1. Since common questions of law arise in these two matters on facts and in circumstances which are similar, we have heard them together and are disposing of them by a common judgment. For the sake of convenience, however, we shall separately set out the facts of each case in brief.

I. Income-tax Reference No. 134 of 1974.

2. This reference relates to the assessment year 1968-69, the relevant previous year being the calendar year 1967. The assessee derived her income from dividends and also received a small amount by way of interest on annuity deposit during the previous year. In the course of the assessment proceedings, the assessee claimed a education in respect of two items of expenditure under s. 57(iii) of the I.T. Act, 1961 (hereinafter referred to as "the Act") : first, an amount of Rs. 44,397 being the amount of interest on the outstanding loan of Rs. 8,53,118 and, secondly, an amount of Rs. 1,900, being the total amount of fees paid to the income-tax practitioner, gift-tax practitioner and wealth-tax practitioner (Rs. 1,600 plus Rs. 50 plus Rs. 250, respectively). As regards the first claim, the ITO came to the conclusion that a part of the loan was taken by the assessee to meet her personal expenses and tax liability and he, therefore, disallowed the claim in so far as sit related to the interest payable on that part of the loan. The sum so disallowed came to Rs. 6,105. As regards the second claim, the ITO appears to have disallowed the same on the ground that expenditure of that nature could not be said to have been incurred wholly and exclusively for the purpose of making or earning dividend income and also on the ground that as regards the payment of fees to the income-tax practitioner, the liability in respect of Rs. 1,600, which amount was payable by way of fees in respect of proceedings for assessments of the past four years, could not be said to have been incurred in the year under consideration, since the assessee was following the mercantile system of accounting. In conformity with this decision, a sum of Rs. 8,005 was held inadmissible and it was added back. The assessee, feeling aggrieved by the decision of the ITO in respect of these two items and dismissed the appeal so far as it related to the said claims. The assessee carried the matter in further appeal to the Income-tax Appellate Tribunal. As regards the claim in respect of interest, the Tribunal, following its own earlier decision in another similar matter, rejected the said claim on the ground that the proportionate amount of loan was admittedly taken for the purpose of meeting obligations of a personal nature and as such interest relatable to that part of the loan could not be treated as admissible under s. 57(iii). As regards the claim pertaining to the fees paid to the tax practitioners, however, the Tribunal allowed the same following its own earlier decision in another similar matter in which it was held, applying the principle of commercial expediency, that the said expenditure was required to be treated as admissible under s. 57(iii), or, though the payment of fees to the income-tax practitionery did not directly lead to the earning of the income-tax practitioner did not directly lead to the earning of the income which had already been earned, it resulted in the saving and preservation or protection of a portion of the income already earned. Both the assessee and the revenue were aggrieved by the decision of the Tribunal and at their instance the following two questions, respectively, have been referred for our opinion :

1. At the instance of the assessee :

"Whether, on the facts and in the circumstances of the case, the decision reached by the Tribunal in holding that the amount of Rs. 6,105, was not deductible in computing the assessee's income under the head 'Other sources' was correct in law ?"

2. At the instance of the revenue :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the fees paid to the practitioners for income-tax, wealth-tax and gift-tax cases of the assessee is an expenditure laid out or expended wholly and exclusively for the purpose of making or earning income charitable under the head 'Income from other sources' and, therefore, is an admissible deduction under section 57(iii) of the Income-tax Act, 1961 ?"

II. Income-tax Reference No. 135 of 1974.

3. The assessment years in question are assessment years 1967-68 and 1968-69, the relevant previous years being calendar years 1966 and 1967, respectively. The assessee derived income from dividends and also received some income by way of interest on debentures, annuity deposits, etc. In the course of assessment proceedings, the assessee claimed a deduction in respect of two items of expenditure under s. 57(iii). The first item consisted of an amount of Rs. 43,762 for assessment year 1967-68, and an amount of Rs. 53,419 for the assessment year 1968-69, being the sums paid towards interest in respect of the relevant previous years on outstanding loans to the tune of Rs. 8,18,255 and Rs. 8,79,197, respectively. The second item comprised of an amount of Rs. 1,200, being the amount paid as and by way of fees to the assessee's wealth-tax practitioner in the previous year relevant to the assessment year 1967-68, and an amount of Rs. 2,900, being the amount of fees paid to the income-tax practitioner, gift-tax practitioner and wealth-tax practitioner (Rs. 2,400 plus, Rs. 50 plus Rs. 450, respectively). The claim in respect of interest to the extent of Rs. 18,693 and Rs. 21,536 for the two years in question and the other claim pertaining to the fees of the tax practitioner were both rejected by the ITO on the same grounds on which similar claims of the assessee in Income-tax Reference No. 134 of 1974 were rejected by him. The said decision was confirmed in appeal by the AAC and, in further appeal, the Income-tax Appellate Tribunal confirmed the decision with regard to the non-allowability of the items of interest but reversed the decision in so far as it related to the items of the fees of the tax practitioners on the same grounds as in the case of the assessee in the companion matter. At the instance of the assessee and the revenue, who were both aggrieved by the said decision, the Tribunal has referred the following two questions, respectively for our opinion :

1. At the instance of the assessee :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts of Rs. 18,693 and Rs. 21,536 were not deductible while determining the income under the head 'Other sources' in computing the total income of the assessee for A.Ys. 1967-68, and 1968-69, respectively ?"

