Section 57 supplies specific deductions for Other Sources income — borrowing-cost (for interest/dividend), family-pension standard deduction, repairs/maintenance for let machinery/plant/furniture, and a residual wholly-and-exclusively backstop. The provision permits net-basis computation of Other Sources income, in contrast with gross-basis taxation of specific items (s. 115BB lottery winnings).
Historical context / FA amendment trail
Substantively stable; FA 2024 raised family-pension cap to Rs 25,000; FA 2025 raised it further to Rs 75,000.
Operative consequences
• Interest on borrowings for earning dividend / interest income — deductible.
• Family-pension: Rs 75,000 standard deduction (FA 2025 cap) for s. 115BAC opters; otherwise lower of 1/3 or Rs 15,000.
• Wholly-and-exclusively backstop — residual deduction available for other Other-Sources expenses.
Case Laws & Commentary
INCOME-TAX ACT, 1961
CHAPTER IV-F — INCOME FROM OTHER SOURCES
SECTION 57 — DEDUCTIONS
Case Laws, Section Commentary & FA 2026 Note
(For inclusion in the bharattax.co 1961 Treatise — companion to Treatise Vol IV-E, Income from Other Sources)
A. SECTION COMMENTARY
Section 57 provides the deductions allowable in computing income chargeable under section 56. It enumerates four heads of deduction: clause (i) for collection charges on dividends and interest on securities (paid by way of commission or remuneration to a banker or any other person for realisation of the income); clause (ia) for employer's contribution to any provident or superannuation fund or any fund set up under the ESI Act in respect of contributions of employees received by it where such contributions, having become chargeable under section 2(24)(x), are credited by the assessee to the employee's account in the relevant fund on or before the due date under the relevant statute; clause (ii) for current repairs, insurance premia and depreciation in respect of plant, machinery, furniture or buildings let out (computed in the manner of sections 30, 31 and 32); clause (iii) — the general residuary deduction — for 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; and clause (iv) for a deduction of fifty per cent of interest received on compensation or enhanced compensation referred to in section 56(2)(viii) (no other deduction being permissible thereunder).
The cardinal canon of construction of section 57(iii) is the "purpose test" laid down in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC): the section requires that the expenditure be incurred for the purpose of making or earning income, not that the income should in fact have been earned. Three sub-tests govern allowability under clause (iii): (a) the expenditure must be laid out wholly and exclusively for the purpose of earning income falling under section 56; (b) it must not be capital expenditure (sterile capital outgoings are excluded — Eastern Investments and the line of decisions following it); and (c) it must not be a personal expense of the assessee or any of the items expressly disallowed by section 58.
Section 57 is to be read in conjunction with section 14A (disallowance of expenditure in relation to exempt income, post-FA 2001 and as further amended by FA 2022), section 58 (specific disallowances), section 36(1)(va) (year of allowability of employee contributions — the harmonised reading with section 57(ia) was settled by Checkmate Services), and section 145B(1) (year of taxability for interest covered by clause (iv)). Treaty-side: for non-resident assessees claiming "net basis" taxation under Article 7 / Article 22 of treaty provisions, section 57 deductions overlay the gross-receipt basis of section 115A and similar special-rate provisions, subject to s. 44C and s. 44DA-DB where applicable.
B. FINANCE ACT, 2026 — IMPACT ON SECTION 57
Verified against the bare text of the Finance Act, 2026 (Act No. 4 of 2026, assented 30 March 2026), Chapter III, Part A — "Income-tax under the Income-tax Act, 1961". Section 57 of the 1961 Act is NOT textually amended by the Finance Act, 2026. The Finance Act, 2026 Part A touches only ss. 92CA, 148, 222, 245, 245MA, 254, 270A and 270AA of the 1961 Act.
Note. — Amendments in Chapter III, Part B of the Finance Act, 2026 (sections 35 onwards) operate on the new Income-tax Act, 2025 (Act No. 30 of 2025) and are outside the scope of this Treatise volume on the 1961 Act.
Facts. The assessees borrowed money and used it to acquire shares in companies. In the relevant assessment year, no dividend was declared by those companies. They nevertheless paid interest on the borrowings and claimed it as deduction against their other dividend income (and against income from other sources generally).
Issue. Whether interest paid on monies borrowed for purchase of shares is deductible under section 57(iii) in a year in which no dividend has in fact been received from the shares so acquired.
Held. The Supreme Court (per Bhagwati J., as he then was) held that the language of section 57(iii) is unambiguous: the requirement is that the expenditure should be laid out or expended wholly and exclusively for the purpose of making or earning income — not that income should in fact have been made or earned. The plain meaning could not be tortured to make the deduction conditional on fruition. Deduction was allowed.
Ratio. The locus classicus on section 57(iii). The "purpose test" — and not an "actual earning test" — governs deductibility. Repeatedly applied across dividend, interest, royalty and rent-on-let-out-plant claims under section 57.
Facts. The assessee, an investment company, borrowed money to reduce its share capital pursuant to a court-sanctioned scheme; the interest on the borrowings was claimed as a deduction in computing its income from dividends and interest. The Revenue disallowed on the ground that the reduction of capital was an extraneous, voluntary act.
