2024 (6) TMI 570 - AT - Income Tax

Claim of expenses u/s 57(iii) - assessee failed to establish the necessary nexus between the expenditure and the interest income - Deductibility of Expenses u/s 57(iii) against the income from other sources earned by way of interest income on fixed deposits - HELD THAT - We find that as far as the claim of interest expenditure is concerned the same has been stated to have been incurred on interest bearing loans granted by the Government to the assessee to meet its liquidation expenses. In this regard several copies of letters from the Government of India Ministry Chemical and Fertilizers for releasing funds to the assessee for liquidation purpose were filed before us. The contents of the same reveal that the interest bearing funds were granted for meeting the expenditure for running the office of the Liquidator.It is only the unsecured loans given which are to be utilized for meeting the liquidation expenses. Therefore purpose of taking unsecured loans or being granted unsecured loans from the government was for meeting the liquidation expenses. The purpose clearly was not to earn interest income there from. Therefore the interest expenditure incurred on these unsecured loans has nexus only with the incurrence of liquidation expenses and has no nexus with the earning of interest income. The same follows for all different expenses which were incurred by the liquidator which admittedly were incurred only for the purpose of carrying out the process of liquidation. The purpose of incurring the expenses definitely was not to earn any interest income. Therefore even with respect to the expenses of liquidation there is no nexus direct or indirect with the earning of interest income. Therefore on the touch-stone of the conditions to be fulfilled u/s 57(iii) of the Act for allowability of claim of expenses incurred by the liquidator against the interest income earned during liquidation we find that all the claims of the assessee fail with no nexus established between incurrence of expenditure and earning of interest income. Assessee s contention that the liquidator in the process of liquidation has earned interest income and also incurred liquidation expenses and both being earned/ incurred in the process of liquidation therefore the liquidation expenses are allowable against the interest income - No merit in this contention of assessee. The allowability of any claim whether of income or expense is to be determined as per the provisions of law. In the present case only expenses which were incurred for the purpose of earning interest income are allowable as per section 57(iii) of the Act. Merely because the incidence of both the income and expenses happen in the same process of liquidation does not establish nexus of the expenses incurred with the earning of interest income. Interest income has been earned on deposits of funds while expenses are incurred for liquidation process. If the directive of granting interest bearing loan included besides the loan also the interest earned therefrom to be utilised for meeting expenses of liquidation it could be said that the interest expenses had a nexus with the earning of interest income because the purpose of incurring interest expenses in that case would be to meet liquidation expenses out of loan and to earn interest again for meeting liquidation expenses. In such circumstance the interest expense would be allowable u/s 57(iii) of the Act having nexus with the earning of interest income. But that is not the case before us. In the present case it was the duty of the liquidator to have retained a portion of interest income to meet the income-tax liability arising as per law and to use only the balance for the purpose of incurring the liquidation expenses. No merit in the contentions of the assessee that all the expenses incurred including the interest paid on the loan obtained from the Government for carrying out the liquidation process were allowable in terms of section 57(iii) of the Act against the interest income earned on deposits from the surplus remaining with liquidator out of unsecured loans given to it to meet the liquidation claims. In view of the above the issue of allowability of expenses incurred during liquidation as per 57(iii) of the Act stands decided against the assessee. Claim of set off of losses under the head income form other sources against the income returned to tax under other heads - This ground also needs to be dismissed since we have disallowed the claim of expenses under the head income from other sources and there arises consequently no losses to the assessee under the head Income from Other sources. Levy of concessional rate of tax of deemed short term capital gains earned by the assessee under section 50 - HELD THAT - The short term capital gains returned by the assessee in terms of provisions of section 50 of the Act on assets held for a period of more than 36 months be treated as long term capital gains and taxes be levied thereon at the concessional rate prescribed u/s 112(1) of the Act.

Summary

Issues Involved:
1. Disallowance of expenses u/s 57(iii) of the Income Tax Act, 1961.
2. Claim of concessional rate of tax on short-term capital gains to be treated as long-term capital gains u/s 112(1) of the Act.

Summary:

Issue No. 1: Disallowance of Expenses u/s 57(iii)

The common issue in all appeals pertained to the claim of expenses u/s 57(iii) of the Act against the income from other sources earned by way of interest income on fixed deposits. The assessee, a cooperative credit society under liquidation, claimed expenses against interest income earned from funds deposited in the bank. The AO disallowed the expenses, stating they were not incurred for the business of the assessee, which had closed, and were capital in nature. The ITAT, in the first round for A.Y 2004-05 and 2009-10, restored the issue to the AO for reconsideration. The AO confirmed the disallowance, which was upheld by the ld. CIT(A). The ITAT held that the expenses incurred by the liquidator had no nexus with the earning of interest income and were not allowable u/s 57(iii) of the Act. Consequently, the claim of set-off of losses under the head "income from other sources" against other heads was also dismissed.

Issue No. 2: Concessional Rate of Tax u/s 112(1)

For A.Y 2011-12 and 2012-13, the assessee claimed that short-term capital gains on depreciable assets held for more than 36 months should be taxed at a concessional rate applicable to long-term capital gains u/s 112(1) of the Act. The ld. CIT(A) denied this claim, but the ITAT, relying on various decisions, including the case of Smita Conductors Ltd. Vs. DCIT and CIT Vs. Ace Builders Ltd., held that the short-term capital gains on assets held for more than 36 months should be treated as long-term capital gains for tax purposes and allowed the concessional rate of tax u/s 112(1) of the Act.

Judgment on Appeals:

i) ITA No.1273/Ahd/2017 A.Y 2004-05: Appeal dismissed.

ii) ITA No.1253/Ahd/2017 A.Y 2009-10: Appeal dismissed.

iii) ITA No.1254/Ahd/2017 A.Y 2011-12: Appeal partly allowed (Issue No.1 dismissed, Issue No.2 allowed).

iv) ITA No.1255/Ahd/2017 A.Y 2012-13: Appeal partly allowed (Issue No.1 dismissed, Issue No.2 allowed).

Order pronounced in the Open Court on 29th May, 2024 at Ahmedabad.