2. At the instance of the revenue :

"Whether, on the facts and in the circumstances of the case, the decision reached by the Tribunal, namely, that the fees paid to the income-tax and wealth-tax practitioner, amounting to Rs. 1,200 for A.Y. 1967-68 and Rs. 2,900 for A.Y. 1968-69 are an expenditure laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head 'Income from other sources' and, therefore, admissible deductions u/s. 57(iii) of the Act is correct in law ?"

4. Now, so far as the first question in each of these references is concerned, it is concluded by the decision of this court in Smt. Padmavati Jaikrishna v. CIT [1975] 101 ITR 153. the assessee, in that case, sought to deduct interest on amounts borrowed for payment of income-tax, wealth-tax and annuity deposits under s. 57(iii) and that claim was rejected by all the revenue authorities. The matter was thereupon brought to this court way of reference and the question which was raised for decision was whether, on the facts and in the circumstances of the case, the expenditure incurred on the payment of interest was an admissible deduction under s. 57(iii). After considering the relevant statutory provisions and various authorities and in the light of the facts found by the Tribunal, it was held that the expenditure in question was not an admissible deduction under s. 57(iii). It is not in dispute that this decision applies on all fours. Following our decision, in that case, therefore, we answer the first question in each of the references in the affirmative, that is, in favour of the revenue and against the assessee.

5. That takes us to the consideration of the second question in each of the references which raises a common issue on almost identical facts. It was urged on behalf of the revenue that, (i) the expenditure incurred on the payment of fees to the various tax practitioners could not be said to have been laid out wholly and exclusively for the purpose of making or earning the income within the meaning of s. 57(iii); (ii) the expenditure in question was really incurred for the private purpose of securing expert assistance for the advantageous computation of the tax liability of the concerned assessee arising under the various fiscal statutes and since such tax liability was the personal liability of the concerned assessee, any expenditure incurred for such purpose must be treated as the personal expenses of the assessee; (iii) such expenditure had no direct connection with the making or earning of the dividend income which was the only material income in the case of each assessee; (iv) such expenditure could not be allowed even on the ground of commercial expendiency since it was not incurred in order to facilitate indirectly the earning or making of such income; (v) even if the motive operating on the mind of the assessee in incurring such expenditure was to effect saving by reducing tax liability and thereby to protect or preserve a portion of the income already earned, such motive was irrelevant and it could not provide the required nexus between the expenditure incurred and the making or earning of income; (vi) even if it was permissible to take that factor into account, the necessary nexus was still not established because the connection, if any, between the expenditure and income earned or made was too remote and far-fetched; and (vii) in any case, the expenditure incurred by each assessee on the payment of fees to the income-tax practitioner would not qualify for deduction since the assessee was following the mercantile system of accounting and it was not shown that the liability for payment of such fees had accrued in the relevant previous years.

6. The assessee contended on the other hand that, (i) the making or earning of income and payment of taxes are not to be treated as isolated and independent transactions; (ii) if an assessee bona fide considers, therefore, that the revenue seeks to take too large a share and to leave him with too little, the expenditure which he incurs in endeavoring to resist such appropriation must necessarily be treated as a disbursement laid out for the purpose of making or earning such income indirectly, if not directly; (iii) dividend income earned by the assessee was subject to the levy of income-tax and any expenditure incurred for securing the assistance of an expert for the computation of the tax liability arising out of the earning of such income must be treated as having been laid out wholly and exclusively for the purpose of making or earning of such income; (iv) such expenditure must be allowed even on the ground of commercial expendiency, for, the proper computation of tax liability under various statutes and consequential reduction, if any, in the incidence of tax would result in effecting savings and in the preservation or protection of a portion of the income already earned and it would also leave in the hands of the assessee surplus funds for investment which would, in their turn, generate additional income; and (v) such expenditure was justified on the ground of commercial expediency even for the reason that if, for want of expert assistance, the tax liability was quantified at a much higher figure, the assessee might be required to liquidate her shareholding to meet such liability or the revenue, in case of default on the part of the assessee to pay the tax, might realise the amount by attachment and sale of such asset and, in either of these events, there would be a proportionate loss of dividend income on account of the depletion of the source of income.

7. The determination of the question as to which of the two rival contentions has merit must, in the ultimate analysis, depend upon the interpretation of the statutory language and its application to the facts and circumstances of the case. It would, therefore, be desirable to refer first to the relevant provisions and then to such of the authorities cited at the Bar which throw some light on the meaning and content of the said provisions.

8. It is pertinent to note that a provision similar to the one found in s. 57(iii) was also there in the earlier Acts though its language has changed from time to time. Section 11(2) of the Act of 1918 provided for the allowance of expenditure in relation to income from "other sources" in the following terms : "any expenditure...... incurrred solely for the purpose of making or earning such income, profits or gains". Under s. 12(2) of the Act of 1922, the relevant provision was as follows : "any expenditure (not being in the nature of capital expenditure incurred slowly for the purpose of making or earning such income, profits or gains....... provided that no allowance shall be made on account of any personal expenses of the assessee". By the Indian I.T. (Amend.) Act, 1939, the proviso was recast but the material words extracted above were retained in the same form. In the present Act, we have ss. 57 and 58 which deal with this subject-matter. section 57, is so far as it is relevant for the purpose of this case, read as under at the material time :

"57. Deductions. - The income chargeable under the head 'Income from from other sources' shall be computed after making the following deductions, namely :-.....

