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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
आयकर अपील�य अ�धकरण, “ए” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I.T.A.No.1244/Mds/2017 �नधा�रण वष�/Assessment Year:2014-15 Shri Ashok Amritraj, The Income Tax Officer, Flat No. 10, Chesney Lane, Vs. International Taxation 1(1), Ethiraj Salai, Egmore, Chennai 34. Chennai 600 008. [PAN: AABPA2975R] (अपीलाथ� /Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से / Appellant by : Shri K. Balasubramanian, Advocate ��यथ� क� ओर से/Respondent by : Shri S. Mohd. Mustafa, JCIT सुनवाई क� तार�ख/ Date of hearing : 29.01.2018 घोषणा क� तार�ख /Date of Pronouncement : 20.02.2018 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 16, Chennai dated 22.03.2017 relevant to the assessment year 2014-15. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) erred in confirming the disallowance of ₹.43,25,232/- being expenses claimed under section 57(iii) of the Income Tax Act, 1961 [“Act” in short].
Brief facts of the case are that the assessee, being a non-resident, filed his return of income for the assessment year 2014-15 on 31.07.2014 admitting a total income of ₹.6,40,000/- and claimed large deduction under section 57 of the Act. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act dated 28.08.2015 was duly served on the assessee. Subsequently, notice under section 142(1) of the Act dated 20.06.2016 was also issued for furnishing various details, which was duly furnished by the assessee. From the return of income, the Assessing Officer noticed that under ‘Schedule OS – Income from other sources’, the assessee has admitted an amount of ₹.1,26,71,941/- as gross interest received and an amount of ₹.6,40,000/- as 115BB Winning from lotteries, cross word puzzles, etc. Against the same, the assessee has claimed expenses/deductions to the tune of ₹.1,37,07,052/- as deductions under section 57 of the Act. The assessee has arrived at a loss of ₹.10,35,111/- chargeable under normal rate and an income of ₹.6,40,000/- under special rate. When called for the details, the assessee filed statement of income, bank statement of account of the assessee with IOB and a note on the details of expenses incurred in connection with recovering the fixed deposit and interest with Canara Bank, Guindy Branch, Chennai with enclosures. From the statement of total income submitted by the AR, the Assessing Officer noticed that he assessee has shown an amount of ₹.1,26,38,102/- as interest receipt from fixed deposit at Canara Bank, Guindy. From the above receipt, the assessee has deducted an amount of ₹.19,20,183/- and ₹.74,61,637/- as interest disclosed on accrual basis for the assessment years 2011-12 and 2012-13 respectively. In support, the AR of the assessee furnished copies of the returns of income for the above assessment years along with statements of total income. The amount of interest thus, offered for the assessment year 2014-15 was ₹.32,56,282. Against this, the assessee has claimed an amount of ₹.43,25,232/- under section 57 of the Act as expenses incurred in recovering the fixed deposit and interest, resulting a loss of ₹.10,68,950/-. After examining the break-up of expenses furnished by the assessee, the Assessing Officer held that the expenditure is attributable primarily towards securing the capital and cannot be said to be incurred wholly and exclusively for the purpose of earning of the income to qualify deduction under section 57(iii) of the Act and accordingly disallowed and brought to tax the entire expenses claimed by the assessee.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee and facts of the case, the ld. CIT(A) confirmed the disallowance of expenses as not admissible.
On being aggrieved, the assessee is in appeal before the Tribunal. By relying on the grounds appeal, the ld. Counsel for the assessee vehemently argued that the ld. CIT(A) went in wrong to hold that the above expenses claimed by the assessee as capital expenditure and also erred in holding that the above expenditure claimed under the head “other sources” was different from expenditure under the head “Business”. The ld. CIT(A) failed to note that as per the directions of the Hon’ble High Court, the bank paid the interest on the FDs till the FDs are paid to the assessee and prayed to allow the expenses claimed under section 57 of the Act. On the other hand, the ld. DR strongly supported the orders of authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. First, we shall adjudicate as to whether the claim of expenses qualifies for deduction under section 57 of the Act or not.
5.1 It is an admitted fact that the assessee has invested an amount of ₹.6.35 crores in fixed deposits with Canara Bank, Guindy Branch, Chennai on 09.08.2010 with the maturity date being 13.08.2011. As the amount was not disbursed on maturity due to some foul play, the assessee approached the Hon’ble High Court of Madras and the Hon’ble High Court, through its order in WP No. 22258 of 2011 dated 23.07.2012 directed the respondent bank to pay the amount payable to the assessee of seven FDRs with same rate of interest till the date of order. To get the entire amount deposited in the FDRs along with interest thereon, the assessee has claimed various expenditures, which was disallowed by the Assessing Officer and the same was confirmed by the ld. CIT(A) by treating the same as capital in nature.
