2021 (11) TMI 883 - HC - Income Tax

Deduction u/s 57(iii) - Tribunal justification in holding that on the borrowings in question, the appellant was neither entitled to claim any deduction under Section 57(iii) nor for a deduction u/s 36(1)(iii) - HELD THAT - Sec 57(iii) of the Act mandates that income chargeable under the head 'income from other sources' shall be computed after making a deduction of 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. Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction under Section 57(iii) of the Act. Under Section 57(iii) of the Act a nexus between the expenditure and income has to be ascertained. The assessee was therefore, entitled to deduction under Section 57(iii) of the Act. The tribunal exceeded its jurisdiction in disallowing the entire interest expenditure and the power of the tribunal is limited to passing of the order in respect of subject matter of the appeal. Thus substantial question of law is answered and is held that assessee is entitled to claim deduction under Section 57(iii) of the Act. Whether the appellant had failed to prove its contention in the alternative that he borrowings in question were made for business purposes? - Whether Tribunal has not been justified in making the observations that the deduction as claimed was not allowable not only in excess of interest expenditure over interest earned, but also the entire interest expenditure incurred on the borrowings in question? - The second and third substantial questions of law are answered in the affirmative and in favour of the assessee.

Summary

Issues involved:
1. Interpretation of deduction under Section 57(iii) of the Income Tax Act, 1961.
2. Validity of disallowance of interest expenditure under Section 36(1)(iii) of the Act.
3. Jurisdiction of the Income Tax Appellate Tribunal in disallowing interest expenditure.

Analysis:

Issue 1: Interpretation of deduction under Section 57(iii) of the Income Tax Act, 1961:
The appeal was filed against the order of the Income Tax Appellate Tribunal regarding the deduction of interest paid by the assessee to Union Bank of India. The assessee argued that the interest paid should be allowed as a deduction under Section 57(iii) of the Act. The court held that Section 57(iii) allows for the deduction of any expenditure laid out for the purpose of making or earning income, irrespective of whether the expenditure directly results in income. As long as the expenditure is incurred to earn income, it must be allowed as a deduction. Therefore, the court ruled in favor of the assessee, stating that there was a nexus between the expenditure (interest paid) and the income earned, entitling the assessee to claim the deduction under Section 57(iii) of the Act.

Issue 2: Validity of disallowance of interest expenditure under Section 36(1)(iii) of the Act:
The assessee also argued that if the borrowing was for business purposes, the interest paid should be allowable under Section 36(1)(iii) of the Act. The court noted that the tribunal had disallowed the entire interest expenditure, which exceeded its jurisdiction. The court emphasized that the tribunal's power is limited to the subject matter of the appeal and cannot go beyond that. Ultimately, the court held that the assessee is entitled to claim the deduction under Section 57(iii) of the Act, thereby answering the first substantial question of law in favor of the assessee.

Issue 3: Jurisdiction of the Income Tax Appellate Tribunal in disallowing interest expenditure:
The court found that the tribunal had overstepped its jurisdiction by disallowing the entire interest expenditure. The court clarified that the tribunal's authority is confined to the subject matter of the appeal and cannot extend to disallowing the entire interest expenditure. As a result, the court quashed the order of the Income Tax Appellate Tribunal and allowed the appeal in favor of the assessee.

In conclusion, the court ruled in favor of the assessee, allowing the deduction of interest paid under Section 57(iii) of the Act and highlighting the limited jurisdiction of the tribunal in disallowing interest expenditure.