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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO & SHRI LALIET KUMAR
PER LALIET KUMAR, JM :
These three appeals of the assessee raising common issues arise out of separate orders of the CIT(A) 2, Pune, for A.Y year 2011-12 dated 17-11-2016 and for A.Ys 2010-11 & 2012-13 both dated 2-5-2018 on the following grounds: (i) The CIT(A) erred in confirming the order of the Assessing Officer by disallowing the expenses of Rs. 9,85,000/- on repairs and renovations and brokerage incurred by the Appellant on the transfer of capital asset, by concluding that the genuineness of the payment is unverifiable and could not be corroborated as because all the payments have been claimed to be made in cash only. (ii) (a) The CIT(A) erred in not admitting the additional evidence produced by the appellant at the time of hearing under Rule 46A of Income-tax Rules 1962 (hereinafter “IT Rules”) which empowers the CIT(A) to take the additional evidence on record, if the same goes to the roots of the matter.
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(b) The CIT(A) failed to appreciate that in appellate proceedings these power are co-terminus to that of the Assessing Officer and hence it was well within his powers to entertain the additional evidence produced by the appellant at the time of hearing. (iii) (a) The CIT(A) erred in confirming the Assessing Officer’s order in disallowing expenses of Rs. 15,00,000/- under section 57(iii) of the Income-tax Act, 1961 (hereinafter “the Act) towards unrecoverable loan by concluding that unrecoverable loans is not an allowable deduction as per the provision of section 57 of the Act and law does not permit any deduction on account of irrecoverable loan against income from other sources; (b) The CIT(A) erred in not appreciating that the claim of Rs. 15,00,000/- made by the Appellant could be allowed as a deduction under the provisions of section 57(iii) of the Act, inasmuch as all the conditions specified in section 57(iii) were satisfied by the Appellant. (c) The CIT(A) erred in not appreciating that the expenditure of Rs. 15,00,000/- which was in the form of loan advanced was given wholly and exclusively for the purpose of making or earning interest/income entailing deduction u/s 57(iii) of the Act. (d) The CIT(A) erred in not appreciating that for earning interest by advancing loans, an assessee does not have to be in the money lending business or hold a valid money lending licence for the purpose of claiming a deduction u/s 57(iii) of the Act. (iv) The Appellant craves leave to add, alter modify, cancel and/or amend any of the aforementioned Grounds of Appeal at the time of hearing.
ITA No. 1312//PUN/2018 for A.Y. 2010-11 Brief facts: 2.. The assessee was deriving income from capital gains and income from other sources ( interest from bonds) during the assessment year under consideration . In the return of income assessee has claimed write off advance in installments of Rs. 15,00,000/- out of Rs. 4,15,88,223/-. It was the case of the assessee that in the year 1996 the husband of the assessee had given an advance of Rs. 4,15,88,223/- with Kalpak Group which was engaged in construction . On the said advance no interest was received at all and therefore no interest income from this investment
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with the Kalpak Group was declared. The assessee had also filed a suit for recovery of the amount of Rs. 4,15,88,223/- but on account of threat to her life she was forced to withdraw the suit, The assessee has claimed the amount of Rs 15.00 lakhs written off out of this amount of Rs. 4,15,88,223/- in this assessment year as eligible expenses u/s 57)(iii) of the Act.
The learned Assessing Officer considered the assessee submissions and observed in para 5 that the assessee is not in the business of money lending nor assessee produced any license of money lending business. Further, the A.O recorded that assessee has not produced any supporting evidence in support of any steps taken for recovery of the amount. Lastly, the A.O had disallowed the expenses holding that the expenditure of Rs 15.00 lakhs cannot be written off against any other income. It was further submitted that any other income is required to be computed under the provisions of sec. 56 to 58 of the Act and the claim of bad and doubtful debts is not covered under the provisions of sec. 57(iii) of the Act. The A.O after considering the provisions of sec. 57(iii) had disallowed the claim of bad and doubtful debts debt against the income from other sources being not eligible expenses. Feeling aggrieved by the order passed by the A.O the assessee filed an appeal before the learned CIT(A).