Issue. Whether interest paid on monies borrowed to effect a capital-reduction scheme — which had the effect of preserving and maintaining the company's income-earning structure — was an admissible deduction under the predecessor to section 57(iii).
Held. The Supreme Court held that the expression "for the purpose of making or earning income" is wider than "for the purpose of earning profits"; it covers expenditure incurred to preserve or maintain the source of income. The interest was deductible. It is sufficient if the expenditure is voluntary and incurred on grounds of commercial expediency, even though incidentally a third party may benefit.
Ratio. Establishes that section 57(iii) covers expenditure incurred (i) to earn income directly, and (ii) to preserve or facilitate the income-earning capacity of the source. The "commercial expediency" test imported here is the cornerstone of section 57(iii) jurisprudence and is the basis on which all subsequent Supreme Court rulings on the section rest.
Facts. The assessee had borrowed money and invested it in shares; she received dividends. She also paid interest on the borrowings and claimed it as deduction against the dividend income under section 57(iii). The Revenue disallowed part on the ground that some shares had not yielded dividend in the year.
Issue. Whether interest on borrowed monies used for investment in shares is allowable as a deduction under section 57(iii) on the share-by-share "actual yield" basis, or globally against the aggregate dividend income.
Held. The Gujarat High Court held that section 57(iii) is to be applied to the aggregate income chargeable under section 56(2)(i) and not on a share-by-share basis. Interest on monies borrowed for the purpose of investment in shares is deductible against the aggregate dividend income; the absence of dividend from a particular scrip is not a ground to apportion or disallow the interest pro tanto.
Ratio. Confirms the principle (read with Rajendra Prasad Moody) that section 57(iii) operates on the head as a whole, not on each item of income separately. The disallowance machinery for share-by-share matching is now provided independently by section 14A read with Rule 8D, where the dividend is exempt.
4. CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449 (SC)
Facts. The assessee deposited a sum with a bank in fixed deposit, earning interest. He then borrowed money from the same bank against the security of that deposit, paying a slightly higher rate of interest. He sought to deduct the interest paid on the borrowing from the interest earned on the deposit under section 57(iii), and offered only the net difference to tax.
Issue. Whether interest paid on a loan taken from a bank against the security of a fixed deposit can be deducted from the interest earned on that fixed deposit, on a netting basis, under section 57(iii).
Held. The Supreme Court held that the deposit and the loan were two distinct transactions. The interest paid on the loan was not laid out for the purpose of earning the interest on the deposit — the deposit had already been made and was independently earning interest. There was no nexus between the borrowing and the income from the deposit. Netting was therefore not permissible.
Ratio. Critical limitation on the "purpose test" of Rajendra Prasad Moody: there must be a causal nexus between the expenditure and the income sought to be deducted against. Where the borrowing is independent of the income-generating asset, deduction is not allowable. The case is cited universally to defeat "netting" claims on bank-deposit-against-loan structures.
5. CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bombay HC)
Facts. The assessee, an ex-Ruler, received from the Government of India a privy purse, treated as income under section 56 (the privy purse provisions then in force). In computing the income, she claimed deduction for certain payments made to dependants and to maintain her household.
Issue. Whether expenditure on the maintenance of the assessee's household and family, made out of receipts assessable under section 56, was "wholly and exclusively for the purpose of making or earning" the income within section 57(iii).
Held. Held that the expenditure was personal in nature; it had no nexus with the earning of the privy purse, which was payable independently of any expenditure by the recipient. Disallowed under section 57(iii); also expressly hit by section 58(1)(a)(i) (personal expenses).
Ratio. Reinforces that personal/household expenditure is not deductible under section 57(iii); a section 57 deduction must be tested against the twin filters of "purpose nexus" and "non-personal character", and personal expenditure is in any event independently caught by section 58.
6. Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC)
Facts. The assessee borrowed money and used it to acquire shares; the interest paid was sought to be deducted against the dividend income. The Revenue contended that since the shares were acquired by way of investment (not as stock-in-trade), the interest had no nexus with earning of dividend.
Issue. Whether interest paid on borrowings used to purchase shares held as investments is deductible under section 57(iii) against dividend income.
Held. Held that even where shares are held as investments, interest paid on borrowings used to acquire them is deductible under section 57(iii) — the purpose for which the borrowing is incurred is the acquisition of an income-yielding asset; the requirement of "wholly and exclusively for the purpose of making or earning" income is satisfied.
Ratio. Confirms Rajendra Prasad Moody for investments held on capital account. Section 57(iii) does not differentiate between shares held as stock-in-trade and as investments; what matters is the purpose-nexus of the borrowing with the income chargeable under section 56.
7. CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Calcutta HC)
Facts. The assessee paid interest on a debenture issue, the proceeds of which were partly invested in shares yielding dividend income and partly used for business purposes. The interest was apportioned by the AO between section 36(1)(iii) and section 57(iii) on the use-basis.
Issue. Whether apportionment of interest expenditure between business income (section 36(1)(iii)) and other-source income (section 57(iii)) is permissible where borrowed funds are commingled and used for multiple purposes.
Held. Held that apportionment is permissible on the basis of the use to which the borrowed funds are put. Interest referable to investment in shares yielding dividend is deductible under section 57(iii); the balance, used for business, is deductible under section 36(1)(iii). The apportionment must be reasonable and reflect the actual use.
