Judgment

BHAGWATI, J.:- These are two references made by the Tribunal to this Court under S. 257 of the Income-tax Act, 1961 in view of a conflict in the decisions of High Courts on the question as to whether interest on monies borrowed for investment in shares in allowable expenditure under S. 57 (iii) when the shares have not yielded any return in the shape of dividend during the relevant assessment year. The preponderance of judicial opinion is in favour of the view that such interest is admissible, even though no dividend is received on the shares, but there are two High Courts which have taken a different view and hence it is necessary for this Court to set the controversy at rest by finally deciding the question. Since the question is purely one of law turning on the true interpretation of S. 57 (iii), it is not necessary to set out the facts giving rise to these two references in any detail. It would be sufficient to state that the assessees in these two references are brothers and each of them had borrowed monies for the purpose of making investment in shares of certain companies and during the assessment year 1965-66 for which the relevant accounting 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 interest paid on the borrowed monies but this claim was negatived by the Income-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 Sources" so as to be allowable as a permissible deduction under S. 57 (iii). The Tribunal, however, on further appeal, disagreed with the view taken by the taxing authorities and upheld the claim of each of the two assessees for deduction under S. 57 (iii). The Revenue being aggrieved by the decision of the Tribunal made an application in each case for reference of the following question of law, namely :-

"Whether on the facts, and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under S. 57 (iii)?"

and since there was divergence of judicial opinion on this question, the Tribunal referred it directly for the opinion of this Court.

2. The determination of the question before us turns on the true interpretation of S. 57 (iii) and it would, therefore, be convenient to refer to that section, but before we do so, we may point out that S. 57 (iii) occurs in a fasciculus of sections under the heading F-Income From Other Sources. Section 56 which is the first in this group of sections enacts in sub-sec. (1) that income of every kind which is not chargeable to tax under any of the heads specified in S. 14, Items A to E shall be chargeable to tax under the head Income From Other Sources and sub-sec. (2) includes in such income various items, one of which is dividends. Dividend on shares is thus income chargeable under the head Income From Other Sources. Section 57 provides for certain deductions to be made in computing the income chargeable under the head "Income From Other Sources" and one of such deductions is that set out in Cl. (iii) which reads as follows :

"Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."

The expenditure to be deductible under S. 57 (iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The argument of the Revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not