Case Law Details

Case Name : Shri M.J. Aravind Vs The Joint Commissioner of Income Tax (ITAT Bangalore)
Appeal Number : ITA No. 1991/Bang/2016
Date of Judgement/Order : 20/04/2018
Related Assessment Year : 2012-13

Shri M.J. Aravind Vs The JCIT (ITAT Bangalore)

As per the provisions of section 57(iii) of IT Act, any 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 under the head ‘income from other sources’ is allowable. In addition to that, in respect of income excluding exempt income being interest on securities, any reasonable sum paid by way of commission or remuneration to banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee is allowable as per clause (i) of section 57. Apart from these two clauses i.e. clause (i) & (iii), other clauses of section 57 are not applicable in the present case. The assessee’s claim is this that as per section 14A of IT Act, 1/2% of the investments has to be disallowed and the balance has to be allowed and the assessee computed the disallowance in that manner and claimed balance amount as deduction. In this regard, we observe that section 14A comes into picture in respect of those expenses which are otherwise allowable and therefore, the assessee has to first establish this that the expenses claimed by the assessee is allowable under any provisions of the law. For that, the assessee has to show that the claim of the assessee is allowable u/s. 57 of IT Act because the expenses are incurred in earning of income from other sources. As per the details of the expenses claimed by the assessee, it is available on table 2 of written submissions filed by the assessee before the CIT(A) as reproduced above, it is seen that there is no claim regarding any expenses specified in clause (i) of section 57 i.e. commission or remuneration to banker or any other person for the purpose of realising dividend or interest income because the assessee has claimed deduction on account of PMS charges,Salaries, Professional charges, vehicle maintenance, travel, computer maintenance, printing and stationery, telephone charges and bank charges. Hence no deduction is allowable in the present case under clause (i) of section 57.

Regarding the allowability of deduction under clause (iii) of section 57, it has to be established by the assessee that expenditure has been exclusively laid out or expended wholly and exclusively for the purpose of making or earning such income taxable under the head ‘income from other sources’and a categorical finding has been given by CIT (A) in para no. 6.2 of his order as reproduced above that no such detail was furnished by the assessee. Before us also, the assessee has made general arguments and has submitted general details but no specific details were furnished before us also. Hence, we hold that no deduction is allowable u/s 57 (iii).

FULL TEXT OF THE ITAT JUDGMENT

This appeal is filed by the assessee which is directed against the order of ld. CIT (A)-3, Bangalore dated 30.09.2016 for Assessment Year 2012-13.

2. The grounds raised by the assessee are as under.

1. On the facts and circumstances of the cases, the learned Commissioner of Income Tax (appeals) has erred in not accepting the contentions of the assessee that various expenses incurred by the assessee viz., PMS charges, professional fees, salary is integral to the investment activity undertaken by him and to earn the income returned in the return of income for the previous year. In view of this, the assessee believes that the expenses claimed under Section 57 as a deduction from the total income is fully justifiable.

1.1 Commissioner of Income Tax (Appeals) has also not appreciated the fact that certain class of assets may not earn income in a certain year viz., investment in unlisted equities and foreign investments and that this fact will not hamper the allowability of the expenditure incurred to manage and maintain the portfolio. Since some of the income may be exempt under the Income Tax Act, the assessee has voluntarily disallowed expenditure to an extent of income not includible in total income as computed below:

Investments Amount in Rs.
Investments as on 1/4/11 41,04,43,249
Investments as on 31/3/12 38,36,65,330
Total Investments 79,41,08,579
Average Investments 39,70,54,289
0.5% of Average Investments u/s 14A (foreign securities and unlisted securities from which no income has been earned has been excluded) 19,85,271

1.2 The above amount of Rs.19,85,271/- is the amount computed under section 14A of theIncome Tax Act, 1961. While claiming the deduction u/s 57, the above amount has been reduced as under:

Total Direct Expenses 53,05,732
Less : 0.5% of average investment 19,85,271
Balance expense claimed u/s 57 33,20,460

1.3 The balance amount of Rs.33,20,460/- has been claimed as deduction from Income from Other Sources to arrive at the taxable value of Income from Other Sources.