5.2 Let us have a glance on the provisions of sections. Clauses (i), (ia), (ii) and (iia) of section 57 of the Act specifically mention to deductions available while computing the income chargeable under the head “Income from other sources”. Clause (iii) to section 57 of the Act makes admissible the deduction of 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 (income chargeable under the head “income from other sources”). Section 57(iii) of the Act is in line with the section 37(1) of the Act which in general (subject to its Explanation) makes available deduction of any expenditure (not being expenditure of the nature described in sections 30 to 36 of the Act and not being in the nature of capital expenditure or personal expenses of the assessee) laid down or expended wholly and exclusively for the purposes of the business or profession while computing the income chargeable under the head “Profit and gains of business or profession. It may be pertinent to mention the distinction in the language used by the legislature in section 37(1) of the Act and 57(iii) of the Act. Section 37 of the Act provides for deduction of expenditure incurred wholly and exclusively “for the purpose of business”, whereas, section 57(iii) of the Act provides for deduction only of expenditure incurred wholly and exclusively “for the purpose of making or earning such income”. “Such income” refers to “income from other sources”. The expression “for the purpose of business” is narrower than the expression “for the purpose of making or earning such income”. In order that the expenditure may be admissible under section 57(iii) of the Act, it is necessary that the primary motive of incurring such expenses directly to turn income falling under the head “income from other sources”. That is not so under section 37 which allows deduction of expenditure; incurred wholly and exclusively” for the purpose of the business”. Under section 57(iii) of the Act, deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head “income from other sources”. Had the assessee not approached the Hon’ble High Court, he would not have got back the investments along with interest thereon.
5.3 The provisions of the Income-tax Act relating to allowances disclose that the expenditure or outgoing sought to be deducted should bear a character which has a connection with or relation to the particular activity which produces the income or constitutes its source. The expenditure as envisaged by section 57(iii) of the Act should not be in the nature of capital or personal expenditure and it should have been incurred wholly and exclusively for the purpose of making or earning the income which is chargeable under the head “income from other sources”. It is not necessary that income should have been earned as a result of expenditure claimed as deduction under section 57(iii) of the Act.
5.4 The Gujarat High Court in the case of Virmati Ramkrishna vs. CIT (1981) 131 ITR 659, has observed the following propositions in respect of deduction of an expenditure under section 57(iii) of the Act after analysing the statutory language and principles laid down by the Hon’ble Supreme Court in the case of Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC) and Seth R. Dalmia vs. CIT (1977) 110 ITR 644 (SC) : (i) in order to decide whether an expenditure is a permissible deduction under section 57(iii) of the Act, 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 of earning “income from other sources”; (iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should 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 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 expenses 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 expediency 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; and nexus must necessarily be 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 hat in fact income was earned; (xi) the test is not whether the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bonafide 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 on of law. 5.5 In view of the broad analysis of the provisions of relevant sections under the Act as well as various case law, we are of the considered opinion that the ld. CIT(A) was incorrect to hold that the above expenditure incurred by the assessee is capital in nature.
5.6 On perusal of the expenditure details furnished by the assessee, the Assessing Officer has not disputed the expenditure incurred by the assessee but objected for claiming the entire expenses in the assessment year 2014- 15. The fate of the assessee to get back his investment was not automatic, but by the directions of the Hon’ble High Court. The Hon’ble High Court of Madras has rendered justice to the assessee by directing the respondent bank to pay the amount payable to him under seven FDRs treating the said amount as if it was continuing in fixed deposits till date with the same rate of interest till the amount is paid by the bank. Thus, the award of interest thereon till the date of order of the Hon’ble High Court, of course, not automatic or by any provision or to say a natural consequence to the retrieval of the investment, but, only by the specific directions of the Hon’ble High Court of Madras. Thus, we hold that the expenditure incurred by the assessee was wholly an exclusively for the purpose of earning of the income to qualify deduction under section 57(iii) of the Act and admissible subjected to basic checks under the Act.
In view of the above observations, we make it clear and direct the Assessing Officer to allow the legal expenses for which the assessee has produced valid bill. Further, with regard to the claim of travel expenses, the Assessing Officer is directed verify the posting of the assessee’s case for putting his appearance/meeting with his advocate and allow the claim after satisfying that there was no personal element involved for claiming the travel expenses. Accordingly, the ground raised by the assessee is allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced on the 20th February, 2018 at Chennai.