(iii) 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."

Section 58, in so far as it is relevant, read as under at the relevant time :

"58. Amounts not deductible. - (1) Notwithstanding anything to the contrary contained in section 57, the following amounts shall not be deductible in computing the income chargeable under the head 'Income from other sources', namely :-.....

(a) in the case of any assessee -

(i) any personal expenses of the assessee,....."

9. It would appear that broadly speaking two changes have been made in the new Act so far as the language of the relevant part of this provision is concerned. First, the word "solely" has been replaced by the words "wholly and exclusively" and, secondly, the words "for the purpose of making or earning such income profits or gains" have been substituted by the words "for the purpose of making or earning such income." This change in the language, however does not affect the substance of the provision and as this court observed in CIT v. Mrs. Indumati Ratanlal [1968] 70 ITR 353 at p. 355 :

"Section 57(iii) is substantially in the same terms as section 12(2) of the old Act and, therefore, the decisions on the construction of section 12(2) must also govern the construction of section 57(iii)."

10. At this stage, it would also be convenient to refer to the provisions of s. 37(1) which deals with permissible deductions in respect of the income chargeable under the head "Profits and gains of business or profession". The relevant part of the said section, at the material time, read as under :

"37. General. - (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'."

11. In CIT v. Malayalam Plantations Ltd, [1964] 53 ITR 140, the Supreme Court observed that "the expression 'for the purpose for the business' is wider in scope than the expression 'for the purpose of earning profits'". Similar observation has also been made in CIT v. Birla Cottom Spg. and Wvg. Mills Ltd. [1971] 82 ITR 166, where the Supreme Court expressed the view that the expression 'for the purpose of the business' is essentially wider than the expression "for the purpose of earning profits". The decision in Malayalam Plantations has been freely drawn upon by courts for laying down that the provisions of s. 37(1) and similar provisions of s. 10(2)(xv) of the 1922 Act in which the expression "for the purposes of the business" is used, have wider implication than the provisions of s. 10(2) of the 1922 Act which used the words "for the purpose of....... earning such.... profits" and the provisions of s. 57(iii) in which the expression "for the purpose of making or earning such income" is used. (See for example, Padmavati Jaykrishna's case [1975] 101 ITR 153). That this view is justified is amply borne out by the different approaches adopted in two decisions of the Supreme Court in relation to a claim for deduction in respect of the same item of expenditure. In T. S. Krishna v. CIT [1973] 87 ITR 429 (SC), a claim for deduction in respect of wealth-tax paid on shares held by the assessee was held to be not a permissible deduction under s. 57(iii) even apart from or irrespectives of the provisions of s. 58(1A). As against this, we have the decision in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC), wherein wealth-tax paid by the assessee, which was a trading company, on assets held by it for the purpose of its business, was held to be deductible as a business expense under s. 10(2)(xv). These two decisions illustrate that different approaches are necessary when the same item of expenditure has to be judged from the standpoint of s. 37(1) on the one hand and s. 57(iii) on the other and that the scope of the provisions is not the same. Reference may also be made in this connection to the decision of this court in Commissioner of Expenditure-tax v. Mrs. Manorama Sarabhai [1966] 59 ITR 262. In that case, it was pointed out that the words "for the purpose of" were used in s. 5(a) of the Expenditure-tax Act, 1957, in connection with the words "the business, profession, vocation or occupation" and also in conjunction with the words "earning income from any other source" and it was observed that (p. 266) :

"The legislature has thus provided disjunctively for different categories of expenditure and it is not right that the concept underlying one category should be imported into the other."

12. These observations, though they are made in a different context, are apposite in judging the relative scope of ss. 37(1) and 57(iii).

13. Even apart from authority, on a comparision of the language of s. 37(1) and s. 57(iii), it becomes clear that the scope of the former section is essentially wider than that of the latter. The word "business" used in s. 37(1) in association with the expression "for the purposes of" is a word of wide connotation. As observed by the Supreme Court in Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 at p. 773 :

"The word 'business' connotes some real substantial and systematic or organised course of activity or conduct with asset purpose."

14. In the context of a taxing statute, the word "business" would signify an organised and continuous course of commercial activity, which is carried on with the end in view of making or earning profits. Under s. 37(1), therefore, the connection has to be established between the expenditure incurred and the activity undertaken by the assessee with such object. As against this, s. 57(iii) use the expression "for the purpose of" in conjunction with the words "making or earning of income" from "other sources". The nexus thereunder must, therefore, be between the expenditure incurred and the income earned and not between the expenditure incurred and the activity which is the source of the income. This court has taken such view in CIT v. Kasturbhai Lalbhai [1986] 70 ITR 267, in the context of s. 12(2) while considering an argument that would be sufficient to bring the expenditure within the scope of s. 12(2) to show that it was incurred to indirectly facilitate to carrying on the activity producing the income and that there was some indirect connection or nexus between the expenditure incurred and the activity which is the source of the income. An argument to that effect advanced in that case was in terms negatived at pp. 274-275. This decision given in the context of s. 12(2) would also govern s. 57(iii). It is thus clear that whereas any expenditure which is incurred in order indirectly to facilitate the carrying on of systematic activity which qualifies as business may be deductible under s. 37(1), similar expenditure incurred in order indirectly to facilitate the carrying on of the activity producing income would not be allowable under s. 57(iii). The implication of s. 57(iii) is, therefore, on its plain terms narrower than that of s. 37(1). It is for this reason that the decisions given in the context of s. 37(1) cannot be straight away applied to cases falling under s. 57(iii).