In view of above grounds, the assessee believes that the expenses claimed under Section 57 as a deduction from the total income is fully justifiable and learned Commissioner of Income Tax (Appeals) has erred in disallowing the said claim under Section 57.

2. Without prejudice to the foregoing contentions even assuming but without admitting that the action of the learned Commissioner of Income Tax (Appeals) upholding the disallowance of a sum of Rs.33,20,460/- to be in order, he ought to have either considered an appropriate sum as cost of acquisition of securities for the purposes of computation of capital gains in the event of sale or as expenditure incurred wholly and exclusively in connection with the transfer of securities during the year thereby entitling the assessee relief under section 48 of the Income Tax Act, 1961. The assessee also wishes to state that the expenses claimed are clearly outgoings and in the most unlikely event of your honor not considering the claim as above the said amount have to be capitalized on the various investments that he is holding so that the necessary claim can be made when the said investment are transferred and tax liability arises in accordance with the scheme of the Act.

Your appellant seeks leave to add to, to amend any of the foregoing grounds as and when considered necessary/at the time of hearing.

3. It was submitted by ld. AR of assessee that written submissions made by assessee before CIT(A) are available on pages 1 to 7 of paper book and he reiterated the same contentions which are raised in these written submissions. In addition to that, reliance was placed by him on the judgment of Hon’ble Apex Court rendered in the case of CIT Vs. Rajendra Prasad Moody as reported in 115 ITR 519. In support of his one more contention that even if no income is earned in present year then also deduction is to be allowed for expenses incurred in respect of such income, reliance was also placed on a Tribunal order rendered in the case of East West Hotels Ltd. Vs. ACIT as reported in 9 SOT 48 (ITAT[Bang]). As against this, the ld. DR of revenue supported the orders of authorities below. He also drawn our attention to para no. 1.9 of the assessment order available on page no. 7 of the assessment order and pointed out that as per the provisions of section 57(iii) of IT Act, the expenditure is allowable only in respect of those expenditure for which it is proved that amount has been spent for exclusive purpose of making or earning interest and dividend admitted by the assessee but in spite of several opportunities having been provided to ld. AR of assessee to produce the details of expenses exclusively incurred or the purpose of earning taxable interest and dividend, no such evidence was produced. He also drawn our attention to para 6.2 of the order of CIT(A) and it was pointed out that a categorical finding is given by CIT(A) in this Para of his order that allowability of expenses against income offered to tax under the head ‘income from other sources’ is governed by the specific provisions of section 57 of IT Act which provides that in respect of dividend and interest on securities, the assessee may claim any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend or interest income and therefore, section 57 provides for deduction of specific expenses such as commission or remuneration paid for realizing the income, provided there is a direct linkage between the expenditure incurred with the earning of such income. But in the present case, it is evident that no such expenditure would have been incurred by assessee on bank and securities and even if any such expenditure would have been incurred in this regard, the assessee was asked for furnishing the details of the same for all such expenses incurred to earn the income from other sources earned during the year but no such details were furnished by the assessee and therefore, the disallowance made by the AO is justified. He strongly supported the order of CIT(A).

4. In the rejoinder it was submitted by ld. AR of the assessee that even if it is held that deduction is not allowable against income from other sources, it should be held that such expenses should be allowed against income from capital gain in the present year or later year.

5. We have considered the rival submissions. First of all, we reproduce written submissions by assessee before CIT (A) which are available on pages 1 to 7 of paper book. The same read as under.

In connection with the above subject and- as instructed by the assessee. we would like to submit the following:

Grounds of appeal 1:

On the facts and circumstances of the case, there is no justification for the Assessing Officer to adopt the income returned read with intimation under section 143(1) at Rs.1,36.66.473/- as against a sum of Rs.1,19,54,560/- returned by the assessee. No reasons have been adduced for the differential amount of Rs.17,11,913/- brought to tax.