The learned CIT(A) considered the submissions of the assessee but was not able to grant any relief to the assessee. He accordingly confirmed the order of the A.O. The paragraph 5.2.1 of the CIT(A)’s order provides as under
“Having considered the facts, I note that the investment in the Kalpak group has never yielded the appellant any interest income. As admitted by the appellant, this was invested in the form of an advance to Kalpak, but for reasons best known to the parties, no interest was ever paid to the appellant, It is therefore not known whether this advance was interest free
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or was interest bearing. No agreement for the same exists as admitted by the appellant. The arguments canvassed by the appellant tare self serving and one sided. Apart from a confirmation of loan from Kalpak, there is no other evidence to show that the advance would bear interest. It is only the appellant who is claiming that the advance was intended to bear interest, and this claim is made without any evidence whatsoever. The appellant is using inverse logic in stating that had any interest been received from that investment, it would have been shown as interest income in her return. Income tax cannot operate in the realm of ifs and buts. The simple fact is that the appellant has not been able to substantiate that the investment in Kalpak was intended to be interest bearing. For the sake of argument if it is assumed, that it was, even then, the write off of an investment going bad and doubtful debts cannot be allowed u/s 57(iii). It is fairly admitted that the provisions of sec. 36(1)(viia) of the Act(2) would not apply in this case, as this is not business income. The appellant has claimed before me that her claim of write off of Rs. 15,00,000 satisfies all conditions u/s 57(iii). However, this claim is simply made without demonstrating how it satisfies all conditions. I am of the view that the claim of write off of part investment fails simply on the condition that it is not an expense. For a claim u/s 57(iii) to be admissible, the primary condition is that it should be an expense in the first place and it should necessarily be wholly and exclusively for the purpose of earning interest income. In the present case, I have demonstrated that the appellant never earned any interest from this investment. Even the claim of the appellant that this advance was for the purpose of earning interest is unsubstantiated. There is another issue which arises which has not been considered by the A,.O and has not been explained by the appellant. If the appellant claims that her investment with the Kalpak Group has gone bad, then why is the write off only of Rs. 15,00,000 out of the total investment of Rs. 4,15,88,223. Logic as well as accounting standards mandate that the whole of the investment should be written off. This figure of Rs. 15,00,000 has not been explained at all by the appellant,. It appears to me that there is no logic in arriving at a figure of Rs. 15,00,000 and the same is determined in an arbitrary fashion by the appellant. In the light of these facts, I am afraid, the claim of the appellant does not survive. I am therefore of the view that the write off of part investment cannot be considered as an expense to earn interest income as in the 1st place no income has ever been earned from that investment and there is no proof that the investment was ever intended to earn interest income. I therefore dismiss the claim of the appellant for deduction of Rs. 15,00,000 and the action of the A.O in disallowing the same is upheld.”
Feeling aggrieved by the order passed by the learned CIT(A) the assessee is in appeals before us on the grounds reproduced hereinabove. Before us, the learned authorized representative of the assessee has submitted that the amount was given as advance to M/s. Kalpak Group which was not recoverable and
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therefore, the assessee wrote off Rs. 15,00,000/- out of the total amount of Rs. 4,15,88,223/- as eligible expenses u/s 57(iii) of the Act.
5.1 Per contra, the learned departmental representative submitted that from the bear reading of the provisions of sec. 57 of the Act, it is abundantly clear that the advance given by the assessee was not allowable/eligible expenditure u/s 57(iii) if the Act as it was not incurred for earning the income from any other sources.
We have heard the rival contentions and perused the record. As mentioned by the learned CIT(A) in his order that the advances were given to M/s. Kalpak Group was in the nature of investments and neither the said amount was returned nor the interest was paid on the said amount.. This fact has not been disputed by the learned A.R of the assessee during the course of arguments. During the course of proceedings before the A.O or before the CIT(A) , the assessee has failed to provide any agreement between the assessee/her husband and M/s. Kalpak group
6.1 In our view, for the purposes of invoking the provisions of section 57(iii) of the Act it is incumbent to prove that (1) the expenditure was incurred by the assessee (2) such expenditure should not be in the nature of capital expenditure (3) such expenditure was laid or expended wholly and exclusively for the purposes of making or earning such income.
6.2 We may also rely upon the finding of the coordinate Bench in the matter of Poona club Ltd [2018] 90 taxmann.com 422 (Pune - Trib.) wherein it was held as under:
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“ 24. Now, coming to section 57(iii) of the Act, which provides as under:— '57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely:—
(i)…..
(ii)….
(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;
(iv)….'
