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December 20, 2022

Not necessary that expenses should have resulted in income sufficient if nexus

by CA Shivam Jaiswal in Income Tax

Not necessary that expenses should have resulted in income sufficient if nexus

Facts and issue of the case

The assesse was engaged in development and purchased , sold , constructed and leased properties . The assessee was sanctioned a loan for a sum of Rs.35 Crores from Union Bank of India. Crores from Union Bank of India. The assessee paid a sum of Rs.33,50,00,000/- to Prestiges Estates Project Limited (PEPPL) as advance towards purchase of properties vide two cheques dated 30th Sept ,2008 and 13th Oct ,2008 . However, on account of adverse market conditions, the assessee decided to withdraw from the transaction and requested PEPPL to refund the earnest money.. PEPPL refunded the money by cheque dated 23rd Oct ,2008 and 29th Oct ,2008. The assessee thereafter lent money to other shareholders and made inter corporate deposits to the tune of Rs.35,62,450/-for which total interest earned was to the extent of Rs.2,02,52,131/- as against an interest of R s.2,84,47,557/-.

The assessee filed return of income for A.Y 2009-2010 , declaring income of RS ,34,23,338/- after claiming a loss of RS,.81,95,426/- under the head ‘income from other sources’, which was arrived at after reducing the interest payable on the loan of Rs.2,84,47,557/- against the interest income of Rs.2,02,52,131/- earned from inter corporate deposits and loans to shareholders under Section 57(iii) of the Act.. The Assessing Officer disallowed the claim for deduction/set-off of loss of RS .81,95,426
The Commissioner (Appeals) upheld the order . The Tribunal dismissed the assesses appeal.

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Observation of the court

Learned counsel for the assessee submitted that deduction for interest paid to Union Bank of India ought to have been allowed under Section 57(iii) of the Act. It is also urged that authorities could not have gone into the motive of the transaction. Alternatively it was urged that if the borrowing is for the purpose of business, the interest paid thereon would be allowable under Section 36(i)(iii) of the Act. It is urged that in any case, the tribunal does not have the power to take back the benefit granted by the Assessing Officer. In support of aforesaid submissions, reliance has been placed on decisions in ‘SETH R DALMIA VS. CIT’, (1977) 110 ITR 644 (SC), ‘CIT VS. RA.7ENDRA PRASAD MODDY’, (1978) 115 ITR 519 (SC), ‘CIT VS. GORAWARA PLASTICS AND D GENERAL INDUSTRIES (P.) LTD.’, (2007) 167 TAXMAN 174 (ALLAHABAD)

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On the other hand, learned counsel for the revenue submitted that provisions of Section 36(i)(iii) of the Act are not attracted to the facts of the case as the amount in question did not remain with the assessee for the purpose of business. It is also urged that the question of application of Section 57(iii) of the Act does not apply as the amount in question is interest free. It is submitted that the order passed by the Assessing Officer and the tribunal do not call for any interference.

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Conclusion

After hearing to the both the parties the court held that Section 57(iii) of the Act mandates that income chargeable under the head ‘income from other sources’ shall be computed after making a 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. Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction under Section 57(iii) of the Act. Under Section 57(iii) of the Act a nexus between the expenditure and income has to be ascertained. The assessee was therefore, entitled to deduction under Section 57(iii) of the Act.

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In The High Court of Karnataka at Bengaluru

Dated  19th Day Of November 2021

West Palm Developments LLP Vs ACIT Karnataka High Court

West-Palm-Developments-LLP-Vs-ACIT-Karnataka-High-Court

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