Grounds of appeal 2: Disallowance under section 57 a sum of Rs. 33,20,460/-

The assessee’s total investment portfolio as at March 31. 2012 was Rs.69.75 crores (breakup of the portfolio is listed in Table 1 below) and the total expenses incurred during the same year to earn income from such portfolio was only Rs.53.06 lakhs (breakup of the expenses is listed in Table 2 below) which is 0.76% of his total portfolio. Considering the total sire and mix of the portfolio, the assessee has to incur certain expenses to manage and maintain the portfolio in an efficient and profitable manner. The portfolio consists of equity shares in Indian companies (both listed and unlisted), shares in foreign entities, domestic and overseas mutual funds, tax free bonds. fixed deposits in banks, loans to a company where he is an investor. The assessee is assisted by certain service providers – portfolio managers, wealth advisors and chartered accountants in making investment decisions and to choose the best yielding portfolios. Along with this they assist the assessee in maintaining the historical data in the form of archives to assist him in making investment decisions in the future.

As can be sees from table 2 below the major expenses are in the form of PMS charges, salaries and professional fees. Each head of expense is discussed as under:

PMS charges:

The portfolio managers provide services like management of funds, making investment decisions, switch in and switch out of various securities, acting as custodians’ and other fund related services. For these services they charge management fees called as PMS charges from time to time based on the market value of the portfolio managed by them based on certain formulae agreed upon. Such charges collected by the PMS is directly attributable to the investment activity of the assessee. As primarily whole capital of the assessee is used in investing activity, PMS play a vital role in actual execution of the investment. They are directly connected with income derived by the assessee.

Professional fees:

Services from wealth advisors and chartered accountants constitute professional charges.

1. The wealth advisors assist the assessee in planning and maintaining the investment portfolio based on risk assessment of each investment. They also understand the risk taking capabilities of the assessee and monitor the investment in risk (in the form of securities and mutual funds both domestic and foreign) and no risk investments (in the form of Government bonds) respectively. They also help the assessee in analysing various investment options available and to guide and select the right investment based on assessee needs. They provide periodical reports on the performance of various portfolio investments. Overall they form an integral part of the investment function of the assessee.

2. The chartered accountants hired by the assessee assist them in maintaining the books of accounts up to date apart from providing monthly MIS on performance of various investment portfolios, developing charts and tables depicting the historical and current position of the funds, provide a basis to the assessee to take decisions whether to retain an investment or exit from the same. Additionally, they also help the assessee in completing various documentation requirements like filing KYC forms, preparing documents for making new investments, timely follow up with portfolio managers for portfolio reports, tracking of dates of payment of interest and capital for fixed income instruments, wherever applicable. The data provided by them helps assessee to maintain a repository of all historical data including performance of the funds, amounts disbursed by each of the funds etc. They have a direct link with the investments made by the assessee.

Salaries:  

The salary paid to Mr. Varadarajan is for coordinating with various PMS, wealth advisors and chartered accountants. He also assists the assessee in taking investment decisions. In the absence of the assessee, Mr. Varadarajan runs the show i.e., he takes all decisions concerned to investments including making fund allocations, redemption of existing investments etc.

On account of the reasons provided above in case of various expenses incurred by the assessee. the assessee is of the view that the services received from the above service provider is integral to the investment activity undertaken by him and to earn the income returned in the return of income for the previous year. In view of this, the assessee believes that the expenses claimed under Section 57 as a deduction from the total income is fully justifiable.

The assessee would like to bring to your kind notice that, certain class of assets may not earn income in a certain year viz., investment in unlisted equities and foreign investments (investment value of such investments as at March 31, 2016 is Rs.26.88 crores). This fact will not hamper the allowability of the expenditure incurred to manage and maintain the portfolio.

Since some of the income may be exempt under the Income Tax Act, the assessee has voluntarily disallowed expenditure to an extent of income not includible in total income as computed below:

Investments Amount in Rs.
Investments as on 1/4/11 41,04,43,249
Investments as on 31/3/12 38,36,65,330
Total Investments 79,41,08,579
Average Investments 39,70,54,289
0.5% of Average Investments u/s 14A (foreign securities and unlisted securities from which no income has been earned has been 19,85.271

The above amount of Rs.19,85,271/- is the amount computed under section 14A of the Income Tax Act 1961. While claiming the deduction u/s 57. the above amount has been reduced as under.

