NAUTILUS PREMISE OWNERS ASSOCIATION,VADODARA vs. THE INCOME TAX OFFICER, WARD-1(2)(2), VADODARA

“Ground 2 and 3: Disallowance of Expenses Under Section 57 1. The central issue in the present case.is whether the expenses claimed by the appellant, amounting to Rs. 27,57,686, can be allowed as deductions under Section 57 of the Income-tax Act, 1961. The appellant has argued that these expenses are indirectly related to the income earned from interest and rent and, therefore, should be deductible. However, a close legal examination reveals significant flaws in the appellant's reasoning, both in terms of legal provisions and factual circumstances. Provisions of Section 57:

1.

2. The intent behind this provision is to prevent taxpayers from deducting general operational or maintenance expenses that are unrelated to the income earned from other sources. Any broader interpretation would open the door to unwarranted deductions and distort the taxable income, which would be contrary to the objectives of tax law. In the present case, the appellant must prove that the expenses claimed were directly linked to the generation of interest income and rent income—a burden the appellant has not met. Appellant's Arguments: 1. The appellant argues that the expenses incurred for maintaining the residential complex, such as security charges, DG maintenance, gardening, and housekeeping, should be allowed as deductions because they are necessary for the upkeep of the premises, which indirectly helps generate interest and rent income. However, this argument is fundamentally misguided.

2. The appellant's attempt to justify these expenses as indirectly related to the income fails because Section 57 does not allow for indirect connections. The law requires that the expenses be incurred solely for the purpose of earning the income. In this case, the expenses claimed are general operational costs associated with the maintenance of the residential complex and are not incurred to earn the interest income from fixed deposits or rent income from property j leases. The appellant's claim that these expenses are indirectly related to income is insufficient under the strict language of Section 57. Analysis of Expenses: 1. Let us analyze the nature of the expenses claimed by the appellant. The expenses include: 1. Security charges 2. Housekeeping and maintenance 3. Gardening and landscaping 4. DG set maintenance

1. 1. The core principle of Section 57 is that there must be a clear, direct nexus between the expense incurred and the income earned- In the present case, the appellant has failed to demonstrate any such nexus. The interest income earned by the appellant from fixed deposits is a result of financial investments, and it accrues regardless of the maintenance expenses incurred for the complex.

2. The appellant's reliance on the doctrine of mutuality is equally misplaced. The mutuality principle applies to contributions made by members for mutual benefit and the surplus arising from those contributions. In the present case, the income in question is derived from external sources-namely, interest from bank deposits and rent from third parties. This income falls squarely under Section 56 (Income from Other Sources), and the deductions available u/s 57 are strictly limited to expenses incurred wholly and exclusively for generating that income. The doctrine of mutuality cannot be stretched to cover incorne earned Mm non-mutual sources like interest or rent. Judicial Precedents: 1. The appellant has relied on the case of CIT v. Maruti Employees Cooperative House Building Society Ltd. (2010) 320 ITR 254 (P&H) to argue that the expenses should be allowed. However, this reliance is misplaced. In the Maruti case, the expenses incurred were directly related to the maintenance of members' houses, and the income earned was derived Mm the members' contributions. The mutuality principle applied because the income was entirely internal and derived from the association's members.

Nautilus Premise Owners Association vs. ITO Asst. Year –2017-18 - 5– 2. In contrast, in the present else, the income is derived Mm external sources (bank interest and rent), and the expenses claimed are unrelated to the generation of that income. The Supreme Court's ruling in Vijay Laxmi Sugar Mills Ltd. v. CIT [1991] 191 ITR 641 (SC) clearly establishes that expenses deductible under Section 57 must be incurred wholly and exclusively for the purpose of earning income. This ruling directly counters the appellant's claim, as the expenses in this case are operational in nature and not incurred for the specific purpose of earning the income from interest or rent. Conclusion on Grounds 2 and 3: 1. Based on the detailed analysis above/it is evident that the expenses claimed by the appellant do not meet the criteria specified under Section 57 of the Income-tax Act. The appellant has failed to establish a direct nexus between the expenses incurred and the income earned from interest and rent. The AO has rightly disallowed the expenses, and the addition of Rs. 27,56,670 is upheld. These grounds of appeal are accordingly dismissed.”

