2024 (2) TMI 148 - AT - Income Tax

Disallowance u/s 57 - assessee has not clarified/gave explanation regarding expenses claimed u/s 57 for earning interest income from Banks, interest on income tax refund, miscellaneous income etc. and its related expenses - as per AO held that the since the expenses are not wholly and exclusively incurred for the purpose of making or earning any income which is chargeable under the head income from other sources, therefore, the same was disallowed - HELD THAT - It is pertinent to note that the expenses/expenditure by the assessee has a direct nexus with the amount/common fund collected by the members of the society and the same which was kept in the Bank as Fixed Deposit. From the perusal of records, it appears that the said deposits as well interest derived thereon is directly used for the maintenance and upkeepment of the society. Therefore, the assessee has rightly set off the same against the income of the assessee society. AO as well as the CIT(A) has not justified in disallowing the same. The decision of Hon ble Supreme Court in case of Secunderabad Club 2023 (8) TMI 925 - SUPREME COURT is applicable in the present case. Thus, the appeal of the assessee is allowed.

Summary

Issues involved:
The judgment involves the disallowance of expenses claimed by the assessee under Section 57 of the Income Tax Act for the Assessment Year 2020-21, the charging of tax at maximum marginal rate on the assessed income, and the application of the decision of the Hon'ble Supreme Court in the case of Secunderabad Club.

Disallowance of Expenses under Section 57:
The assessee, a Co-operative Housing Society, filed an appeal against the order of the CIT(A) upholding the disallowance of expenses amounting to Rs. 55,34,578 under Section 57(iii) of the Act. The Assessing Officer disallowed the expenses as they were not wholly and exclusively incurred for the purpose of making or earning income chargeable under the head "income from other sources." The assessee argued that the expenses were related to maintaining common amenities provided to its members and were deductible. The ITAT observed a direct nexus between the expenses and the common fund collected by the society, which was used for maintenance. Relying on the Secunderabad Club case, the ITAT allowed the appeal, holding that the expenses were rightly set off against the income of the society.

Charging Tax at Maximum Marginal Rate:
The Assessing Officer charged tax on the assessed income at the maximum marginal rate instead of the normal rate applicable to individuals. The assessee contended that the tax should have been charged at the normal rate as per the Secunderabad Club decision. The ITAT agreed with the assessee, noting that the net interest income earned from investments with outside third parties should be taxed at the normal rate. The ITAT found the Assessing Officer's approach unjustified and allowed the appeal.

Application of Secunderabad Club Decision:
The ITAT emphasized the relevance of the Hon'ble Supreme Court's decision in the Secunderabad Club case to the present matter. The Court held that the net interest income earned from investments with outside third parties should be taxed at the normal rate. The ITAT applied this decision to the case at hand, supporting the assessee's position and allowing the appeal.