Total Direct Expenses 53,05,732
Less : 0.5% of average investment 19,85,271
Balance expense claimed u/s 57 33,20,460

The balance amount of Rs.3.3.20,460!- has been claimed as deduction from Income from Other Sources to arrive at the taxable value of Income from Other Sources.

We would like to draw your attention to below case laws in this regard:

a) It is settled position of law that in computation of the income all expenses incurred have to

be allowed. The apex court in the case of Rajendra moody 1 I 5 1TR 519 has held that it is not necessary for an assessee to have income in order to claim expenses. When the entire expense can be allowed even without any income it is pertinent to claim expenses when we have claimed are all attributable to the earning of the income. In fact we have already) provided the detailed explanation in this regard

b) The principle of matching concept has been enunciated by the apex court in the case of J.K. Industries 297 ITR 176 where in it has been held the revenues for the period have to be matched with the costs or expenses of that period. Thus all expenses attributable to income have to be given deduction. We have ourselves applied section 14 A of the act and have removed expenses on account of exempt income. Though the same is not required for purpose of section 57 we have applied in order to err in favour of the revenue.

c) We also wish to state and submit that there is nothing in the language in the Income tax Act from which it can be fairly implied that an expenditure or allowance falling within any section must fulfill some other conditions before it can be allowed. In allowing a deduction which is permissible one need not look beyond the expenditure and see whether it has the quality of directly or indirectly producing taxable income (Reliance on CIT vs. Indian Bank 56 ITR 77 SC).

d) We invite your attention to the decision of the Income Tax Appellate Tribunal. Bangalore bench in the case of East West Hotels Limited vs. Assistant Commissioner of Income-tax. Circle-11(2), Bangalore ([2006] 9 SOT 48 (BANG.). In this case, the assesse “as not carrying on any business but had let out its hotel premises to Taj Hotels Limited and earned lease rental income which was by the Assessing Officer under the head ‘Income from other sources’. It also claimed deduction of certain expenses such as managing director’s perquisites, travelling expenses, security charges, power/fuel/water charges, repairs and renewals, printing and stationery, garden expenses, flowers and plants, entertainment, motor car maintenance, subscription to clubs, rent paid on executive residence, legal expenses. advertisement etc. The Assessing Officer disallowed all expenses claimed. The honourable tribunal held where expenses were incurred either under compulsion or were obligatory on ground of commercial expediency, it was not for Assessing Officer to decide as to what could be reasonability or necessity for same, what was to be seen was whether such expenses were incurred wholly and exclusively for purpose of earning income. They also held that there was some connection, direct or indirect, between expenses incurred and income earned and, therefore, entire expenses claimed by assessee were to be allowed.

It is thus clear that there had to be some connection, direct or indirect, between expenses incurred and income earned and, therefore, entire expenses claimed by assessee were to he allowed. Applying the ratio of this decision, all expenses incurred by Mr Aravind (subject to section 14A) have a direct or indirect connection with the income earned by him and relate to no other purpose. The assessee believes that all expenditure incurred are allowable under section 57 in connection with earning the income.

The AO’s argument that application of rule 8D is purely his prerogative and cannot be done by the assessee is at best technical. If this were to be the case, there would have been no question of a chartered accountant certifying the amount disallowable in terms of section 14A for assesses to whom tax audit is applicable (clause 21h of form 3CD). The AO cannot object to a statutory formula provided in the Income Tax Rules to compute the quantum of expenses attributable to exempt income. The assessee accepts that it has incurred certain expenditure to earn both taxable and non-taxable income. We submit the AO cannot take a stand that no expenditure is required to manage a portfolio of nearly Rs. 70 crores and earn income therefrom. Once there is expenditure incurred to earn both taxable and non-taxable income and has a direct or indirect connection to the same, the only course of action to the Assessing Officer (AO) is to apply rule 8D (Which rule has already been applied by the assessee). No other disallowance is warranted.