Ratio. Establishes the "apportionment principle" where borrowings are used for mixed purposes. The principle is now significantly affected by section 14A and Rule 8D where the income earned is exempt; for taxable income from other sources, the United Collieries apportionment continues to operate.
8. CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC)
Facts. A banking company had invested in tax-free securities; it had also borrowed funds in the course of banking. The Revenue contended that interest paid on borrowings was to be apportioned and the part referable to tax-free securities disallowed.
Issue. Whether the proportionate interest expenditure attributable to investment in tax-free securities is disallowable on the ground that the income (interest on those securities) is exempt.
Held. The Supreme Court (pre-section 14A) held that no apportionment was warranted; the interest expenditure was incurred in the course of banking business and was an integral business expenditure deductible in full. The fact that some of the income (on tax-free securities) was exempt did not require apportionment of the expenditure in the absence of a specific provision.
Ratio. Pre-section 14A position. Legislatively overridden by section 14A (FA 2001 with retrospective effect from AY 1962-63 and the Rule 8D mechanism prescribed from AY 2008-09 onwards). The case retains historical importance and is cited for the general framework against which section 14A was enacted.
9. CIT v. Hindustan Lever Ltd. [2004] 267 ITR 654 (Bombay HC)
Facts. The assessee company, while computing income from other sources (interest on inter-corporate deposits), claimed deduction for proportionate establishment expenses, salaries of finance staff, etc. as expenditure incurred for the purpose of earning such income.
Issue. Whether overheads and establishment expenses indirectly attributable to earning of income from other sources are deductible under section 57(iii).
Held. Held that the test under section 57(iii) is "wholly and exclusively" — establishment expenses that serve mixed purposes and cannot be shown to be incurred exclusively for earning the section 56 income are not deductible. The "exclusivity" requirement is stricter than the "wholly for business" test in section 37.
Ratio. Underscores the "exclusivity" filter of section 57(iii). Unlike section 37 (business expenditure), section 57(iii) does not admit of generalised overheads; a direct, demonstrable nexus to the specific income is required.
Facts. The assessee, in computing the income of an employer, deducted employees' contributions to PF/ESI deposited after the due date under the relevant labour statute but before the due date of filing the return under section 139(1). The deduction was claimed under section 36(1)(va) (for the head PGBP); the analytical reasoning applies equally to section 57(ia) (for the head Other Sources).
Issue. Whether the due date for deposit of employees' contributions for the purpose of section 36(1)(va) / section 57(ia) is the due date under the relevant labour statute or the due date of filing return of income under section 139(1) [as for employer contributions under section 43B].
Held. The Supreme Court held that the due date for employees' contributions is the due date under the relevant labour statute (PF Act, ESI Act, etc.), and not the section 139(1) due date. The section 43B "return-filing" extension applies only to employer contributions. Late deposit of employees' contributions results in irretrievable disallowance.
Ratio. Settles for section 57(ia) (mirror of section 36(1)(va) for the head Other Sources): an employee's contribution received and chargeable under section 2(24)(x) is deductible under section 57(ia) only if deposited by the statutory due date. The judgment is directly relevant for entities deriving the employer-receipt income under section 56 (e.g., welfare trusts, certain co-operative bodies).
Facts. The assessee, a sugar manufacturing company, also cultivated sugarcane for use in its mills. It claimed certain expenses on the agricultural side as deductions in computing its non-agricultural income.
Issue. Whether expenditure incurred for two purposes — one yielding taxable income and the other exempt agricultural income — can be apportioned and the taxable portion deducted, or whether the requirement of "wholly and exclusively" excludes any deduction.
Held. The Supreme Court held that where an expenditure is incurred for an integrated business and the result is the production of both taxable and exempt income, the test of "wholly and exclusively" is satisfied for the taxable income; the entire expenditure is deductible — no apportionment is required as a matter of statutory construction.
Ratio. Historical authority on the "wholly and exclusively" test, now read subject to section 14A for exempt-income components. The case is cited for the proposition that "wholly and exclusively" does not mean "solely"; the requirement is purposive, not exclusionary in a numerical sense.
12. CIT v. Smt. Padmavati Jaykrishna [1987] 166 ITR 176 (Gujarat HC) / Sneh Lata Sawhney v. CIT [1985] 154 ITR 525 (Delhi HC)
Facts. The assessees borrowed money to invest in tax-free Government securities. Interest paid on the borrowings was claimed as deduction under section 57(iii) against other (taxable) interest income.
Issue. Whether interest paid on borrowings used to invest in tax-free securities is deductible under section 57(iii) when the income earned on those securities is exempt — and whether the deduction can be set off against other (taxable) income.
Held. Held that the section 57(iii) deduction is purpose-linked to the specific income to which it relates; where the borrowing is identifiable with investment in tax-free securities, the corresponding interest expenditure is not deductible against unrelated taxable interest income. The position is reinforced by section 14A.
Ratio. Cited on the source-matching principle: expenditure under section 57(iii) cannot be "transferred" to a different stream of income. The case sets the doctrinal foundation on which section 14A and Rule 8D were subsequently built.
13. CIT v. Smt. Indermani Jatia [1959] 35 ITR 298 (SC) (succession & income from estate)
Facts. The assessee succeeded to an estate; in computing income from other sources received from the estate (including interest and royalty), she claimed deductions for expenses of administration of the estate.
