In this appeal by revenue and cross-objection by assessee, dispute is about sum of Rs. 59,230, allowed by AAC, as interest paid by assessee on borrowing and as admissible in computing income of assessee. 2. assessee is HUF known as K.M.D. Thackersey (HUF). assessment year is 1976-77, for which previous year ended on 31-3-1976. On scrutiny of computation of income filed by assessee, with his return of income for this year, ITO noticed that assessee had claimed deduction of Rs. 60,836, being deficit in interest as per 'Vatav' account. On examination of details filed for this year and earlier year, ITO found that this deficit in interest account was on account of interest referable to 1,358 shares of Crown Spg. & Mfg. Co. Ltd., which were acquired by assessee with borrowed funds of Rs. 4,97,000. ITO also found that 1,350 shares out of these shares, of value of Rs. 4,94,000, had been partitioned by assessee by end of March 1975. ITO, therefore, concluded that interest relating to said 1,350 shares, which worked out to Rs. 59,820 (at 12 per cent of Rs. 4,94,000) could not be allowed as deduction in this year. ITO rejected assessee's claim for deduction of interest to this extent and allowed only balance of Rs. 1,556 in computing assessee's total income. 3. assessee appealed against this disallowance of Rs. 59,280, and contended that he was entitled to deduction of interest paid on borrowings, once it was proved that borrowings were invested for purposes of earning income. He argued that it was not necessary to see whether investments had actually yielded any income in any particular year., He, therefore, pleaded that claim of assessee to get deduction of interest was not defeated only because shares acquired out of borrowed funds were not held by assessee during year of account. assessee relied on two decisions in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) and Kevalchand Nemchand Mehta v. CIT [1968] 67 ITR 804 (Bom.). 4. AAC held that two decisions, relied on by assessee, were distinguishable on facts from assessee's case. He pointed out that shares had left hands of assessee consequent on partial partition of assessee-HUF and that there were absolutely no prospects of earning any income from said shares by assessee-HUF. Hence, he held that ratio of Supreme Court decision was inapplicable to assessee's case. AAC next pointed out that in decision of Bombay High Court, it was held that income from investments acquired out of borrowed funds was still income of assessee in law, in view of deeming provisions of section 16(3) of Indian Income-tax Act, 1922 ('the 1922 Act') but in case of present assessee, income, if any, from shares allotted to coparceners could never be considered as income of assessee-HUF and that Bombay High Court decision, though somewhat identical on facts, was of no help to assessee's case. 5. In paragraph No. 7 of his order, AAC examined whether assessee's claim could be considered for other reasons and held that assessee was enabled to earn income from already existing investments, by not immediately liquidating debt by forced sales of other investments and that in this view of matter, it could be accepted that interest paid by assessee had ultimately helped assessee in earning income for assessee. AAC was of view that it could not, therefore, be said that there was no nexus whatever between payment of interest and earning of income from other investments. AAC, therefore, held that assessee was entitled to deduction of interest paid on borrowing. In this view, AAC did not consider assessee's alternative claim, set out in paragraph No. 8 of his order. AAC, therefore, allowed assessee's appeal. 6. revenue feels aggrieved by this order of AAC and has come up in appeal to Tribunal on following two grounds: " 1. On facts and in circumstances of case and in law, learned AAC erred in holding that interest payable on loan utilized for purpose of acquiring certain shares is admissible deduction in computation of assessee's total income for this year, even though these shares are no longer held by assessee now. 2. On facts and in circumstances of case and in law, learned AAC erred in deleting additions of Rs. 59,280 made by ITO on account of interest claimed by assessee as deduction. " 7. In his cross-objection, assessee has raised following ground: " learned Appellate Assistant Commissioner erred in not deciding question that interest attributable to borrowing made for purposes of investment and which was disallowed being Rs. 59,280, as determined by ITO, was excessive and ought to have in any case been much less. " 8. We have heard learned counsels on both sides and carefully considered their