Without prejudice to the foregoing contentions even assuming but without admitting that the action of the Assessing Officer in disallowing a sum of Rs.33,20,460/- is in order, he ought to have either considered an appropriate sum as cost of acquisition of securities for the purposes of computation of capital gains in the event of sale or as expenditure incurred wholly and exclusively in connection with the transfer of securities during the year thereby entitling the assessee relief under section 48 or the Income Tax Act, 1961. The assessee also wishes to state that the expenses claimed are clearly outgoings and in the most unlikely event of your honor not considering the claim as above the said amount have to be capitalized on the various investments that he is holding so that the necessary claim can be made when the said investment are transferred and tax liability arises in accordance with the scheme of the Act.

Table 1:

Amount in Rs.

Particulars

As at March 31,2012

As at March 31, 2011
1. INVESTMENT IN INDIAN SECURITIES
INVESTMENT IN EQUITY
Portfolio equity Shares 5,74,14,016 4,58.64,189
Direct Investment in Shares 15,40,24,962 15,37,00,062
INVESTMENT IN MUTUAL
a)  Portfolio Mutual Fund . 13,19,24,559 15.68,16,906
b)  Direct Investment 1,20,05,673 1,50,75,789
INVESTMENT IN TAX FREE BONDS 20,90,99,000 16,59.08,446
II. INVESTMENT IN FOREIGN SECURITIES 11,48,15.543 1036,41,926
Ill. Loan and advances 78,81,694 1,56,47,557
IV. Cash and Bank 1,02,91,926 1,76,04,533
TOTAL INVESTMENT 69,74,57,373 67,42,59,408

Table 2:

Nature of expenses Amount in
PMS Charges 21,18,485
Salaries & bonus 17,14,498
Professional Charges 11,87,348
VEHICLE MAINTANENCE 2,14,523
Travel —Official 7,615
COMPUTER MAINTANENCE 11,288
PRINTING & STATIONERY 1,422
TELEPHONE CHARGES 43,481
Bank Charges 7.071
Total expenses incurred during 2011-12 53,05,732

Grounds of appeal 3: On the facts and circumstances of the case, there is no justification for the Assessing Officer for restricting the credit for tax deducted at source to Rs.34,69,562/- as against a sum of Rs.36,22,922/- claimed in the return of income. The difference ostensibly relates to tax deducted at source by Woodstock Ambience Private Ltd under section 194A of the Income Tax Act 1961 during the previous year ended March 31, 2011. The relevant income has been offered to tax during the previous year ended March 31, 2012 relevant to the assessment year 2012-13 on receipt basis in terms of the method of accounting regularly followed by the assessee. Since the relevant income covered by these TDS certificates have been offered to tax during the year, credit for the same ought to have been allowed by the Assessing Officer. A rectification application has been filed before the AO in this respect.”

6. We also reproduce para 6.2 of order of CIT (A) as per which the issue in dispute was decided by him. The same is as under.

“6.2 In this regard it is also relevant to note that deduction of expenditure incurred for earning any income offered to tax as ‘income from other sources’ is governed by the specific provisions under Sec.57 of the Act, which provides that in respect of dividend and interest on securities the appellant may claim any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend or interest income. Therefore it is very much evident that Sec.57 provides for deduction of specific expenses such as commission or remuneration paid for realizing the income, provided there is a direct linkage between the expenditure incurred with the earning of such income. However in the case of the appellant, it is very much evident that no such expenditure would have been incurred by the appellant for earning the income by way of interest on bank deposits and interest on securities. Even if some expenditure would have been incurred in this regard, it is necessary for the appellant to furnish the details of the same providing direct co-relation of such expenses with the income from other sources earned during the year. However, no such specific details were furnished by the appellant. Therefore the claim of the appellant that an amount of Rs.33,20,460/- is the expenditure relatable to the earning of the income from other sources has not been substantiated and is also not found to be legally correct. Accordingly the disallowance of Rs.33,20,460/- made by the AO is found to be correct and is accordingly confirmed. The ground of appeal raised in this regard is dismissed.”

7. We also reproduce para 1.9 from the assessment order on pages 7 and 8 of the assessment order. The same reads as under.