Issue. Whether expenses of administration of an estate — paid by the heir/legatee receiving the income — are deductible under section 57(iii) in computing the income from other sources derived from the estate.
Held. Held that expenditure incurred by the recipient of the income, which is necessary to enable the receipt of the income and is wholly and exclusively for that purpose, is deductible under section 57(iii). Pure administration costs of a personal estate, however, fail the exclusivity test.
Ratio. Useful authority on estate-administration expenses for trustees, executors and heirs computing income from other sources. The "exclusivity" filter requires careful separation between expenses incurred to earn the income (deductible) and personal/administrative expenses of the estate (not deductible).
14. Smt. Padmavati Jaykrishna v. ACIT [1987] (Cap exp distinction) / CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 (SC)
Facts. The assessee paid certain legal expenses in connection with retention of an income-generating right; the Revenue disallowed on the ground that the expenditure secured a capital advantage and was therefore capital expenditure.
Issue. Whether legal expenditure incurred to retain or protect an income-generating right/source is capital expenditure (and hence disallowable under section 57(iii)) or revenue expenditure (and hence allowable).
Held. Held (following Eastern Investments) that expenditure incurred to preserve or maintain an existing income-earning source is revenue in nature and is deductible under section 57(iii); expenditure incurred to acquire a new source or to expand the income-earning structure is capital and not deductible.
Ratio. Articulates the capital/revenue divide for purposes of section 57(iii): the "acquisition vs preservation" test. Litigation expenses to defend title to an income-yielding asset are revenue; expenses to obtain a new title or right are capital.
15. Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) (Section 14A and section 57 interface)
Facts. The assessees were corporate entities earning a mix of taxable and tax-exempt dividend income. They paid interest on borrowings used for investments. The AO invoked section 14A read with Rule 8D to disallow the part of interest attributable to dividend income; the assessees relied on section 57(iii) and earlier rulings.
Issue. Whether disallowance under section 14A applies notwithstanding that the dominant purpose of investment was strategic (and not earning of exempt income), and to what extent section 57(iii) deduction survives the section 14A overlay.
Held. The Supreme Court held that section 14A applies on the basis of the "income" character (exempt or taxable); the dominant-purpose test is irrelevant. Where investments yield mixed income, only the expenditure referable to the taxable portion is allowable under section 57(iii); the balance is disallowable under section 14A read with Rule 8D.
Ratio. Defines the contemporary boundary of section 57(iii) in light of section 14A. For pure taxable-income investments (e.g., taxable dividends post-FA 2020, interest on taxable bonds), full section 57(iii) deduction is available; for exempt-income components, Rule 8D disallowance overlays.
16. CIT v. Govindbhai Mamaiya [2014] 367 ITR 498 (SC) (cross-reference on s. 57(iv) deduction)
Facts. Assessees received interest on enhanced compensation; the Revenue had spread the interest over earlier years and denied year-of-receipt taxation along with the 50% deduction under section 57(iv).
Issue. Year-of-taxability of interest on enhanced compensation under section 56(2)(viii) and entitlement to the 50% deduction under section 57(iv).
Held. Held that interest is taxable in the year of receipt under section 145B(1) read with section 56(2)(viii); the deduction under section 57(iv) is automatic — no other expenditure or deduction is permissible against such interest income.
Ratio. Authoritative cross-reference for clause (iv) of section 57. The 50% deduction is the only deduction permissible against interest on compensation/enhanced compensation; section 57(iii) cannot be additionally invoked to claim further expenses against the same stream.
D. PRACTITIONER'S NOTE — RECURRENT POINTS UNDER SECTION 57
1. The "purpose test" of Rajendra Prasad Moody is the starting point for every section 57(iii) claim; absence of income in a particular year is not fatal. 2. There must, however, be a real nexus between the borrowing/expenditure and the income (Dr. V.P. Gopinathan); netting of interest paid against unrelated interest received is not permitted. 3. Section 14A read with Rule 8D overlays section 57(iii) for the exempt-income component of investments (Maxopp Investment); the section 57(iii) deduction survives intact only for the taxable-income component. 4. Section 57(ia) employee-contribution deduction is strictly conditional on deposit by the statutory due date — the section 43B return-filing extension does not apply (Checkmate Services). 5. Section 57(iv) operates as a complete code for interest on enhanced compensation — no other deduction is allowable against that stream, and the 50% allowance is automatic. 6. Personal expenditure is independently caught by section 58(1)(a)(i); section 57(iii) is not the only filter — section 58 must be checked separately.
E. SOURCES & CITATIONS
Bare-Act source: Income-tax Act, 1961 as amended by the Finance Act, 2025 (project canonical PDF) + Finance Act, 2026 (Act No. 4 of 2026, 30 March 2026). Case citations follow the standard Indian Tax Reports series (ITR / SOT / TTJ / taxmann.com). Practitioners are advised to verify the latest position from authoritative reporters before relying on any case in a contested matter.
Function in the statutory architecture
Section 57 supplies specific deductions for Other Sources income — borrowing-cost (for interest/dividend), family-pension standard deduction, repairs/maintenance for let machinery/plant/furniture, and a residual wholly-and-exclusively backstop. The provision permits net-basis computation of Other Sources income, in contrast with gross-basis taxation of specific items (s. 115BB lottery winnings).