The Statute provides that against the income chargeable under head 'Income from other sources', the deduction on account of expenditure, not being in the nature of capital expenditure, laid out or expended wholly or exclusively for the purpose of making or earning such income is deductible. In other words, the assessee has to establish its claim of expenditure within parameters "laid out or expended wholly and exclusively for the purpose of making or earning such income". Both the learned Authorized Representatives before us has placed reliance on different decisions of the Hon'ble Apex Court or various other High Courts to lay emphasis on the meaning of terms used in section 57(iii) of the Act. 26. The Hon'ble Supreme Court in Seth R Dalmia (supra) relied upon by the learned Departmental Representative for the Revenue, where the provisions of the old Act i.e. section 12 was considered by the Hon'ble Supreme Court and it was held as under:— "An analysis of this sub-section would show that in computing the income under this head the assessee is entitled to deduction in respect of the expenditure incurred solely for the purpose of earning such income, provided the expenditure is not of a capital nature and does not include any personal expenses incurred by the assessee. In other words, before this provision could apply, the following conditions must be fulfilled: (i) the expenditure must have been incurred solely and exclusively for the purpose of earning income or making profit;
(ii) the expenditure should not be in the nature of a capital expenditure ;
(iii) the amount in question should not be in the nature of personal expenses of the assessee;
(iv) that the expenditure should be incurred in the accounting year; and
(v) there must be a clear nexus between the expenditure incurred and the income sought to be earned."
Further, the Hon'ble Bombay High Court in H.H. Maharani Shri Vijaykuverba Saheb of Morvi (supra) had also while considering the provisions of section 12(2) of 1922 Act held
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that If with the borrowings that were made, a source of income like shares or securities was acquired, then obviously the interest paid on such borrowings was a permissible deduction under section 12(2) of the 1922 Act and if that be so, then interest paid over the borrowings made for the purpose of maintaining or preserving the income should also be deductible under the said provision. In the facts before the Hon'ble Bombay High Court, the assessee had claimed deduction against dividend income on account of dividend and interest on securities on account of interest paid on borrowals made for meeting liability of estate duty. The trustees paid the estate duty by borrowing money and claimed interest as deductible against dividend and interest on securities, which formed part of trust property. The Hon'ble Bombay High Court allowed the said claim because the expenditure was incurred for the purpose of preserving particular source of income. The learned Authorized Representative for the assessee relying on the said decision has pointed out that in the case of assessee also, source of interest income is the club activities carried on, wherein expenditure is incurred for upkeep of the club. In order to attract more persons as new members, the amount received from new members as membership fees is parked in fixed deposits, on which interest is earned and for attracting the members whatever expenditure is incurred on the activities of club, its preservation, its upkeep, etc. is for the purpose of earning interest income and hence, part of the said expenditure merits to be allowed in the hands of assessee. 28. Now, coming to the next reliance placed upon by the learned Authorized Representative for the assessee on the Hon'ble High Court of Punjab & Haryana in the case of Maruti Employees Co-operative House Building Society (supra), wherein the interest was earned on deposits made by the members of society, which was floated for maintenance of their houses and the expenditure incurred on account of maintenance of houses was allowed against interest income i.e. the said expenditure was allowed holding that interest was derived on deposits made by the members of society requiring the assessee to discharge the liability of maintaining their houses. It was held that the said expenditure was to be treated as part and parcel of contractual agreement between the members of society and the society itself. 29. The Hon'ble High Court of Gujarat in Kasturbhai Lalbhai (supra) while deciding the issue of allowability of expenditure admissible under section 12(2) of 1922 Act had held that the same must be incurred directly or indirectly to facilitate earning of income, while interpreting the terms "in order indirectly to facilitate carrying on their business". The learned Authorized Representative for the assessee has placed heavy reliance on all these decisions which related to interpretation of terms used in section 12(2) of the old Act, except the decision of Hon'ble High Court of Punjab & Haryana in the case of Maruti Employees Co-operative House Building Society (supra). However, the claim of assessee is under the 1961 Act, wherein the terms used in sub-section (iii) to section 57 of the Act are at variance to the terms used in earlier section. The requirement of section 57(iii) of the Act is that expenditure should be laid out or expended wholly and exclusively for the purpose of making or earning such income. 30. The Hon'ble Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 had observed as under:— "What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income." 31. Applying the said ratios laid down by various Courts, we find that the assessee must have incurred expenditure for the purpose of earning income from other sources; this is the condition precedent for allowing deduction under section 57(iii) of the Act. In other words,