“1.9 (a) Since assessee is failed to produce the evidence to show that he has incurred expenditure exclusively to earn the receipts offered under the head of Income from Other sources, no expenditure is allowed as per the S.57 of the Act. In this regard the relevant portions of sections 56 and 57 are extracted and quoted below for ready reference.

“56. Income from other sources.- (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

(i) dividends ;

(ia) ;(ib) ;(ic) ;

(id) income by way of interest on securities, if the income is not chargeable to income-tax under the head “Profits and gains )f business or profession”;

(ii);(iii);(iv);(v);(vi); (vii) and (viii)

57. Deductions.- The income chargeable under the head “Income from other sources”‘ shall be computed after making the following deductions, namely :—

(i) in the case of dividends, other than dividends referred to in section 115-0, or interest on securities, any reasonable sum paid by way of commission or remuneration to banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee;(1a);(ii);(iia)

(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;”

(b) Sec.57(iii) is specifically allows the deduction of expenditure only when it is proved that amount is spent for exclusive purpose of making or earning interest and dividend admitted by the assessee. Several opportunities are given to the AR to produce the details of expenses exclusively incurred for the purpose of earning taxable interest and dividend. But he failed to produce evidences and reiterates that the method of computation made by the assessee is correct. Since the claim is not made as per the law, the entire amount of expenses claimed u/s 57 of the Act is disallowed and added to the income from other sources.”

8. As per the provisions of section 57(iii) of IT Act, any 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 under the head ‘income from other sources’ is allowable. In addition to that, in respect of income excluding exempt income being interest on securities, any reasonable sum paid by way of commission or remuneration to banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee is allowable as per clause (i) of section 57. Apart from these two clauses i.e. clause (i) & (iii), other clauses of section 57 are not applicable in the present case. The assessee’s claim is this that as per section 14A of IT Act, 1/2% of the investments has to be disallowed and the balance has to be allowed and the assessee computed the disallowance in that manner and claimed balance amount as deduction. In this regard, we observe that section 14A comes into picture in respect of those expenses which are otherwise allowable and therefore, the assessee has to first establish this that the expenses claimed by the assessee is allowable under any provisions of the law. For that, the assessee has to show that the claim of the assessee is allowable u/s. 57 of IT Act because the expenses are incurred in earning of income from other sources. As per the details of the expenses claimed by the assessee, it is available on table 2 of written submissions filed by the assessee before the CIT(A) as reproduced above, it is seen that there is no claim regarding any expenses specified in clause (i) of section 57 i.e. commission or remuneration to banker or any other person for the purpose of realising dividend or interest income because the assessee has claimed deduction on account of PMS charges,Salaries, Professional charges, vehicle maintenance, travel, computer maintenance, printing and stationery, telephone charges and bank charges. Hence no deduction is allowable in the present case under clause (i) of section 57.

9. Regarding the allowability of deduction under clause (iii) of section 57, it has to be established by the assessee that expenditure has been exclusively laid out or expended wholly and exclusively for the purpose of making or earning such income taxable under the head ‘income from other sources’and a categorical finding has been given by CIT (A) in para no. 6.2 of his order as reproduced above that no such detail was furnished by the assessee. Before us also, the assessee has made general arguments and has submitted general details but no specific details were furnished before us also. Hence, we hold that no deduction is allowable u/s 57 (iii).

10. Now we examine the applicability of two judgments on which reliance have been placed by ld. AR of assessee. First judgment is the judgment of Hon’ble Apex Court rendered in the case of CIT Vs. Rajendra Prasad Moody (supra). In our considered opinion, this judgment does not help assessee in the absence in the absence of any details as required u/s. 57(iii) of IT Act because the disallowance was not made by the AO and confirmed by CIT (A) by holding that since no income is earned in the present year, deduction is not allowable in respect of this expenditure which are spent for earning some income taxable under the head “Income from other Sources” but income could not be earned in the present year. The reason for disallowance made by the AO and confirmed by CIT(A) is this that the assessee has not furnished necessary details and hence, this judgment renders no help to the assessee in the present case.

