2018 (7) TMI 947 - AT - Income Tax

Disallowance of claim of expenses in respect of income from interest - necessary evidence to claim expenditure which was incurred wholly and exclusively for the purpose of earning such interest income - Held that - In the present case the assessee has not led any evidence regarding expenditure incurred to earn such interest income. The assessee has only relied on the order of the Tribunal and claimed 10% of the total interest income to be allowed as expenditure incurred towards earning of such interest income. But there is no basis for such estimation. The assessment in this year was made u/s. 143(3) of the Act by calling for details like books of accounts etc. and it was not best judgment assessment. Then it is the duty of the assessee to produce necessary evidence in support of the claim of the assessee. It is the primary duty of the assessee to discharge the burden cast on it which it failed to do so. Simply the assessee cannot claim deduction on estimated basis. The basis on which the Tribunal had come to its conclusion for the assessment year 1985-86 would not help this issue. In our opinion it is appropriate to remit this issue to the file of the Assessing Officer to allow that expenditure supported by vouchers and bills for incurring of that expenditure. Addition as interest accrued - Held that - Admittedly this issue was considered by the High Court of Kerala in assessee s own case 2017 (12) TMI 1364 - KERALA HIGH COURT as held the interest income on Bank deposits is hypothetical income and that the assessee is entitled to get the interest excluded from assessment. The question raised is thus answered in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Disallowance of claim of expenses in respect of income from interest.
2. Addition of accrued interest as income.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Expenses in Respect of Income from Interest:

The assessee claimed expenses amounting to ?26,01,772/- against interest income. The Assessing Officer disallowed the claim due to the lack of satisfactory evidence that the expenses were incurred wholly and exclusively for earning the interest income, as required under section 57(iii) of the Income Tax Act. The CIT(A) upheld this disallowance.

The assessee argued that the issue was covered in their favor based on a previous Tribunal order for the assessment year 1985-86, which allowed a deduction of 10% of the total receipts as expenses. However, the Tribunal noted that the earlier order did not provide a rationale for adopting the 10% figure and emphasized that each assessment year is a separate unit.

The Tribunal highlighted the principle of consistency but also noted that the assessee failed to provide evidence for the expenses claimed. It was emphasized that the assessee, being a limited company required to maintain audited books of accounts, should have produced necessary evidence. The Tribunal concluded that the matter should be remitted back to the Assessing Officer to allow expenditure supported by vouchers and bills. Thus, this ground of appeal was allowed for statistical purposes.

2. Addition of Accrued Interest as Income:

The assessee contested the addition of ?3,72,64,177/- as accrued interest, arguing that it was hypothetical income. The CIT(A) rejected this claim, noting that the interest income from fixed deposits with banks was certain and not hypothetical.

The Tribunal referred to a decision by the High Court of Kerala in the assessee’s own case for the assessment year 2009-10, which held that interest accrued on fixed deposits is not hypothetical income and should be taxed in the year it accrues, regardless of whether it was received. The High Court emphasized that the interest income, being accrued and accounted for in the assessee's books, could not be excluded from assessment.

The Tribunal, following the High Court's decision, dismissed the assessee's ground of appeal regarding the addition of accrued interest.

Conclusion:

The appeal filed by the assessee was partly allowed for statistical purposes concerning the disallowance of expenses, with the matter remitted back to the Assessing Officer. The ground of appeal regarding the addition of accrued interest was dismissed, upholding the High Court's decision that such interest is not hypothetical and must be included in the assessment. The judgment was pronounced on 11th July, 2018.