15. Now, there are a few decisions which have considered the scope and ambit of s. 12(2) and s. 57(iii) and it would be useful to refer to them at this stage. in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal. [1951] 20 ITR 1 (SC), s. 12(2) fell for consideration before the Supreme Court. The assessee, in that case, was an investment company and the majority of its shares was held by an individual and the rest was held by his nominees. That individual died and his shares vested in the administrator of his estate. Since moneys were needed by the executors, an agreement was entered into between the administrator on the one hand and the assessee on the other where under the assessee agreed to reduce its shares held by him and he on his part agreed to forgo cash payment and to receive debentures of an equivalent face value carrying interest at the rate of 8% per annual and redeemable at his option at any time. The revenue authorities and, on reference, the Calcutta High Court took the view that in computing the income of the assessee, interest paid on those debentures could not be deducted under s. 12(2). On appeal to the Supreme Court, it was observed that in judging a claim for deduction under s. 12(2), the following principles were relevant (p. 4) :

"(a) though the question must be decided on the facts of each case the final conclusion is one of law;

(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned;

(c) it is enough to show that the 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 expendiency, and in order indirectly to facilitate the carrying on of the business';

(d) beyond the no hard and fast rule can be laid down to explain what is meant by the word 'solely'."

16. It was pointed out in that case that the consideration that the transaction had the effect of diminishing the taxable income of the assessee without in any manner disturbing the holding of the investments of the company or interfering with the earning of its income and that it had resulted in considerable benefit to the other party to the transaction as not at all relevant when the transaction was not challenged on the ground of fraud. It was also observed that the test was not whether the other party benefited, nor indeed whether it was a prudent transaction, which resulted in ultimate gain to the assessee, but whether it was properly entered into as a part of the appellant's legitimate commercial undertaking in order indirectly to facilitate the carrying on of its business. It did not matter whether the company was right or wrong in its view. There are usually many ways in which a given thing can be brought about in business circles but it is not for the court to decide which of them should have been employed when the court is deciding a question under s. 12(2). It was, therefore, held that the expenditure incurred on payment of interest fell within the purview of s. 12(2).

17. In CIT v. Purshottamdas Thakurdas [1946] 14 ITR 305 (Bom), the assessee who was elected as a member of the local board of the Reserve Bank of India incurred in the year of account certain legal expenditure in successfully defending a suit brought some time after his election for a declaration that his election was invalid. The assessee claimed to deduct such expenditure under s. 12(2). The claim was rejected by the ITO but it was allowed by the AAC and that decision was confirmed by the Tribunal. On reference, it was, inter alia, urged on behalf of the revenue that the expenditure could not be said to have been incurred "solely" for the purpose of making or earning the income because what the assessee did in defending the litigation was not only to secure his fees as a director but also to secure the right and privileges appertaining to such office and to maintain hi status. Stone C.J. rejected this argument in the following words (p. 311) :

"In my judgment the only purpose of incurring expenditure in this case was for the assessee to preserve his directorship. There was no personal attack upon him which he was seeking to defend. What his own private motive, if any, in preserving his position as a director may have been does not seem to me to be relevant. So far as the revenue authorities are concerned, the directorship only sounds in fees and the only purpose of defending the action was to preserve the office and therefore the fees."

18. Chagla J. (as the then was), who delivered a concurring judgment, observed as under (pp. 312,313, 314) :

"The purpose and the sole purpose for incurring this expenditure was to preserve and maintain the source which yielded the income which is shown as being derived from other sources under section 12 of the Indian Income-tax Act.... It would be entirely irrelevant to enter into the motives of Sir Purshottamdas why he fought this litigation... and as no other purpose appears on the fact of the record we must accept that and hold that in this case the object and purpose with which this expenditure was incurred was solely, as required by section 12, sub-section (2), of the Indian Income-tax Act, for earning the income as a member of the Local Board of the Reserve Bank of India..."

19. The expenditure was, accordingly, held to be an admissible deduction under s. 12(2).

20. In Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543 (Bom), the assessee claimed to deduct under s. 12(2) from interest earned by her from fixed deposit the interest on money borrowed by her for the purpose of meeting household expenses, purchasing jewellery and meeting advance tax payment. The claim was negatived by the revenue authorities and, upon a reference to the High Court, Chagla C.J., speaking for the court, observed as under (p. 547) :

".... in order to decide whether a deduction is permissible under sub-section (2), we have to examine the nature of the expenditure. The purpose for which the expenditure is incurred must be in order to earn the income. The expenditure may be incurred for any commercial purpose. The connection between the expenditure and the earning of the income may not be direct. However indirect the connection may be, there must be a connection or a nexus between the expenditure incurred and the income earned."