11. Reliance has been placed by ld. AR of assessee on the Tribunal order rendered in the case of East West Hotels Ltd. vs. ACIT (supra). In that case, lease rent income was to be assessed as income from other sources and the assessing officer held that expenditure allowable is restricted to only such payment, which is separately binding on the employer and legal entity, i.e., company, such as salaries, PF, ESI and other inevitable expenses. In that case, the assessee was a company and the Tribunal has followed the judgment of Hon’ble Calcutta High Court rendered in the case of CIT Vs. Ganga Properties Ltd. as reported in 199 ITR 94 in which it was held that expenditure incurred in complying with statutory obligations is deductible u/s. 57(iii) of IT Act. As per the relevant para of judgment reproduced by the Tribunal, it was noted that even if a company derives income from ‘other sources’, it has to maintain its establishment for complying with statutory obligations so long it is in operation and its name is not struck off the register of companies or unless the company is dissolved which means cessation of all corporate activities of the company for all practical purposes and so long as it is in operation, it has to maintain its status as a company and it has to discharge certain legal obligations and for that purpose, it is necessary to appoint clerical staff and a secretary or accountant and incur incidental expenses and therefore, such expenses incurred were wholly and exclusively for the activities to earn income and it was held that such expenses are allowable. For the same ratio, judgment of Hon’ble Bombay High Court rendered in the case of Chinai& Co. (P.) Ltd. Vs. CIT a reported in 206 ITR 616 was also followed and the judgment of Hon’ble Allahabad High Court rendered in the case of Rampur Timbur & Turnery Co. Ltd. as reported in 129 ITR 58 was also followed. Since in the present case, the assessee is not a company, these judgments of Hon’ble Calcutta High Court in the case of CIT Vs. Ganga Properties Ltd. (supra), Hon’ble Bombay High Court in the case of Chinai & Co. (P.) Ltd. Vs. CIT (supra) and of Hon’ble Allahabad High Court in the case of Rampur Timbur & Turnery Co. Ltd. (supra) have no relevance and since, the Tribunal has followed these judgments and decided the issue in case of that assessee being a company, this Tribunal order is also not applicable in the present case. The nature of expenses in dispute in that case are noted by the Tribunal in the form of a table and from the same, it is seen that the expenses claimed in that case were regarding the personal expenses of Directors, travelling expenses of others, Motor car expenses, security charges, printing and stationery, staff welfare, flowers and plants, AGM expenses, Board meeting expenses, miscellaneous expenses, rent paid, subscription to club, Interest on purchase of car, legal expenses etc. Hence it is seen that as per the nature of expenses involved in that case, the expenses were in relation to the fulfilling the requirements of company law to have directors and to have AGM, Board meeting and to maintain the office etc. which are necessary for fulfilling the legal requirements of a company under the Companies Act. Hence we hold that this Tribunal order is also not applicable in the present case because the assessee in the present case is not a company and therefore, there is no such legal compulsion to incur the expenses which are claimed in the present case. Hence we find that the claim of assessee for allowing deduction of expenses against income from other sources is not allowable because the assessee has not established that the expenses are allowable u/s. 57(iii) of IT Act.

12. Now we deal with and decide the alternative argument of ld. AR of assessee that even if expenses are held as not allowable against income from other sources, the same should be allowed against income from capital gain in the present year or future years. Regarding this argument, we would like to observe that for computing income from capital gains, deduction is allowable u/s. 48 and expenses which can be allowed as per this section are expenses incurred wholly and exclusively in connection with transfer of asset or cost of acquisition of asset or cost of any improvement of the concerned capital asset only. The claim of expenses in the present case is not for those expenses which are incurred on account of cost of transfer of asset or cost of acquisition of asset or cost of any improvement of asset and therefore, this alternative claim also has no merit and accordingly rejected.

13. In the result, the appeal filed by the assessee is dismissed.

Order pronounced in the open court on the date mentioned on the caption page.

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One Comment

  1. Mohammed Aftab says:

    Sir, whether loss of investment made in ponzi scheme is allowable expenses/deduction u/s 57 (iii) .
    Partly short term and partly long term. Upto to preceeding previous year income from said scheme was offered to tax…

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