2014 (12) TMI 135 - AT - Income Tax

Expenses incurred for earning interest income on estimation basis disallowed Nexus between earning of interest income and expenditure on estimation basis established or not Held that - There is a force in the argument advanced by the assessee which is supported by the documentary evidence in Rajpath Club Limited vs. Commissioner of Income Tax 1993 (11) TMI 20 - GUJARAT High Court it has been held that expenditure incurred by the assessee which is wholly and exclusively for the purpose of earning interest income was required to be deducted while computing income from other sources - the assessee has claimed the expenditures on estimation basis, but the same has not been fully substantiated by the assessee - But it does not mean that assessee is not entitled for any expenditure for the income earned by the assessee - It is not logically acceptable that if any person earned any income and did not incur any expenditure for earning the same - assessee has deputing their staff who used their skills mentally as well as physically to earn the income - They managed its fund for better utilization and also identify the funds from time to time for their better investment to maximizing the assessee s return - This exercise of identifying the funds is time consuming needs day to day involvement of assessee company staff and also requires allocation of resources and infrastructure. The cost attributable to involvement and was claimed as deductible against interest income on estimation basis - the other disallowances on the service charges income on gross basis - The assessee has also filed details of services charges received before the authorities expenditure attributed to the earning of service charges have been computed/allocated the assessee has also filed detail before the authority - the service charges are brought to tax under the head Income from Other Sources - The amount of expenditure allocated on a consistent and reasonable basis to the earning of service charges being directly related is clearly allowable - But in the present case the assessee has itself estimated the expenditure in dispute for which the assessee had not filed sufficient evidence for substantiating its claim before the Revenue Authority - assessee is entitled for some expenditure on the incomes - the AO is directed to allow 1% of expenses on account of interest income and on service charges income of ₹ 36,66,291/- on gross basis Decided partly in favour of assessee.

Issues Involved:
1. Disallowance of expenses incurred for earning interest income.
2. Disallowance of expenses incurred for earning service charges income.
3. Discrepancy in reported other income.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Incurred for Earning Interest Income:

The appellant company, wholly owned by the Government of India under the Ministry of Railways, had claimed an expenditure of Rs. 22,01,478/- against the interest income of Rs. 7,03,14,282/-. The Assessing Officer (AO) disallowed this expenditure on the grounds that the appellant failed to establish a nexus between the earning of interest income and the claimed expenditure. The AO emphasized that, according to Section 57(iii) of the Income Tax Act, 1961, only those expenditures which are "laid out or expended wholly and exclusively for the purpose of making or earning income" are allowable. The AO further noted that the appellant's claim of 2.5% of total expenses as attributable to earning interest income was based on estimation and lacked substantiation.

The First Appellate Authority upheld the AO's decision, stating that the entire expenditure of Rs. 17,51,41,182/- incurred by the appellant was pre-operative and had to be capitalized, as the business of dedicated freight corridors had not yet commenced. Hence, no set-off against the interest income was permissible.

Upon appeal, the Tribunal observed that although the appellant's claim was based on estimation, there was a logical basis for some expenditure being incurred to earn the interest income. The Tribunal directed the AO to allow 1% of the expenses on the interest income of Rs. 7,03,14,282/- on a gross basis, acknowledging the need for some allocation of resources and infrastructure for managing funds and earning interest income.

2. Disallowance of Expenses Incurred for Earning Service Charges Income:

The appellant claimed an expenditure of Rs. 8,11,987/- against service charges income of Rs. 36,66,291/-. The AO disallowed this expenditure, arguing that it was not incurred wholly and exclusively for the purpose of earning the service charges income. The AO noted that the expenditure was based on estimation without any substantiated nexus to the income earned.

The First Appellate Authority confirmed the AO's decision, reiterating that the entire expenditure was pre-operative and had to be capitalized. The Authority stated that the appellant's claim of 2.5% of the expenditure as attributable to earning service charges was not supported by any provision in the Income Tax Act.

The Tribunal, however, found merit in the appellant's argument that some expenditure would logically be incurred in earning the service charges income. The Tribunal directed the AO to allow 1% of the expenses on the service charges income of Rs. 36,66,291/- on a gross basis, recognizing the involvement of staff and resources in earning the said income.

3. Discrepancy in Reported Other Income:

The appellant reported other income of Rs. 6,02,405/-, whereas the AO found the actual other income to be Rs. 9,87,491/-, resulting in a discrepancy of Rs. 3,85,086/-. The appellant failed to explain this difference, leading the AO to treat the discrepancy as income of the appellant.

The First Appellate Authority deleted the addition of Rs. 3,85,086/- made by the AO on account of the difference in other income. The Tribunal did not further address this issue, as the relief had already been granted by the First Appellate Authority.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to allow 1% of the expenses on both the interest income and the service charges income on a gross basis. The appeal was thus partly allowed, recognizing the necessity of some expenditure in earning the incomes in dispute.

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