2020 (5) TMI 164 - AT - Income Tax

Disallowance of expenditure u/s 57(iii) - assessee failed to provide any proof to A.O. to prove that the expenses claimed were incurred for earning interest on fixed deposits under the head Income from other sources - CIT-A allowed the disallowance - Additional disallowance as made u/s 14A - HELD THAT - The investment managers were appointed by the trustee to manage the asset of the trust. The investment manager raises funds from contributors at beginning of fund life, parks the same for time being in FDR with Bank, invest the same in investee company, realizes income from investment, make exit at appropriate time, park surplus money in bank FDR and distributes fund amongst contributors. Assessee had earned exempt income against which it has offered disallowance u/s 14A in terms of Rule 8D. However, by implication, it could not be said that rest of the expenditure was incurred to earn the interest income. It is quite evident form assessee s own submissions before Ld. CIT(A) that the prime objective of the assessee was to make investment as venture capital fund. The income earned therefrom was assessed as capital gains. Only the surplus money held by the assessee was kept as fixed deposits in the bank. The management / trusteeship fees other expenditure was primarily directed towards venture capital investments. No borrowing costs have been incurred by the assessee - claim of the assessee was to be adjudged at the threshold of Sec. 57(iii) which mandate that any expenditure laid out or expended wholly or exclusively for the purposes of earning such income, would be allowable. However, in the present case, the management / trusteeship fees and other expenses which mainly consist of audit fees, professional fees etc. were directed towards the prime activity i.e. venture capital investment, the income from which has been assessed under the head Capital Gains. Therefore, we find that there was no direct nexus of these expenditure vis- -vis interest income earned by the assessee. The rule of consistency would not be applicable since matter of disallowance u/s 57(iii) arose in AY 2010-11 also. The decision of Tribunal for AY 2009-10 was concerned with disallowance u/s 14A only and therefore, the same would also not be applicable. Upon perusal of grounds raised by revenue, it is evident that revenue was under appeal on the ground that Ld. CIT(A) allowed the expenditure though the assessee did not fulfill the Venture Capital Fund regulations. The deduction u/s 57(iii) was not the issue under consideration. In the decision of CIT V/s Richardson Cruddas Ltd. 1989 (12) TMI 3 - CALCUTTA HIGH COURT there was nexus of custodian expenditure vis- -vis interest income and therefore, the same is factually distinguishable. Since there was no material on record which would suggest any nexus of expenditure vis- -vis interest income, the expenditure thus claim would not be allowable to the assessee - we set aside the impugned order and restore the computations made by Ld. AO. - Decided in favour of revenue.

Summary

Issues Involved:
Disallowance of interest expenditure.

Analysis:
The appellate tribunal considered the appeal by the revenue for the Assessment Year 2012-13 against the order of the Commissioner of Income-Tax (Appeals). The primary issue was the disallowance of expenditure under Section 57(iii) of the Income Tax Act. The assessee claimed the expenses were incurred for earning interest on fixed deposits, while the revenue argued that the expenses were for earning income from venture capital fund investments. The tribunal examined the facts and legal provisions to make a decision.

The facts revealed that the assessee, a venture capital fund, earned exempt dividend income and interest on fixed deposits. The assessee claimed significant expenditure, including management and trusteeship fees, against the interest income. The Assessing Officer disallowed the expenditure, stating that it was not incurred for earning interest income. The tribunal analyzed the provisions of Section 57(iii) which allow deduction of expenses exclusively for earning such income. The assessee's argument that the expenditure was for earning non-exempt income was rejected.

Before the CIT(A), the assessee argued that the fees were incurred for managing venture capital investments and fixed deposits. The tribunal noted the consistency plea and previous disallowances. The CIT(A) relied on the appellate order for the previous year and deleted the disallowance. The tribunal reviewed the factual matrix and concluded that the expenditure was primarily for venture capital investments, not for earning interest income. The tribunal emphasized the lack of a direct nexus between the expenditure and interest income.

The tribunal distinguished the case from precedents cited by the assessee, emphasizing the unique circumstances. It highlighted that the expenditure was not linked to interest income and that the rule of consistency did not apply. Ultimately, the tribunal found no evidence of a nexus between the expenditure and interest income, leading to the disallowance of the claimed expenditure. The tribunal set aside the CIT(A)'s order and upheld the Assessing Officer's computations.

In conclusion, the tribunal allowed the appeal by the revenue, emphasizing the lack of a direct connection between the expenditure claimed and the interest income earned by the assessee. The decision was based on a thorough analysis of the facts, legal provisions, and precedents cited during the proceedings.