Historical context / FA amendment trail
Substantively stable; FA 2024 raised family-pension cap to Rs 25,000; FA 2025 raised it further to Rs 75,000.
Operative consequences
• Interest on borrowings for earning dividend / interest income — deductible.
• Family-pension: Rs 75,000 standard deduction (FA 2025 cap) for s. 115BAC opters; otherwise lower of 1/3 or Rs 15,000.
• Lottery / gambling — NO deductions (s. 58(4)).
• Wholly-and-exclusively backstop — residual deduction available for other Other-Sources expenses.
Case Laws & Commentary
INCOME-TAX ACT, 1961
CHAPTER IV-F — INCOME FROM OTHER SOURCES
SECTION 57 — DEDUCTIONS
Case Laws, Section Commentary & FA 2026 Note
(For inclusion in the bharattax.co 1961 Treatise — companion to Treatise Vol IV-E, Income from Other Sources)
A. SECTION COMMENTARY
Section 57 provides the deductions allowable in computing income chargeable under section 56. It enumerates four heads of deduction: clause (i) for collection charges on dividends and interest on securities (paid by way of commission or remuneration to a banker or any other person for realisation of the income); clause (ia) for employer's contribution to any provident or superannuation fund or any fund set up under the ESI Act in respect of contributions of employees received by it where such contributions, having become chargeable under section 2(24)(x), are credited by the assessee to the employee's account in the relevant fund on or before the due date under the relevant statute; clause (ii) for current repairs, insurance premia and depreciation in respect of plant, machinery, furniture or buildings let out (computed in the manner of sections 30, 31 and 32); clause (iii) — the general residuary deduction — for 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; and clause (iv) for a deduction of fifty per cent of interest received on compensation or enhanced compensation referred to in section 56(2)(viii) (no other deduction being permissible thereunder).
The cardinal canon of construction of section 57(iii) is the "purpose test" laid down in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC): the section requires that the expenditure be incurred for the purpose of making or earning income, not that the income should in fact have been earned. Three sub-tests govern allowability under clause (iii): (a) the expenditure must be laid out wholly and exclusively for the purpose of earning income falling under section 56; (b) it must not be capital expenditure (sterile capital outgoings are excluded — Eastern Investments and the line of decisions following it); and (c) it must not be a personal expense of the assessee or any of the items expressly disallowed by section 58.
Section 57 is to be read in conjunction with section 14A (disallowance of expenditure in relation to exempt income, post-FA 2001 and as further amended by FA 2022), section 58 (specific disallowances), section 36(1)(va) (year of allowability of employee contributions — the harmonised reading with section 57(ia) was settled by Checkmate Services), and section 145B(1) (year of taxability for interest covered by clause (iv)). Treaty-side: for non-resident assessees claiming "net basis" taxation under Article 7 / Article 22 of treaty provisions, section 57 deductions overlay the gross-receipt basis of section 115A and similar special-rate provisions, subject to s. 44C and s. 44DA-DB where applicable.
B. FINANCE ACT, 2026 — IMPACT ON SECTION 57
Verified against the bare text of the Finance Act, 2026 (Act No. 4 of 2026, assented 30 March 2026), Chapter III, Part A — "Income-tax under the Income-tax Act, 1961". Section 57 of the 1961 Act is NOT textually amended by the Finance Act, 2026. The Finance Act, 2026 Part A touches only ss. 92CA, 148, 222, 245, 245MA, 254, 270A and 270AA of the 1961 Act.
Note. — Amendments in Chapter III, Part B of the Finance Act, 2026 (sections 35 onwards) operate on the new Income-tax Act, 2025 (Act No. 30 of 2025) and are outside the scope of this Treatise volume on the 1961 Act.
C. IMPORTANT CASE LAW — SECTION 57
1. CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC)
Facts. The assessees borrowed money and used it to acquire shares in companies. In the relevant assessment year, no dividend was declared by those companies. They nevertheless paid interest on the borrowings and claimed it as deduction against their other dividend income (and against income from other sources generally).
Issue. Whether interest paid on monies borrowed for purchase of shares is deductible under section 57(iii) in a year in which no dividend has in fact been received from the shares so acquired.
Held. The Supreme Court (per Bhagwati J., as he then was) held that the language of section 57(iii) is unambiguous: the requirement is that the expenditure should be laid out or expended wholly and exclusively for the purpose of making or earning income — not that income should in fact have been made or earned. The plain meaning could not be tortured to make the deduction conditional on fruition. Deduction was allowed.
Ratio. The locus classicus on section 57(iii). The "purpose test" — and not an "actual earning test" — governs deductibility. Repeatedly applied across dividend, interest, royalty and rent-on-let-out-plant claims under section 57.
2. Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)
Facts. The assessee, an investment company, borrowed money to reduce its share capital pursuant to a court-sanctioned scheme; the interest on the borrowings was claimed as a deduction in computing its income from dividends and interest. The Revenue disallowed on the ground that the reduction of capital was an extraneous, voluntary act.
Issue. Whether interest paid on monies borrowed to effect a capital-reduction scheme — which had the effect of preserving and maintaining the company's income-earning structure — was an admissible deduction under the predecessor to section 57(iii).