21. It was urged in that case that the assessee had the option either of taking the money from the fixed deposit and thereby reducing the income or borrowing money and paying interest on it and that inasmuch as she exercised the option of borrowing money, she preserved the source of the income and, therefore, the expenditure was an allowable expenditure. This argument was negatived in the following terms (pp. 547, 548, 550) :

"...... What sub-section (2) emphasise is the purpose for which the expenditure is incurred. The court is not concerned with the motive of the assessee and what Mr. Mehta asks us to do is to probe into the motive of the assessee. It may be that the assessee's motive was to save her fixed deposit and interest accruing from it and to purchase the jewellery by means of a loan borrowed from some person or other. But that consideration is entirely irrelevant. What we are concern with is the actual action on the part of the assessee and not of the action she could have taken under the circumstances.... If an assessee has no option except to incur an expenditure in order to make the earning of an income possible, then, undoubtedly, the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of section 12(2). But where the option has no connection with the carrying on of the business or the earning of the income and the option depends upon personal considerations or upon motives of the assessee, that expenditure cannot possibly come within the ambit of section 12(2)."

22. It was, therefore, held that the expenditure incurred by the assessee on payment of interest on the moneys borrowed was not an admissible deduction under s. 12(2).

23. In CIT v. Kasturbhai Lallubhai [1968] 70 ITR 267 (Guj), certain expenditure was incurred in sending out circular and collecting proxie from shareholders of a public limited company by two of its directors who were assessee in that case and they claimed to deduct their share of the amount so spent in their respective assessments under s. 10(2)(xv) and s. 12(2). The departmental authorities negatived the claim but the Tribunal allowed the expenditure as permissible deduction under s. 12(2). On a reference, this court considered the ambit of the provisions of s. 12(2) in the light of the observation of the Supreme Court in Eastern Investments Ltd.'s case [1951] 20 ITR 1, and observed (pp. 273, 275, 276 of 70 ITR) :

"....... in order to decide whether an expenditure is a permissible deduction under section 12(2), we haves to examine the nature of those expenditure. The purpose for which the expenditure is incurred must be in order to earn the income and here we must not confuse purpose with motive....... Moreover, the purpose of making or earning the income must be the sole purpose for which the expenditure is incurred. If the expenditure is incurred for the purpose of making or earning the income as also for another purpose or, in other words, the purpose of making or earning the income is mixed up with another purpose in making of the expenditure......... the expenditure would be outside the scope and ambit of section 12(2) and would not be a permissible deduction under that section...... 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 faciliate the earning of the income. There must be a connection, direct or indirect, between the expenditure incurred and the income earned..... and, in judging whether in respect of a particular expenditure there is such connection, we should not be guided by abstract or academic considerations but should take into consideration questions of commercial expendiency and principles of ordinary commercial trading."

24. Applying this test it was held that the expenditure voluntarily incurred by the assessee in issuing circulars on the ground of commercial expediency in order to indirectly faciliate the earning of the director's fees was admissible. However, the expenditure incurred on the collection of proxies from the shareholders could not be regarded as allowable expenditure incurred for the purpose of earning such fees.

25. In CIT v. Mrs. Indumati Ratanlal [1968] 70 ITR 353 (Guj), the assessee's husband had died leaving a will bequeathing half of his estate to his wife and the other hand to his minor son. The estate consisted mainly of shares and securities. The assessee claimed that the expenditure incurred by her on the payment of one-half of the interest on moneys borrowed for the payment of estate duty was deductible under s. 57(iii) from the dividends derived from the shares and securities. The departmental authorities disallowed the claim but on appeal the Tribunal held that the claim was well founded and allowed the deduction. On a reference, it was observed by this court (p. 356) :

"The expenditure in order to fall within section 57(iii) must, therefore, be incurred wholly and exclusively for the purpose of making or earning the income sought to be assessed. There must be a connection between the expenditure and the earning of the income. The connection may be direct or it may even be indirect. But howsoever indirect the connection may be, there must be a connection or nexus between the expenditure incurred and the income earned."

26. Applying this test, it was found in that case that the liability of an accountable person under the E.D. Act, 1953, being a personal liability, interest paid on moneys borrowed for the purpose of discharging such a purely personal liability would not be a allowable expenditure under s. 57(iii). In this case also an argument similar to the one advanced before the Bombay High Court in Bhuriben's case [1956] 29 ITR 543, namely, that if moneys had not been borrowed, the assessee would have had to sell the shares for the payment of estate duty-since she had no moneys of her own-and that in that event she would have lost the dividends on those shares and that, therefore, it was for the purpose of earning such dividend income that moneys were borrowed by her, was advanced on behalf of the assessee. This argument was negatived on similar ground, namely, that the assessee's motive for borrowing moneys was not relevant and that what had to be seen for the applicability of s. 57(iii) was not the motive but the purpose of the borrowing. It was observed that if the assessee had chosen to sell the shares and pay the estate duty out of the sale proceeds, her income from dividends might have been reduced but it did not, therefore, follow that the purpose for which the moneys were borrowed was to maintain or preserve the shares and to help her to earn dividend on the shares. The moneys were in fact borrowed by the assessee in order to discharge her personal liability and this purpose and obviously no connection, direct or indirect, with the earning of dividend on the shares.

27. The last decision to which reference may be made is Smt. Padmavati's case [1975] 101 ITR 153. The assessee, in that case, sought to deduct under s. 57(iii) interest paid on loans borrowed by her to meet her income-tax and wealth-tax liability and to make annuity deposit, inter alia, on the ground that if she had not taken loans to meet her tax liabilities she would have had to liquidate her shareholding and thus would have lost one of her sources of income. The claim was negatived by the revenue authorities and, on a reference, this court, following the earlier decisions in Bai Bhuriben's case [1956] 29 ITR 543 (Bom) and Mrs. Indumati Ratanlal's case [1968] 70 ITR 353 (Guj), held that the expenditure incurred on the payment of interest was not a permissible deduction. The distinction between "motive" and "purpose" was re-emphasised and it was pointed out that what was relevant was purpose and not motive. It was held that whatever be the motive, the "immediate purpose" in borrowing loans was to discharge the assessee's six liabilities and the connection, if any, between the payment of interest and earning of dividends was "too remote" to be taken into account. In any case, even if the motives was relevant, the purpose of expenditure was a dual one, namely, to discharge tax liabilities and to save the source of income and, therefore, also it did not qualify for deduction. The decision of the revenue authorities was thus affirmed on reference.

