2014 (11) TMI 317 - HC - Income Tax

Claim of expenses incurred in earning interest declined Held that - The assessing authority did not accept the return filed by the assessee declaring a loss of ₹ 22,07,204 - It has disallowed the loss claimed and has made the additions in respect of Guest Fees, Interest received from Banks, Interest received on KEB Deposit, Discount received from liquour manufacturers and Outsourcing income from canteen activity - The authorities ought to have considered whether any expenditure is incurred in this regard - If any expenditure is incurred, it should have been deducted out of the interest income - Though the assessee declared loss, he has disallowed the same - when the assessing authority has chosen to take out the interest income and levied the income tax, the expenditure incurred if any, should have been taken into consideration in arriving at the income - the exercise has not been done thus, the matter is remitted back to the Assessing authority only to consider whether the assessee has incurred any expenditure permissible in law in earning Interest Income from Banks, so that it could be given deduction before that income is taxed decided partly in favour of assessee.

Issues:
1. Consideration of expenditure incurred in earning interest income by the assessing authority.
2. Disallowance of claimed loss and additions made by the assessing officer.
3. Tribunal's decision on the claim for deduction of expenditure incurred in earning interest income.
4. Appeal against the tribunal's order and request for remand to the assessing authority.

Analysis:
The appeal before the Karnataka High Court involved the assessing authority's refusal to consider the expenditure incurred by the assessee in earning interest income, which was being taxed. The assessee, an Association of Person operating a club, had filed its income tax return for the assessment year 2008-09, declaring a loss. However, the assessing officer disallowed the claimed loss and made additions, including interest received from banks and on KEB Deposit. The Commissioner of Income Tax (Appeals) partly allowed the appeal, but the tribunal upheld the disallowance of the expenditure claimed by the assessee in earning interest income.

The appellant contended that the assessing officer should have considered the expenditure incurred in earning the interest income and allowed deduction accordingly. The counsel argued that since the assessing authority did not accept the return showing a loss and separately taxed the interest income, the expenditure should have been taken into account for deduction. On the other hand, the Revenue's counsel argued that since all expenditure was already accounted for in the Income and Expenditure Account, there was no need for separate deduction.

The High Court observed that the assessing authority did not accept the declared loss and made additions based on various income sources, including interest received from banks. The court emphasized that if any expenditure was indeed incurred by the assessee in earning interest income, it should have been deducted before taxing the income. The court noted that the argument that all expenditure was already booked in the accounts was invalid, as the assessing officer had rejected the declared loss. Therefore, the matter was remanded back to the assessing authority to determine if any permissible expenditure was incurred in earning interest income.

In the final order, the High Court partly allowed the appeal, set aside the tribunal's decision on refusing to consider the claimed expenditure deduction, and kept all contentions open for adjudication before the assessing authority. Since the matter was remanded, the court decided that substantial questions of law did not require consideration at that stage.

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