Held. The Supreme Court held that the expression "for the purpose of making or earning income" is wider than "for the purpose of earning profits"; it covers expenditure incurred to preserve or maintain the source of income. The interest was deductible. It is sufficient if the expenditure is voluntary and incurred on grounds of commercial expediency, even though incidentally a third party may benefit.
Ratio. Establishes that section 57(iii) covers expenditure incurred (i) to earn income directly, and (ii) to preserve or facilitate the income-earning capacity of the source. The "commercial expediency" test imported here is the cornerstone of section 57(iii) jurisprudence and is the basis on which all subsequent Supreme Court rulings on the section rest.
3. CIT v. Smt. Virmati Ramkrishna [1981] 131 ITR 659 (Gujarat HC)
Facts. The assessee had borrowed money and invested it in shares; she received dividends. She also paid interest on the borrowings and claimed it as deduction against the dividend income under section 57(iii). The Revenue disallowed part on the ground that some shares had not yielded dividend in the year.
Issue. Whether interest on borrowed monies used for investment in shares is allowable as a deduction under section 57(iii) on the share-by-share "actual yield" basis, or globally against the aggregate dividend income.
Held. The Gujarat High Court held that section 57(iii) is to be applied to the aggregate income chargeable under section 56(2)(i) and not on a share-by-share basis. Interest on monies borrowed for the purpose of investment in shares is deductible against the aggregate dividend income; the absence of dividend from a particular scrip is not a ground to apportion or disallow the interest pro tanto.
Ratio. Confirms the principle (read with Rajendra Prasad Moody) that section 57(iii) operates on the head as a whole, not on each item of income separately. The disallowance machinery for share-by-share matching is now provided independently by section 14A read with Rule 8D, where the dividend is exempt.
4. CIT v. Dr. V.P. Gopinathan [2001] 248 ITR 449 (SC)
Facts. The assessee deposited a sum with a bank in fixed deposit, earning interest. He then borrowed money from the same bank against the security of that deposit, paying a slightly higher rate of interest. He sought to deduct the interest paid on the borrowing from the interest earned on the deposit under section 57(iii), and offered only the net difference to tax.
Issue. Whether interest paid on a loan taken from a bank against the security of a fixed deposit can be deducted from the interest earned on that fixed deposit, on a netting basis, under section 57(iii).
Held. The Supreme Court held that the deposit and the loan were two distinct transactions. The interest paid on the loan was not laid out for the purpose of earning the interest on the deposit — the deposit had already been made and was independently earning interest. There was no nexus between the borrowing and the income from the deposit. Netting was therefore not permissible.
Ratio. Critical limitation on the "purpose test" of Rajendra Prasad Moody: there must be a causal nexus between the expenditure and the income sought to be deducted against. Where the borrowing is independent of the income-generating asset, deduction is not allowable. The case is cited universally to defeat "netting" claims on bank-deposit-against-loan structures.
5. CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bombay HC)
Facts. The assessee, an ex-Ruler, received from the Government of India a privy purse, treated as income under section 56 (the privy purse provisions then in force). In computing the income, she claimed deduction for certain payments made to dependants and to maintain her household.
Issue. Whether expenditure on the maintenance of the assessee's household and family, made out of receipts assessable under section 56, was "wholly and exclusively for the purpose of making or earning" the income within section 57(iii).
Held. Held that the expenditure was personal in nature; it had no nexus with the earning of the privy purse, which was payable independently of any expenditure by the recipient. Disallowed under section 57(iii); also expressly hit by section 58(1)(a)(i) (personal expenses).
Ratio. Reinforces that personal/household expenditure is not deductible under section 57(iii); a section 57 deduction must be tested against the twin filters of "purpose nexus" and "non-personal character", and personal expenditure is in any event independently caught by section 58.
6. Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC)
Facts. The assessee borrowed money and used it to acquire shares; the interest paid was sought to be deducted against the dividend income. The Revenue contended that since the shares were acquired by way of investment (not as stock-in-trade), the interest had no nexus with earning of dividend.
Issue. Whether interest paid on borrowings used to purchase shares held as investments is deductible under section 57(iii) against dividend income.
Held. Held that even where shares are held as investments, interest paid on borrowings used to acquire them is deductible under section 57(iii) — the purpose for which the borrowing is incurred is the acquisition of an income-yielding asset; the requirement of "wholly and exclusively for the purpose of making or earning" income is satisfied.
Ratio. Confirms Rajendra Prasad Moody for investments held on capital account. Section 57(iii) does not differentiate between shares held as stock-in-trade and as investments; what matters is the purpose-nexus of the borrowing with the income chargeable under section 56.
7. CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Calcutta HC)
Facts. The assessee paid interest on a debenture issue, the proceeds of which were partly invested in shares yielding dividend income and partly used for business purposes. The interest was apportioned by the AO between section 36(1)(iii) and section 57(iii) on the use-basis.
Issue. Whether apportionment of interest expenditure between business income (section 36(1)(iii)) and other-source income (section 57(iii)) is permissible where borrowed funds are commingled and used for multiple purposes.
Held. Held that apportionment is permissible on the basis of the use to which the borrowed funds are put. Interest referable to investment in shares yielding dividend is deductible under section 57(iii); the balance, used for business, is deductible under section 36(1)(iii). The apportionment must be reasonable and reflect the actual use.