28. On an analysis of the statutory language and principles laid down in the decided cases referred to above, the following proposition clearly emerge :

(i) in order to decide whether an expenditure is a permissible deduction under s. 57(iii), the nature of the expenditure must be examined;

(ii) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee;

(iii) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning

"income from other sources"

;

(iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must haves been incurred, that is to say, expenditure would not have been incurred for such purpose as also for another purpose, or for a mixed purpose;

(v) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure;

(vi) if the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction;

(vii) it is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expendiency and in order indirectly to facilitate the making or earning of the income;

(viii) if, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deduction;

(ix) it would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on of the activity which is the source of the income; the nexus must necessarily be between the expenditure incurred and the income earned;

(x) it is not necessary to show that the expenditure was a profitable one or that in fact income was earned;

(xi) the test is not whether the assessee benefited thereby or whether it was a pruent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income;

(xii) the question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law.

29. Now, let us proceed to examine in the light of the above mentioned principles whether the disbursement in question in the present case is a permissible deduction under s. 57(iii). The expenditure incurred on payment of fees of the different tax practitioners is sought to be deducted from income earned by way of dividend. The question which we must, therefore, examine is whether such expenditure was incurred solely in order to make or earn the dividend income. It is not in dispute that the source of such income, that is, the shares and securities, was not in direct jeopardy and that the expenditure was not incurred for the immediate purpose of preserving or protecting such source. It is also apparent that this is not a case where the assessee has no option but to incur this expenditure in order to earn dividend. In other words, it was not obligatory to engage the services of the tax consultants in order to earn such income. The expenditure was not laid out even in order to discharge the assessee's duties an obligations, statutory or otherwise, as a shareholder. In fact, the expenditure was not at all incurred for the imminent purpose of making or earning the dividend income or for augmenting the same. It was incurred primarily an immediately for the purpose of proper computation of the tax liability of the assessee under the I.T. Act, W.T. Act and G.T. Act. The liability to pay tax under those various statutes is undoubtedly the personal liability of the assessee and any expenditure incurred for the proper computation of such liability would be clearly for the private purpose of the assessee. It would be in the nature of personal expense of the assessee which by the statutory injunction contained in s. 58(1)(a)(i) is clearly outside the pale of s. 57(iii). It is true that income and taxes are interconnected and that, therefore, an assessee may legitimately incur expenses on securing the services of a tax consultant to ensure that he is not left with a merge share of the income earned by him. However, such expenditure does not on that account ceases to be in the nature of personal expense as aforesaid nor can it be said to have been laid out for earning income. It is more a case of application of income after it is earned than of incurring expenditure for the application of making or earning the income.

30. The argument urged on behalf of the assessee that such expenditure was justified on the ground of commercial expediency because if the tax liability was computed as a much higher figure for want of expert assistance, she would have been required to liquidate her shareholding to meet such liability or the revenue might have recovered the tax due from the property of the assessee including those shares in case of default and that, therefore, the expenditure was incurred really for the preservation or protection of the income-yielding asset and for the continued flow of the income, cannot be accepted in view of the well-settled legal position : [See Malayalam Plantations Ltd.'s case [1964] 53 ITR 140 (SC), Bai Bhuriben's case [1956] 29 ITR 543, Mrs. Indumati Ratanlal's case [1968] 70 ITR 353 and Smt. Padmavati Jayukrishna's case [1975] 101 ITR 153]. Similar argument advanced in those cases (though on different premises) was rejected as earlier noted, mainly on the ground that that presumably may have been the motive but not the purpose and that motive was irrelevant and that, in any case, the connection if any, between the expenditure incurred and income earned was too remote. The other argument, namely that the engagement of he services of the tax consultants and consequential reduction in the tax liability would result in savings and that such savings could be reinvested to earn more income, also cannot be accepted. The connection sought to be established in that manner between the expenditure incurred and the earning of income is too remote an far-fetched. Besides, that may be the motive but not the immediate purpose for incurring the expenditure in question and what we are concerned with in the context of s. 57(iii) is the purpose and not the motive. We cannot enter into the arena of speculation and justify deduction on such grounds. In any case, even if both the above mentioned arguments advanced on behalf of the assessee based on the underlying motive are taken into consideration, it cannot still be said that the expenditure was wholly and exclusively laid out for the purpose of making or earning income from dividend. It is, at the highest, a case in which the purpose of making or earning of income is mixed up with another purpose, namely, to obtain the advantage of a favorable computation of tax liability. Such an expenditure, which is incurred for a dual purpose, would not be a permissible deduction under s. 57(iii).