5. Before us the ld. counsel for the assessee placed reliance on the case of Sohamnagar Co-Operative Housing Society Ltd. vs. Income-tax Officer [2024] 165 taxmann.com 508 (Ahmedabad - Trib.)[30-07-2024], which has held that where assessee, a co-operative housing society, collected maintenance charges from its members and funds so generated were utilized for meeting common maintenance expenses of housing society and it had also earned interest income on FDR made with banks and rental income, there was no bar on set off of deficit arising from shortfall in collection from its members towards maintenance of society vis-a-vis expenses incurred for maintaining housing society, against rental and interest income earned by assessee. Accordingly, the ld. counsel for the assessee submitted that in view of the above decision, relief may be afforded to the assessee considering the similarly of facts.

Nautilus Premise Owners Association vs. ITO Asst. Year –2017-18 - 6– 7. We have heard the rival contentions and perused the material on record. We note that a similar issue came up before Ahmedabad ITAT in the case of Balwa Group Coop Society vs. ITO for the Assessment Year 2018- 19 (ITA No. 1636/Ahd/2024), wherein the ITAT dealt with the issue of taxability of interest income earned from nationalized banks. The brief facts of the case were that the assessee, a credit co-operative society, had filed its return declaring NIL income after claiming deduction under Section 80P(2)(a)(i) of the Act. However, the Assessing Officer disallowed this claim, treating the interest income of ₹26,31,656/- from various banks as not eligible for deduction under Section 80P, and taxed the same under the head "Income from Other Sources." Before ITAT, the assessee submitted that the interest earned was from surplus funds which were deposited to meet the objectives of the society and should therefore qualify for deduction under Section 80P. Alternatively, the assessee requested that if the income is taxable under Section 56, then proportionate expenses related to earning this income should be allowed under Section 57. The assessee further submitted that administrative and other operational expenses such as interest paid to members, salaries, and member welfare expenses were incurred in the process of managing funds and earning interest from bank deposits. The Department, however, opposed this, arguing that the interest income from nationalized banks was from surplus or idle funds and had no direct connection to the society’s main business of providing credit to its members. The Departmental Representative contended that most of the expenses, especially the interest paid to members were directly related to the core lending activities and could not be deducted from income earned from other sources like bank deposits, to avoid double deduction. After hearing both Nautilus Premise Owners Association vs. ITO Asst. Year –2017-18 - 7– sides, the Tribunal upheld the CIT(A)'s decision on the first ground, confirming that the interest income earned from nationalized banks is not eligible for deduction under Section 80P(2)(a)(i) of the Act. However, regarding the alternative claim of deduction of proportionate expenses under Section 57 of the Act, the Tribunal found merit in the assessee’s submission and noted that whether proportionate expenses could be allowed or not required further verification. The ITAT accordingly remanded this specific issue back to the Assessing Officer for fresh adjudication after examining the working of the proportionate expenses, with instructions to give the assessee an opportunity to be heard. Following the above decision, the Ahmedabad ITAT in the case of Kheralu Taluka Primary Teachers in vide order dated 25.08.2025, made the following observations: “We are of the considered view that the facts of the case before us are similar to above decision of jurisdictional Ahmedabad ITAT. We concur with the view taken in the aforesaid decision that the assessee should be allowed proportionate expenditure against interest income subject to the assessee establishing connection between incurring of such expenditure towards earning of interest income from nationalized banks, which is a specific requirement for claim of such expenditure u/s section 57 of the Act. Accordingly, the appeal of the assessee is allowed for statistical purposes and matter with respect to claim of deduction of proportionate expense under Section 57 of the Act is remitted to the Assessing Officer for fresh consideration. In the result, the appeal of the assessee is allowed for statistical purposes.”

Nautilus Premise Owners Association vs. ITO Asst. Year –2017-18 - 8– Accordingly, the appeal of the assessee is allowed for statistical purposes and matter with respect to claim of deduction of proportionate expense under Section 57 of the Act is remitted to the Assessing Officer for fresh consideration. Regarding the reliance on the decision in the case of Sohamnagar Co-Operative Housing Society Ltd supra, we are of the view that the facts are distinguishable in that case since the assessee in that case had earned substantial rental income (almost three times as compared to interest on FD) whereas in the instant case the assessee has earned a sum of ₹23,45,282/- as interest income from FD with banks and a sum of ₹32,540/- as rental income. Accordingly, since the facts of the assessee’s case are akin to above decisions of Ahmedabad ITAT as reproduced above, the matter is directed to be restored to the file of the Assessing Officer for necessary verification.