Deduction u/s 57 available only when it is established that expense is expended wholly and exclusively for earning income

D D & Co. Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that for claiming deduction u/s. 57 of the Income Tax Act, it is important to establish that the expenditure is laid out or expended wholly and exclusively for the purpose of making or earning such income. Accordingly, matter remanded to consider the movement in the FD account and the loan account to understand the nexus.

Facts- In the present case, AO held that the assessee could not establish the nexus between the fixed deposits made and the loans borrowed from the family members and, therefore, the deduction claimed by the assessee against the interest income from fixed deposits u/s. 57 cannot be allowed as a deduction since it was not established by the assessee that the expenses is incurred wholly and exclusively for the purpose of earning income offered under section 56 of the Act. Accordingly, AO disallowed the interest expenses to the tune of Rs.47,89,528/- for A.Ys 2017-18 and Rs. 55,46,456/- for A.Y. 2018-19.

CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.

Conclusion- Held that for the purpose of claiming deduction under section 57, it is important to establish that the expenditure (not being in the nature of capital expenditure) is laid out or expended wholly and exclusively for the purpose of making or earning such income. In assessee’s case the assessing officer has not considered the movement in the loan account details submitted by the assessee and also has not considered the fresh FDs and renewal of FDs before concluding that the entire claim is not allowable under section 57. The alternate plea of the assessee that the interest expenditure if disallowed under section 57 should be allowed as business expenditure for the reason that the FDs are kept for business purpose has also not been considered by the lower authorities. In view of these discussions we deem it fit to remit the issue back to the assessing officer for a de novo consideration. The assessing officer is directed to consider the movement in the FD account and the loan account to understand the nexus and also to consider the alternate claim of interest as business expenditure based on the facts and evidences that may be submitted by the assessee. Needless to say that the assessee be given a reasonable opportunity of being heard.

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