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it is incumbent upon the assessee claiming the said expenditure to establish nexus between the expenditure and income and in the absence of the same, the assessee is not entitled to the claim of expenditure under section 57(iii) of the Act. Even if we see the decision of the Hon'ble High Court of Punjab & Haryana in the case of Maruti Employees Co-operative House Building Society (supra), which has been heavily relied upon that there is direct nexus between expenditure claimed and interest earned on the deposits. The Co-operative housing society was formulated for the purpose of maintenance of houses. The members were the owners of houses who require the maintenance and out of interest income, the Co- operative society was incurring expenses for maintenance of houses of members and hence, the decision by the Hon'ble High Court to allow the same as deductible from interest income. 32. Now, coming to the facts of the present case, the assessee claims that club activities have nexus with earning of interest income. For determining the applicability of section 57(iii) of the Act what has to be seen is the purpose of expenditure and the purpose must be for earning the income. The link is between expenditure incurred and income earned. To be eligible for deduction under section 57(iii) of the Act, expenditure incurred should be linked to earning of income. Where the assessee is running club and is providing facilities to its members by way of general upkeep of club, its maintenance and provision of various facilities to the members of club, then the same is against the membership collected from members, for which the members are charged. The assessee had so claimed it in its audited accounts. However, the profit arising from the same is not taxable in the hands of assessee on principle of mutuality. The assessee in the return of income had offered interest earned on FDRs as 'Income from other sources'. However, by way of additional ground of appeal raised before the CIT(A), the assessee wants to change the ground position i.e. it has now argued at length that certain percentage of expenditure incurred by the assessee club is attributable to the interest income earned. The case of assessee has already been dealt with in the paras hereinabove. However, we find no merit in the plea of assessee as under the provisions of section 57(iii) of the Act, the eligibility for deduction arises only if the expenditure has been laid out wholly and exclusively for the purpose of making or earning the income which is chargeable under the said head. There is no merit in the claim of assessee that the expenditure which it is incurring for upkeep of the club and other facilities including the depreciation charged on various assets is to be proportionately allowed as expenditure under section 57(iii) of the Act since the interest earned on FDRs is linked to the membership fees charged at the time of joining of members. The learned Authorized Representative for the assessee has time and again pointed out that since it was providing such facilities it could attract more members and hence, more membership fees can increase in investment in FDRs and consequent increase in the interest on such FDRs, hence, the plea of enhanced deduction to be allowed against interest income under section 57(iii) of the Act. We find no merit in the aforesaid plea of assessee, in view of the strict provisions of section 57(iii) of the Act. The assessee has failed to establish nexus between earning of interest income and the proportionate expenditure it wants to be allocated. In the absence of the same, we find no merit in the claim of assessee and the same is rejected.”
6.2 If we look into the facts of present case, the amount of Rs. 15.00 lakhs sought to be claimed by the assessee was not in the nature of expenditure as it was in the nature of investment out of the total amount of Rs. 4,15,88,223/- given
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as advance to M/s. Kalpak group. Further, this amount of Rs. 15.00 lakhs was not laid or expended for the purposes of earning the income from other sources. Admittedly, the assessee has earned the income from other sources of interest from Bonds. Thus by any stretch of reasoning it cannot be said that the amount of Rs. 15.00 lakhs was spent for earning the other income . In the light of above, the claim of the assessee to treat Rs. 15.00 lakhs as eligible expenditure incurred for earning the interest income or eligible expenditure u/s 57()iii) cannot be sustained and hence the appeal of the assessee is liable to be dismissed.
I.T.A. No. 681/PUN//2017 and 1313/PUN/2018
As the grounds raised by the assessee in those appeals are similar to that of the appeal for the assessment year 2010-11 therefore, respectfully following the decision in appeal No. 1312/PUN//2018 these two appeals are also dismissed. 8. As regards the additional grounds raised by the assessee in ITA No. 681/PUN/2017, the same are not admitted and as such are liable to be dismissed. 9. As regards the additional grounds raised by the assessee in ITA No. 681/PUN/2017, the same are not admitted and as such are liable to be dismissed. In the result, all the three appeals of the assessee are dismissed.
Order pronounced in the open court on 6th February, 2020.
Sd/- sd/- D. KARUNAKARA RAO LALIET KUMAR (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) Pune; Dated : 6th February, 2020 Ankam
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Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. CCIT (International Taxation), West Zone, Mumbai 4. The Pr. Chief CIT Pune. 5. The Pr. CIT 2, Pune
// True Copy // BY ORDER
Sr. Private Secretary ITAT Pune Benches, Pune.
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Date 1 Draft dictated on 3.2.2020 Sr.PS/PS 2 Draft placed before author 3-2-2020 Sr.PS/PS 3 Draft proposed and placed 5-2-2020 JM/AM before the second Member 4 Draft discussed/approved 5-2-2020 AM/JM by second Member 5 Approved draft comes to 5-2-2020 Sr.PS/PS the Sr. PS/PS 6 Kept for pronouncement 6-2-2020 Sr.PS/PS on 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk 6-2-2020 Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order