31. It cannot be overlooked in this connection that in T. S. Krishna's case [1973] 87 ITR 429, the claim for deduction of wealth-tax paid in respect of shares held by the assessee was negatived by the Supreme Court on the ground that the wealth-tax paid did not bear any relationship, direct or indirect, with earning or dividend income an that it could not, therefore, be allowed to be deducted under s. 57(iii). Similarly, in Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) amounts paid by way of estate duty were held by the Supreme Court to be inadmissible deductions even under s. 10(2)(xv) on the ground that the payments had nothing to do with the conduct of the business and that they were made to discharge a statutory duty unconnect with the business. If the claim for deduction in respect of payments of such taxes has been held to be inadmissible, it is difficult to appreciate as to how expenditure incurred in engaging the services of a tax practitioner of obtaining favorable computation of a tax liability could be held to be admissible. Furthermore, in the case noted above, the Bombay High Court as well as this court have consistently held that expenditure incurred on payment of interest on loans borrower for discharging tax liabilities is not a permissible deduction. The expenditure incurred in the present case on payment of fees to tax practitioners for the computation of tax liability stands on a much weaker footing an audit is difficult, in view of the decisions aforementioned which are binding on us, to take a different view with regard to such expenditure. We are, therefore, of the view that the claim for deduction of such expenditure under s. 57(iii) is not justified.

32. Strong reliance was, however, placed on behalf of the assessee on the decision of the Bombay High Court in CIT v. H. H. Maharani Vijaykuverba Saheb [1975] 100 ITR 67 for the purpose of bringing their case within s. 57(iii). In that case, interest paid on the amount borrowed for payment of estate duty was held to be an admissible deduction under s. 12(2), inter alia, on the ground that the test for allowing a deduction under that section was not whether the liability tax was to be discharged was personal liability or not but whether the expenditure in the shape of interest that was incurred had any direct or indirect connection with the earning of the income, which expression would include maintaining the income or preserving the income at the old rate. The aforesaid reasoning adopted by the Bombay High Court in that case is in apparent conflict with the ratio of the decisions of this court in Mrs. Indumati Ratanlal's case [1968] 70 ITR 353 (Guj) and Smt. Padmavati Jaykrishna's case [1975] 101 ITR 153 (Guj). In Gopalbhai Dahyabhai Lavsi v. CIT (Income-tax Reference No. 66 of 1974 decided on December 4, 1975) ([1977] 108 ITR 531 (Guj)) the abovementioned decision of the Bombay High Court was cited before a Division Bench of this court and there also it was observed that the said decision was in direct conflict with the views expressed in the earlier two decisions of this court. It is obvious, therefore, that we cannot with respect, agree with the said decision and that it cannot be of any assistance to the assessee.

33. Reliance was then placed on behalf of the assessee upon three other decisions, in which a claim for education in respect of expenses incurred in engaging the services of lawyers or tax practitioners and other legal expenditure was held to be admissible either under s. 12(2) or s. 10(2)(xv). We shall briefly deal with those cases.

34. In CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), the assessee-company spent certain amounts in engaging eminent lawyers and conducting appropriate proceedings before an Investigation Commission and also in courts where the vires of the statute under which the Commission was constituted was challenged. The question was whether the expenditure so incurred in connection with the proceedings before the Investigation Commission could be deducted in computing the profits of the business of the assessee under s. 10(2)(xv) of the old Act. The ITO disallowed the claim but the AAC allowed it and the Tribunal confirmed that decision. On a reference, the decision of the Tribunal was affirmed. In appeal, the Supreme Court pointed out in the source of its judgment that two of the pivotal provisions of the statute under which the Commission was set up were struck down by it as unconstitutional. In judging whether expenditure incurred in connection with proceedings before such Commissioner was allowable, the test to be applied was whether the expenses were incurred for the preservation and protection of the assessee's business from any such process which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred. Applying this test to the case on hand, it was pointed out that the expenditure there incurred was incidental to the business and was necessitated or justified by commercial expediency. The earning of profits and the payment of taxes were not isolated and independent activities of a business. The business activities were continuous and they took place from year to year during the whole period for which the business continued and if the assessee took any steps for reducing its liability to tax which resulted in more funds being left for the purpose of carrying on the business, there was always a possibility of higher profits. Besides, the proceedings before the Commission were initiate with a view to collection of materials for more taxation. Taxes levied on income suspected to have escaped taxation and the penalties imposed thereon would naturally have been very heavy and might have either crippled or annihilated the business of the assessee. To preserve the business from an investigation which, according to the assessee, was unlawful, the assessee was justified in taking proper steps and spending moneys therefor. The expenditure so incurred in opposing a coercive governmental action under a legislation which was unconstitutional and with the object of saving taxation and safeguarding business was necessitate or justified by commercial expediency. It is on that ground that the claim for deduction as held justifiable.

35. In CIT v. Calcutta Landing & Shipping Co. Ltd. [1970] 77 ITR 575 (Cal), the assessee had agreed to pay a firm of chartered accountants a consolidated sum of Rs. 2,000 per year for settling each year's income-tax assessment irrespective of whether there was an appeal or not in respect of any particular year. A sum of Rs. 24,000 was accordingly paid in the preceding year being fees due to the firm under the agreement and the assessee sought to deduct it as an allowance under s. 10(2)(xv). The claim for Rs. 8,000 was allowed by the ITO but for the balance of Rs. 16,000 it was disallowed both by the ITO and the AAC. The Tribunal however, allowed it. On a reference, the Calcutta High Court held that expenses incurred for conducting proceedings before the I.T. authorities might not be apparently related to the assessee's trading activities, but they were justifiably necessary for increasing the assessee's net profits or for the carrying on of the business with larger funds at the disposal of the assessee. From this point of view, those expenses were expenses for the purpose of the business in the wider sense in which that expression was understood.

