditure was made was different from the capacity in which the earning was made. This view was not shared by the subsequent decisions in Smith v. Lion Brewery Co., and Usher's Wiltshire Brewery Ltd. v. Bruce and other cases. The Supreme Court therefore modified the view which it had previously taken in Travancore Titanium Products Ltd. v. Commissioner of Income-tax and held that if expenditure is laid out by owner-cum-trader, and the expenditure is really incidental to the carrying on of its business, it must be treated to have been laid out by him as a trader and as incidental to his business. It is thus clear that by reason of the decision in the Indian Aluminum Co. Ltd. the ratio of this court's decision in Mrs. Indumati Ratanlal is not affected. The principle of commercial expediency is not invoked in Indian Aluminum Co. Ltd., and that case turns upon the effect of dual capacity of the assessee. Moreover, the decision given by the Supreme Court in Indian Aluminum Co. Ltd., falls under section 10(2) (xv) of the Act of 1922 which is equivalent to section 37 of the Act. As already noted by us above, the purpose which is contemplated by section 10(2)(XV) of the Act of 1922 is wider than the purpose which is contemplated either by section 12(2) of the Act of 1922 or clause (iii) of section 57 of the Act of 1961.
15. The contention of the learned Advocate-General was that this decision of the Supreme Court impliedly overrules the ratio of the decision of the Bombay High Court in Bhuriben's case because the High Court of Bombay in effect, has given that decision on the distinction between the personal capacity and the correct to say that the High Court of Bombay has given in Bhuriben's case its decision on any distinction between the different capacities of the assessee. The ratio of the decision in Bhuriben's case is that the expenditure made to discharge a personal obligation does not supply any purpose for earning income even though there is motive to save a particular source of income. It is, therefore, not possible to say that the decision in Bhuriben's case is, in any manner, affected by the Supreme Court decision in Indian Aluminum Co. Ltd.
16. On the contrary, we find two other Supreme Court decisions which show that such type of expenditure cannot be allowed to be deducted under clause (iii) of section 57 of the Act so long as a nexus between them and the income sought to be taxed is not established. One of these decisions is Commissioner of Income-tax v. Malayalam Plantations Ltd. That was a case under section 10(2)(XV) of the Act of 1922 and it related to the payment of estate duty under section 84 of the Estate Duty Act. The question was whether the amounts paid buy way of estate duty were deductible as business expenditure. The Supreme Court held that the payments in question had nothing to do with the conduct of the business and the fact that, in default of the said payment, the revenue would have realised the amount from the business assets was merely a consequence of the default of the assessee in not discharging his legal obligations. Under the circumstances, the court held that it did not make an expenditure any the more expenditure incurred in the conduct of business. Another decision on the point given by the Supreme Court is in T. S. Krishna v. Commissioner of Income-tax. In that case the assessee who had paid wealth-tax in respect of the shares held by him claimed deduction of tax in computing his income form divided and interest under section 57(iii) of the Act. An argument, which is exactly the same as that advanced in this case, was advanced before the Supreme Court on behalf of the assessee. But the same was rejected by the Supreme Court with the following observations :
'Even apart from the amendment disallowing the deduction, the very nature of the income from dividends in respect of which deduction of wealth-tax is claimed dies not, as pointed out by the High Court, bear any relationship direct or incidental to the earning of that income and cannot, therefore, be said to be laid out or expended exclusively for the purpose of making or earning such income within the meaning of sub-clause (iii) of section 57 of the Act or under the corresponding provision of section 10(2)(xv) of the Indian Income-tax-Act, 1922.'
17. These two decisions of the Supreme Court are, in our opinion, sufficient to dispose of the contentions raised on behalf of the assessee in this case.
18. We may, however, note that even if it is believed that the assessee in this case was required to take loans with a view to save her investment in shares, and even if it is further believed that this 'motive' of the assessee to save her share investment amounted to a 'purpose' within the meaning of clause (iii) of section 57, the question which still remains to be considered is whether it can be said that the expenditure in question was incurred 'wholly and exclusively' for the purpose of earning income from investment. It cannot be denied that the immediate purpose for taking loan on interest was to pay income-tax, etc. But since, in the opinion of the assessee, she did not find it commercially expedient to pay taxes by liquidating her share capital, it may also be said that another purpose for which she took the loans on interest was too save one of the sources of her income. But this would only show that the purpose was a dual one. If that be so, it cannot be said that the expenditure was incurred 'wholly and exclusively' for the purpose of making the earning in question. One of the important requirements of clause (iii) of section 57 is that the purpose in question should be 'wholly and exclusively' to earn income. Therefore, if this purpose is coupled with some other extraneous purpose, then it is not possible to say that the deduction as contemplated by clause (iii) of section 57 is earned by the assessee. The learned Advocate-General then contended that, so far as the loan amount which is raised for annuity deposit is concerned, the same is definitely covered by clause (iii) of section 57 because annuity deposit earns interest income for the assessee. Here also we find ourselves in agreement with the view taken by the Tribunal that at the relevant time it was obligatory upon the assessee to make annuity deposit and that the earning of interest through such deposits was merely incidental. Section 280C of the Act makes this position quite clear.
19. To conclude, therefore, our answer to the question referred to us is that the expenditure in question was not an admissible deduction under section 57(iii) of the Act. We, thus, answer the question in favour of the revenue. This reference is accordingly disposed of. The applicant shall bear the costs of the Commissioner in this reference.