2018 (5) TMI 577 - AT - Income Tax

Claim of legal expenses u/s 57(iii) against interest income - expenditure for recovering FD and interest - direct nexus - AO objected for claiming the entire expenses in the assessment year 2014- 15 - Held that - 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. 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) and admissible subjected to basic checks under the Act. AO will allow the legal expenses for which the assessee has produced valid bill - With regard to the claim of travel expenses, AO 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. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Disallowance of expenses claimed under section 57(iii) of the Income Tax Act, 1961.

Analysis:
1. The assessee claimed a deduction under section 57 of the Act for expenses incurred in recovering fixed deposit and interest. The Assessing Officer disallowed the expenses, stating they were primarily to secure capital and not for earning income, resulting in disallowance and taxation of the claimed expenses.

2. The ld. CIT(A) upheld the disallowance of expenses as inadmissible after considering the submissions and facts of the case presented by the assessee.

3. The assessee appealed before the Tribunal, arguing against the capital nature of expenses and the distinction between expenses under "other sources" and "Business." The assessee emphasized that the expenses were necessary as per the High Court's directions for interest payment on fixed deposits.

4. The Tribunal analyzed whether the claimed expenses qualified for deduction under section 57 of the Act. The assessee had invested in fixed deposits, faced issues with maturity, and incurred expenses to recover the deposits based on High Court directions.

5. Section 57(iii) allows deductions for expenses laid out exclusively for making or earning income from other sources. The Tribunal compared the language of sections 37(1) and 57(iii) to highlight the narrower scope of the latter. The expenditure should directly contribute to earning income from other sources.

6. Referring to case law, the Tribunal emphasized that expenses must not be capital or personal in nature and should be wholly and exclusively incurred for earning income. The Tribunal concluded that the expenses were incurred solely for earning income and were admissible under section 57(iii) after evaluating the High Court's role in directing interest payments.

7. The Tribunal directed the Assessing Officer to allow legal expenses with valid bills and verify travel expenses for their connection to the case. The appeal was allowed for statistical purposes, emphasizing the admissibility of expenses under section 57(iii) for earning income from other sources.