36. Now, we are unable to see how these decisions can help the assessee. In the first place, the decisions are given in the context of s. 10(2)(xv) which is equivalent of s. 37(1). As pointed out earlier, the scope of s. 37(1) and s. 57(iii) is much different. The latter is not as wide as the former and many an expenditure which might be covered by the former may not be covered by the latter. Therefore, a case decided under s. 10(2)(xv) can hardly afford any guidance in judging the eductibility of a similar expenditure under s. 57(iii). In the next place, the decision in Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), was rested to a large extent on the ground that the expenditure was there incurred for the preservation and protection of the assessee's business from an investigation which was unlawful and which would have possibly crippled or annihilated the assessee's business. The expenditure was found to be necessitated with a view to opposing a coercive governmental action with the object of saving taxation and safeguarding business. These are not the facts so far as the case in hand is concerned. The assessee has not incurred the expenditure in question for the purpose of preservation or protection of her income or her shareholding, from which she derives the dividend income, from any such coercive action. In the last place, in both those cases, expenditure was incurred by businessmen in the course of their business and, as pointed out in both those decisions, the expenditure so incurred might result in more funds being left for the purpose of carrying on the business and that, in its turn, might, in the ultimate result, bring about higher profits by leaving at the disposal of the assessee larger funds. Such an incidental consideration could not possibly apply while considering the case of an assessee who derives income from sources other than business and in whose case the question of permissibility of the deduction of expenditure is to be viewed from the immediate angle of making or earning of income. We do not think, therefore, that these two decisions could be of any assistances to the assessee.

37. In J. K. Commercial Corporation Ltd. v. CIT [1969] 72 ITR 296(All), the assessee-company held 750 ordinary shares and 3,625 preference shares of the total value of Rs. 15,01,250 in Muir Mills Ltd., which was a public limited company. Those shares were purchase by it from M/s. Bengal an Assam Investors Ltd. who in their turn originally held the largest single block of 5,085 ordinary shares and 19,540 preference shares in Muir Mills Ltd. It might be stated that the assessee-company was under the management and control of one of the directors of M/s. Bengal and Assam Investors Ltd. It would appear that Muir Mills Ltd. was under the management and control of another group of businessmen and that as a result of the tactics adopted by that group, M/s. Bengal and Assam Investors Ltd. failed to secure registration of the shares held by it in the said mills. Ultimately, an action was initiated in the court on behalf of M/s. Bengal and Assam Investors Ltd. under the Companies Act, 1956, and certain orders were made in these proceedings under which, inter alia, the assessee-company was ordered to run the Muir Mills. Before the said orders were made, the board of directors of the assessee-company resolved that it should bear the costs of the proceedings before the court and reimburse such expenses as the applicants before the court might incur. In taking this decision, the board of directors was influenced by the report of its financial adviser that it had a substantial stake in the Muir Mills Ltd. and that it was in the best interests of the assessee-company if it took steps to protect its interests against the reported misappropriation and mismanagement of the Mills by its existing directors and managing agents. The expenditure incurred on legal and traveling expenses in consequence of this resolution was claimed by the assessee-company as a deduction under s. 12(2). The claim was disallowed by the ITO as also by the AAC. The Tribunal, however, held that the expenditure was admissible but it did not allow it to the full extent claimed. On a reference, the Allahabad High Court upheld the entire claim made by the assessee-company under s. 12(2) on the ground that the investment of the assessee-company was in jeopardy and that if the proceedings initiated under the Companies Act had not terminated in favour of the assessee-company, the shareholding of the company worth more than Rs. 15 lakhs would have been reduced to mere scraps of paper. It was, therefore, necessary for the assessee to finance the case not for improvement of the quality of its investment but for the very preservation thereof. The fact that as a result of such expenses the assessee expected to earn better dividends was only an additional argument for allowing the same under s. 12(2). We are unable to appreciate how this decision can help the assessee on the facts and in the circumstances of this case. The expenditure there was rightly allowed, with respect, primarily and mainly on the ground that it had to be incurred for preserving and protecting the very asset, namely, the shareholding. Such an expenditure, if it is incurred, would certainly be allowed as a permissible deduction under s. 12(2) or s. 57(iii), as the case may be, as per the well-settled legal position. As earlier pointed out, however, such a situation does not obtain in the present case. The decision is, therefore, clearly distinguishable and though it is given in the context of s. 12(2), it cannot assist the assessee in the facts and circumstances of the present case.

38. In view of the foregoing discussion, it would appear that the expenditure incurred by the assessee on account of payment of fees to the various tax practitioners cannot be said to have been laid out or expended wholly and exclusively for the purpose of making or earning of dividend income and that it is, therefore, not a permissible deduction under s. 57(iii). We must, therefore, answer the second question in each of the references in the negative, that is, in favour of the revenue and against the assessee.

39. To sum up, we answer the questions referred to us as follows :

I.T.R. No. 134/1974 I.T.R. No. 135/1974 Q.No.1. - In the affirmative. Q.No.1. - In the affirmative.

Q.No.2. - In the negative. Q.No.2. - In the negative.

40. The assessee in each case will pay the costs of the reference to the Commissioner.