arguments in light of materials placed before us and authorities cited by them. 9. Shri Roy Alphonso submitted that for deduction to be allowed under section 57(iii) of Income-tax Act, 1961 ('the Act'), there must be source or rather specific source of income, since section uses words 'such income'. He argued that expenditure should correlate specifically to particular item of income chargeable under section 56 of Act and not generally to income assessable under head 'Income from other sources', to which income it could be correlated. point made out by learned departmental representative was that particular income would be derived from particular source in contradistinction to section 37(1) of Act, which allows expenditure laid out wholly and exclusively for purposes of business. In this connection, learned departmental representative referred to decision of Supreme Court in case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140. Shri Alphonso next argued that source, from which income was derived, should also remain with assessee in order to enable assessee to get deduction of expenditure claimed by him. He pointed out that in present case, 1350 shares of Crown Spg. & Mfg. Co. Ltd. had gone out of hands of assessee-HUF consequent to partial partition, that these shares no longer belonged to assessee family and that income from these 1350 shares were not assessable in hands of assessee-family, but in hands of divided coparceners, to whom they have been allotted in partial partition. Shri Alphonso submitted that facts of present case were similar to facts in case of Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.) and that ratio of said decision would be directly applicable to facts of present case. He, therefore, submitted that reasoning of AAC in paragraph No. 7 of his order to allow assessee's claim for deduction of this interest was erroneous and that department should succeed in its appeal. 10. Shri Dilip Chokshi relied on language of section 57(iii) and pointed out that emphasis in said provision was on words 'laid out' or 'expended', that these two words do not connote same idea, that word 'expended' means taking over obligation by way of mortgage or pledge and word 'purpose' means what was paid to be obtained. In support of his arguments, Shri Chokshi relied on decision of Gujarat High Court in case of Smt. Padmavati Jaykrishna v. CIT [1975] 101 ITR 153 at pages 160 and 164 and contended that we should consider immediate purpose of loan only and not whether asset continued with family or not. He argued that in present case, dominant purpose of borrowing was to invest in shares at time of making borrowing, which would entitle assessee to allowance of interest under section 57(iii). He further argued that there was distinction between accruing of expenditure and incurring of expenditure and submitted that assessee incurs liability to pay interest on borrowing as soon as borrowing is effected. He submitted that continuance of asset in subsequent years, i.e., after year of borrowing was necessary and that asset did continue with assessee-HUF in depleted form, i.e., in form of 8 shares. Shri Chokshi, therefore, submitted that source of income, viz., shares, still continued to exist even after partial partition and that, therefore, assessee would be entitled to deduction of interest claimed by him. argument of learned counsel is that dividends from shares of Crown Spg. & Mfg. Co. Ltd. and other shares, constitute one source of income under head 'Income from other sources' and that, therefore, assessee's claim for deduction of interest on borrowing under section 57(iii) was rightly allowed by AAC. He further pointed out that shares partitioned in partial partition were out of shares of value of Rs. 10.24 lakhs and that remaining shares continued with assessee family, which was source of income under head 'Income from other sources' and that, consequently, assessee would be entitled to deduction under section 57(iii). Shri Chokshi submitted that decision of Allahabad High Court in Seth Shiv Prasad's case, relied on by revenue, was distinguishable on facts, as would be seen from discussion at p. 19 (Second paragraph). Shri Chokshi relied on decision of Bombay High Court in Mills Store Co. v. CIT [1971] 80 ITR 225 for purpose of determining amount disallowable, which is point agitated by assessee in his cross-objection. 