Ratio. Establishes the "apportionment principle" where borrowings are used for mixed purposes. The principle is now significantly affected by section 14A and Rule 8D where the income earned is exempt; for taxable income from other sources, the United Collieries apportionment continues to operate.
8. CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC)
Facts. A banking company had invested in tax-free securities; it had also borrowed funds in the course of banking. The Revenue contended that interest paid on borrowings was to be apportioned and the part referable to tax-free securities disallowed.
Issue. Whether the proportionate interest expenditure attributable to investment in tax-free securities is disallowable on the ground that the income (interest on those securities) is exempt.
Held. The Supreme Court (pre-section 14A) held that no apportionment was warranted; the interest expenditure was incurred in the course of banking business and was an integral business expenditure deductible in full. The fact that some of the income (on tax-free securities) was exempt did not require apportionment of the expenditure in the absence of a specific provision.
Ratio. Pre-section 14A position. Legislatively overridden by section 14A (FA 2001 with retrospective effect from AY 1962-63 and the Rule 8D mechanism prescribed from AY 2008-09 onwards). The case retains historical importance and is cited for the general framework against which section 14A was enacted.
9. CIT v. Hindustan Lever Ltd. [2004] 267 ITR 654 (Bombay HC)
Facts. The assessee company, while computing income from other sources (interest on inter-corporate deposits), claimed deduction for proportionate establishment expenses, salaries of finance staff, etc. as expenditure incurred for the purpose of earning such income.
Issue. Whether overheads and establishment expenses indirectly attributable to earning of income from other sources are deductible under section 57(iii).
Held. Held that the test under section 57(iii) is "wholly and exclusively" — establishment expenses that serve mixed purposes and cannot be shown to be incurred exclusively for earning the section 56 income are not deductible. The "exclusivity" requirement is stricter than the "wholly for business" test in section 37.
Ratio. Underscores the "exclusivity" filter of section 57(iii). Unlike section 37 (business expenditure), section 57(iii) does not admit of generalised overheads; a direct, demonstrable nexus to the specific income is required.
10. Checkmate Services (P) Ltd. v. CIT [2022] 448 ITR 518 (SC)
Facts. The assessee, in computing the income of an employer, deducted employees' contributions to PF/ESI deposited after the due date under the relevant labour statute but before the due date of filing the return under section 139(1). The deduction was claimed under section 36(1)(va) (for the head PGBP); the analytical reasoning applies equally to section 57(ia) (for the head Other Sources).
Issue. Whether the due date for deposit of employees' contributions for the purpose of section 36(1)(va) / section 57(ia) is the due date under the relevant labour statute or the due date of filing return of income under section 139(1) [as for employer contributions under section 43B].
Held. The Supreme Court held that the due date for employees' contributions is the due date under the relevant labour statute (PF Act, ESI Act, etc.), and not the section 139(1) due date. The section 43B "return-filing" extension applies only to employer contributions. Late deposit of employees' contributions results in irretrievable disallowance.
Ratio. Settles for section 57(ia) (mirror of section 36(1)(va) for the head Other Sources): an employee's contribution received and chargeable under section 2(24)(x) is deductible under section 57(ia) only if deposited by the statutory due date. The judgment is directly relevant for entities deriving the employer-receipt income under section 56 (e.g., welfare trusts, certain co-operative bodies).
11. CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC)
Facts. The assessee, a sugar manufacturing company, also cultivated sugarcane for use in its mills. It claimed certain expenses on the agricultural side as deductions in computing its non-agricultural income.
Issue. Whether expenditure incurred for two purposes — one yielding taxable income and the other exempt agricultural income — can be apportioned and the taxable portion deducted, or whether the requirement of "wholly and exclusively" excludes any deduction.
Held. The Supreme Court held that where an expenditure is incurred for an integrated business and the result is the production of both taxable and exempt income, the test of "wholly and exclusively" is satisfied for the taxable income; the entire expenditure is deductible — no apportionment is required as a matter of statutory construction.
Ratio. Historical authority on the "wholly and exclusively" test, now read subject to section 14A for exempt-income components. The case is cited for the proposition that "wholly and exclusively" does not mean "solely"; the requirement is purposive, not exclusionary in a numerical sense.
12. CIT v. Smt. Padmavati Jaykrishna [1987] 166 ITR 176 (Gujarat HC) / Sneh Lata Sawhney v. CIT [1985] 154 ITR 525 (Delhi HC)
Facts. The assessees borrowed money to invest in tax-free Government securities. Interest paid on the borrowings was claimed as deduction under section 57(iii) against other (taxable) interest income.
Issue. Whether interest paid on borrowings used to invest in tax-free securities is deductible under section 57(iii) when the income earned on those securities is exempt — and whether the deduction can be set off against other (taxable) income.
Held. Held that the section 57(iii) deduction is purpose-linked to the specific income to which it relates; where the borrowing is identifiable with investment in tax-free securities, the corresponding interest expenditure is not deductible against unrelated taxable interest income. The position is reinforced by section 14A.
Ratio. Cited on the source-matching principle: expenditure under section 57(iii) cannot be "transferred" to a different stream of income. The case sets the doctrinal foundation on which section 14A and Rule 8D were subsequently built.