11. Shri Alphonso, in his reply, submitted that decision in case of Mills Store Co. was case arising under section 10(2)(iii) of 1922 Act, corresponding to section 36(1)(iii) of 1961 Act, relating to allowance of interest on borrowings for purpose of business and, therefore, said decision would be inapplicable to facts of present case. He further pointed out that for computing disallowance, ITO had taken note of 8 shares of Crown Spg. & Mfg. Co. Ltd., which were acquired by assessee out of borrowing made by him, which continued to remain with assessee- family and, after excluding value of Rs. 3,000 relating to these 8 shares, ITO had calculated interest on balance of borrowing amounting to Rs. 4,94,000 and that, therefore, assessee was not entitled to any further deduction. He submitted that disallowance made by ITO was correct and that same should be restored and cross-objection deserved to be rejected. 12. In our view, decision of Allahabad High Court in case of Seth Shiv Prasad is directly applicable to facts of present case. In said case, assessee, HUF, already holding large number of shares of company, purchased block of 19,250 shares of company from 'D'. part of purchase consideration was paid and unpaid balance was treated as money due to 'D' and interest was paid on this amount. There were partial partitions in assessee-family in 1953 and 1959. As result, entire block of 19,250 shares ceased to form part of assets of assessee. For assessment years 1960-61 and 1961-62, assessee claimed deduction of interest amount as also legal expenses incurred in defending right to block of shares. Allahabad High Court held that block of 19,250 shares was treated by assessee as distinct group and formed single source of was treated by assessee as distinct group and formed single source of income of assessee, that as these shares were not held by assessee during relevant previous years, interest was not expenditure incurred for earning dividend from it, that it was not deductible and that legal expenses in defending right to shares were not also deductible. Their Lordships held that under section 12(2) of 1922 Act, corresponding to section 57(iii) of 1961 Act, allowance is in respect of expenditure incurred for purpose of making or earning income and, hence, it must be incurred while there is possibility of income being earned and that necessarily postulates existence of source of such income at time when expenditure is incurred. Their Lordships also held that source of income may be described as spring or fount from which clearly defined channel of income flows, that it is that by which its nature and incidents constitute distinct and separate origin of income capable of consideration as such in isolation from other sources of income and which, by manner of dealing adopted by assessee, can be treated so. Their Lordships further held that assessee may treat shares of same company as constituting number of separate and distinct holdings and, hence, distinct sources of income and that shares may be divided into groups defined by reference to circumstances in which they were acquired or to purpose for which they were acquired or to class or category to which they belong. We are unable to agree with learned counsel for assessee that this decision of Allahabad High Court is distinguishable on facts from present case. 13. In Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543, Bombay High Court held, on facts of said case, that purpose for which assessee borrowed money had no connection, whether direct or indirect, with income which she earned from fixed deposit and that she was not entitled to deduction claimed under section 12(2) of 1922 Act and that it might be that assessee's motive was to save her fixed deposit and interest and to meet household expenses, etc., by means of loan borrowed but that consideration was entirely irrelevant. Their Lordships further held that even as regards advance payment of tax, purpose of borrowing money in order to pay advance tax was to discharge statutory obligation upon assessee, that receipt of interest on that tax was purely incidental and that, therefore, assessee could not claim deduction on that account either. Their Lordships further held that if assessee has no option except to incur expenditure in order to make earning of income possible, then undoubtedly exercise of that option is compulsory and any expenditure incurred by reason of exercise of such option would come within ambit of section 12(2). Their Lordships also held that whether option has no connection with carrying on of business or earning of income and option depends upon personal considerations or upon motives of assessee, that expenditure cannot possibly come within ambit of section 12(2). In that case, assessee had claimed to deduct under section 12(2) interest earned by her from fixed deposit, interest on money borrowed by her for purpose of meeting household expenses, purchase of jewellery and meeting advance payment of tax. In our view, ratio of this decision is also to be followed in present case. 14. In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200, their Lordships of t h e Supreme Court held that expression 'for purpose of business' occurring in section 10(2)(iii) as also in section 10(2)(xv) of 1922 Act was wider in scope than expression 'for purpose of earning income, profits or gains' occurring in section 12(2) and, therefore, scope for allowing deduction under section 10(2)(iii) or section 10(2)(xv) was much wider than one available under section 12(2). In said case, Supreme Court affirmed decision of Allahabad High Court, disallowing assessee's claim for deduction of interest on borrowing of Rs. 5.5 lakhs made by assessee for purpose of making donation to educational institution. assessee's claim that she had preferred to draw on overdraft account for purpose of paying to college in order to save her income earning assets, viz., shares, which she otherwise would have had to sell, was not accepted by Court. 15. decision of Gujarat High Court in Smt. Padmavati Jaykrishna's case, relied on by assessee's learned counsel, also supports case of revenue and not that of assessee. In this case, their Lordships of Gujarat High Court have held that, in order to earn deduction from 'Income from other sources' contemplated by section 57(iii), assessee has to prove two things, viz., (i) that expenses in question were incurred for purpose of earning viz., (i) that expenses in question were incurred for purpose of earning income sought to be taxed and (ii) that such expenditure was incurred 'wholly and exclusively' for said purpose. Pointing out distinction between provisions of section 37 and section 57(iii), their Lordships held that purpose contemplated by section 57(iii) is more specific in character inasmuch as it points to precise and specific object of making or earning income and that motive, with which expenditure is incurred, is irrelevant in this section. Their Lordships also pointed out that other requirement of section 57(iii) is that expenditure should be incurred 'wholly and exclusively' for purpose of earning income and that if purpose of earning income is coupled with some other extraneous purpose, it will not be possible to say that deduction under section 57(iii) is earned by assessee. In that case also, assessee claimed to deduct interest on amounts borrowed for payment of income-tax, wealth-tax and annuity deposit under section 57(iii) on ground that if she had not borrowed money, she would have had to liquidate her shareholdings and, thus, would have lost one of her sources of income and in any case annuity deposit would earn interest. These contentions were rejected and it was held that interest on borrowed amount was not deductible under section 57(iii). Their Lordships followed decisions of Supreme Court in cases of Malayalam Plantations Ltd., T.S. Krishna v. CIT [1973] 87 ITR 429 and two other decisions of Gujarat High Court in CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 and CIT v. Mrs. Indumati Ratanlal [1968] 70 ITR 353. This decision, in our view, rather supports stand of revenue and not that of assessee in present case. 16. decision of Bombay High Court in Mills Store Co.'s case, cited b y assessee's learned counsel, was case under section 10(2)(iii) and is, therefore, of no relevance for point in dispute in present appeal and cross-objection, It is, therefore, not necessary to refer to this decision in detail. 17. When we examine facts of present case in light of ratio of four decisions discussed above, we find that 1,350 shares out of 1358 shares of Crown Spg. & Mfg. Co. Ltd. which were acquired by assessee- HUF, out of borrowing of Rs. 4,97,000, have been taken out of joint family common stock and divided by metes and bounds by allotment of specific shares to three coparceners in partial partition effected on 17-3-1975. Only 8 shares are left with assessee-HUF and remaining 1350 shares have been specifically allotted with their distinctive numbers to three coparceners. This is clear from indenture of partial partition dated 17-3-1975, balance sheet of assessee-HUF as on 31-3-1975 and order of ITO accepting partial partition as on 17-3-1975 and holding that these 1350 shares and other assets divided among three coparceners ceased to be held by assessee-HUF and that from that date onwards, partitioned assets would be considered in hands of respective members/groups to whom they have been allotted. There is no dispute before us that in this partial partition, liability for borrowing for acquisition of 1350 shares was not also divided and allotted to three members