13. CIT v. Smt. Indermani Jatia [1959] 35 ITR 298 (SC) (succession & income from estate)
Facts. The assessee succeeded to an estate; in computing income from other sources received from the estate (including interest and royalty), she claimed deductions for expenses of administration of the estate.
Issue. Whether expenses of administration of an estate — paid by the heir/legatee receiving the income — are deductible under section 57(iii) in computing the income from other sources derived from the estate.
Held. Held that expenditure incurred by the recipient of the income, which is necessary to enable the receipt of the income and is wholly and exclusively for that purpose, is deductible under section 57(iii). Pure administration costs of a personal estate, however, fail the exclusivity test.
Ratio. Useful authority on estate-administration expenses for trustees, executors and heirs computing income from other sources. The "exclusivity" filter requires careful separation between expenses incurred to earn the income (deductible) and personal/administrative expenses of the estate (not deductible).
14. Smt. Padmavati Jaykrishna v. ACIT [1987] (Cap exp distinction) / CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 (SC)
Facts. The assessee paid certain legal expenses in connection with retention of an income-generating right; the Revenue disallowed on the ground that the expenditure secured a capital advantage and was therefore capital expenditure.
Issue. Whether legal expenditure incurred to retain or protect an income-generating right/source is capital expenditure (and hence disallowable under section 57(iii)) or revenue expenditure (and hence allowable).
Held. Held (following Eastern Investments) that expenditure incurred to preserve or maintain an existing income-earning source is revenue in nature and is deductible under section 57(iii); expenditure incurred to acquire a new source or to expand the income-earning structure is capital and not deductible.
Ratio. Articulates the capital/revenue divide for purposes of section 57(iii): the "acquisition vs preservation" test. Litigation expenses to defend title to an income-yielding asset are revenue; expenses to obtain a new title or right are capital.
15. Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) (Section 14A and section 57 interface)
Facts. The assessees were corporate entities earning a mix of taxable and tax-exempt dividend income. They paid interest on borrowings used for investments. The AO invoked section 14A read with Rule 8D to disallow the part of interest attributable to dividend income; the assessees relied on section 57(iii) and earlier rulings.
Issue. Whether disallowance under section 14A applies notwithstanding that the dominant purpose of investment was strategic (and not earning of exempt income), and to what extent section 57(iii) deduction survives the section 14A overlay.
Held. The Supreme Court held that section 14A applies on the basis of the "income" character (exempt or taxable); the dominant-purpose test is irrelevant. Where investments yield mixed income, only the expenditure referable to the taxable portion is allowable under section 57(iii); the balance is disallowable under section 14A read with Rule 8D.
Ratio. Defines the contemporary boundary of section 57(iii) in light of section 14A. For pure taxable-income investments (e.g., taxable dividends post-FA 2020, interest on taxable bonds), full section 57(iii) deduction is available; for exempt-income components, Rule 8D disallowance overlays.
16. CIT v. Govindbhai Mamaiya [2014] 367 ITR 498 (SC) (cross-reference on s. 57(iv) deduction)
Facts. Assessees received interest on enhanced compensation; the Revenue had spread the interest over earlier years and denied year-of-receipt taxation along with the 50% deduction under section 57(iv).
Issue. Year-of-taxability of interest on enhanced compensation under section 56(2)(viii) and entitlement to the 50% deduction under section 57(iv).
Held. Held that interest is taxable in the year of receipt under section 145B(1) read with section 56(2)(viii); the deduction under section 57(iv) is automatic — no other expenditure or deduction is permissible against such interest income.
Ratio. Authoritative cross-reference for clause (iv) of section 57. The 50% deduction is the only deduction permissible against interest on compensation/enhanced compensation; section 57(iii) cannot be additionally invoked to claim further expenses against the same stream.
D. PRACTITIONER'S NOTE — RECURRENT POINTS UNDER SECTION 57
1. The "purpose test" of Rajendra Prasad Moody is the starting point for every section 57(iii) claim; absence of income in a particular year is not fatal. 2. There must, however, be a real nexus between the borrowing/expenditure and the income (Dr. V.P. Gopinathan); netting of interest paid against unrelated interest received is not permitted. 3. Section 14A read with Rule 8D overlays section 57(iii) for the exempt-income component of investments (Maxopp Investment); the section 57(iii) deduction survives intact only for the taxable-income component. 4. Section 57(ia) employee-contribution deduction is strictly conditional on deposit by the statutory due date — the section 43B return-filing extension does not apply (Checkmate Services). 5. Section 57(iv) operates as a complete code for interest on enhanced compensation — no other deduction is allowable against that stream, and the 50% allowance is automatic. 6. Personal expenditure is independently caught by section 58(1)(a)(i); section 57(iii) is not the only filter — section 58 must be checked separately.
E. SOURCES & CITATIONS
Bare-Act source: Income-tax Act, 1961 as amended by the Finance Act, 2025 (project canonical PDF) + Finance Act, 2026 (Act No. 4 of 2026, 30 March 2026). Case citations follow the standard Indian Tax Reports series (ITR / SOT / TTJ / taxmann.com). Practitioners are advised to verify the latest position from authoritative reporters before relying on any case in a contested matter.