in proportion of shares allotted to each of them, but was retained by assessee-HUF as its liability as could be seen from balance sheet as at 31-3-1975. There is also no dispute that borrowing relating to acquisition of 1350 shares amounted to Rs. 4,94,000. It is interest paid by assessee in respect of this amount of Rs. 4,94,000, which ITO had worked out at 12 per cent and disallowed Rs. 59,820 in assessment order. materials referred to above clearly establish that 1358 shares of Crown Spg. & Mfg. Co. Ltd. acquired out of borrowing along with 20 shares acquired earlier, were treated as separate and distinct holdings by assessee-family and also divided among three coparceners, leaving only 28 shares with assessee-HUF. Out of these 28 shares, only 8 shares were acquired out of borrowing, since 20 shares seem to have been acquired much earlier. It is not case of assessee before us that these 20 shares were acquired out of any borrowing. These facts, therefore, lead to conclusion that source of income, namely, 1350 crown shares have gone out of hands of assessee-HUF as result of partial partition and that there is absolutely no chance of any dividend income from these 1350 shares being earned by assessee-HUF, as such dividend income will belong to three coparceners to whom they have been allotted. No doubt, dividends from 8 shares still remaining with assessee-HUF, will be assessable in hands of assessee-HUF. For that reason, can it be said that interest on entire borrowing of Rs. 4,97,000 should be allowed against such dividend income from 8 shares? To our mind, assessee is entitled to deduction of interest relatable to borrowing invested in 8 shares and not to entire amount of interest on borrowing of Rs. 4,97,000 invested in acquiring 1358 shares. interest relating to borrowing of Rs. 4,94,000 invested in 1350 Crown shares, which have gone out of common HUF hotchpot in partial partition is not allowable deduction in hands of assessee-HUF, as such interest was neither laid out nor expended by assessee-family in year ended 31-3-1976, for purpose of making or earning any income, much less any dividend income from 1350 Crown shares. 18. argument of learned counsel that such interest would be allowed under section 57(iii), as assessee-HUF was holding shares of other companies which yielded dividend income under head 'Income from other sources' and that all these shares should be considered as single source of income for this purpose, cannot be accepted for simple reason that it is indisputable fact that none of these shares has been acquired out of borrowing of Rs. 4,94,000. Therefore, interest relating to this amount of Rs. 4,94,000 can by no stretch of argument or imagination be held to have been laid out or expended for purpose of making or earning dividend income from other companies' shares held by assessee-HUF. reasoning and conclusion of AAC in paragraph No. 7 of his appellate order to allow assessee's claim are, therefore, clearly contrary to law as laid down by Supreme Court, Allahabad, Bombay and Gujarat High Courts, referred to above. 19. This takes us to consideration of assessee's alternative submission in his cross-objection, that amount disallowed by ITO is excessive. On examination of particulars of interest payments in statements of accounts filed along with return of income, we find that there is some force in submission of Shri Chokshi. We find that borrowing for purpose of purchase of 1,358 Crown shares was made by assessee-HUF on 31-1-1975 from Laxmi Sprinklers Deposit Account No. 1. This is separate account distinct from another 'Deposit account' in name of same 'Laxmi Sprinklers'. interest credited to deposit account No. 1 for this year was Rs. 50,738 only as assessee-HUF had repaid Rs. 1 lakh in this loan account. Therefore, ITO was not justified in disallowing Rs. 59,280, ignoring actual Therefore, ITO was not justified in disallowing Rs. 59,280, ignoring actual amount of interest paid by assessee in this deposit account No. 1. Even out of this Rs. 50,738, amount to be disallowed is Rs. 49,378 only, if Rs. 360 representing interest at 12 per cent per annum on Rs. 3,000 invested in 8 Crown shares retained by assessee-HUF is excluded. Thus, out of deficit of Rs. 60,836 on account of interest in Vatav account claimed by assessee- HUF, Rs. 11,458 is allowable instead of Rs. 1,556 allowed by ITO (Rs. 60,836 minus Rs. 49,378). ITO is directed to allow said deficit of Rs. 11,458 as against Rs. 1,556 allowed by him and allow consequential relief due to assessee. 20. In result, revenue's appeal and assessee's cross-objection are partly allowed. *** SECOND INCOME TAX OFFICER v. K.M.D. THACKERSEY (HUF)