2024 (9) TMI 286 - AT - Income Tax

Disallowance of brokerage expenses u/s 57(iii) - Addition in the proportion of ratio of principal and interest received by the assessee from the Builder - HELD THAT - There is nothing enabling contained in the said section allowing the ld. AO to estimate the incurring of expenditure towards the income reported by the assessee under the head 'income from other sources' from which the said deduction is claimed. Once it is established that the expenditure has been incurred wholly and exclusively for the purpose of earning such income and it is not in the nature of capital or personal expenses or not covered by section 58 the same is allowable. It is merely incidental that part of the money recovered is subjected to tax and part of it is not. Section 57 provides for allowing such expenditure which is wholly and exclusively laid out or expended for the purpose of earning such income. It does not provide for such expenditure to be partly allowed on an estimation basis if in the opinion of the AO, the expenditure is partly laid out or expended for earning such income. AO cannot have presumption that exemption of expenditure is partly laid out or expended for earning the income. We need to look at the entire transaction as a whole and not to adopt a dissecting approach. AO ignored that assessee had other legal recourse to recover the principal amount from the Builder. In order to recover not only the principal amount but also the interest thereon from the Builder, assessee took up the matter by availing the services of the brokers and their associates by agreeing to pay them a lump sum amount of ₹ 50 lakhs which ultimately resulted into the recovery of the entire amount including the principal and interest thereon. Assessee has duly offered the interest component as income in his return under the head 'income from other sources' and has thus claimed a deduction of 50 lakhs plus other expenses, from the said interest income which was received by him only after the services of the brokers. Accordingly, the balance of convenience is in favour of the assessee and thus the deduction of claim of Rs. 50 lakhs from the interest income of Rs. 85,63,262/- offered in the return by the assessee is justified. Implication of section 57(iii) is narrower by the use of the expression for the purpose of in conjunction with the words making or earning of income from other sources when compared with the words for the purpose of business or profession used in section 37(1). In order to decide whether a deduction is permissible, connection between the expenditure and earning of income must exist, either direct or indirect. Also, the expenditure must be incurred for the purpose for earning the income though it is not necessary that incurring of expenditure is profitable one or in fact income was earned. Hon ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. 1991 (8) TMI 1 - SUPREME COURT held that The requirement under section 57(iii) that the expenditure should have been incurred 'for the purpose of making or earning such income' shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. Thus, we find it proper to delete the addition made by the AO by disallowing a portion of the total expense of Rs. 50 lakhs incurred by the assessee towards recovery of brokerage from total amount due from the builder. Accordingly, grounds taken by the assessee are allowed.

Issues Involved:
1. Disallowance of brokerage expenses claimed under Section 57(iii) of the Income-tax Act.
2. Proportional allocation of brokerage expenses between principal and interest recovery.
3. Applicability of judicial precedents, particularly the Gujarat High Court decision in Virmati Ramakrishna vs. CIT.

Issue-wise Detailed Analysis:

1. Disallowance of Brokerage Expenses Claimed Under Section 57(iii):
The assessee filed an appeal against the disallowance of Rs. 33,45,313/- out of the total brokerage paid of Rs. 50,00,000/-. The brokerage was incurred to recover the investment principal of Rs. 1,73,12,500 and interest of Rs. 85,63,262/- from a builder. The assessee claimed this brokerage as a deduction under Section 57(iii) of the Income-tax Act, asserting it was an expense incurred wholly and exclusively to earn the said income.

2. Proportional Allocation of Brokerage Expenses Between Principal and Interest Recovery:
The Assessing Officer (AO) acknowledged the brokerage payment but disallowed the portion attributed to the principal recovery. The AO issued a show cause notice and subsequently disallowed Rs. 33,45,313/- of the brokerage, permitting only Rs. 16,54,657/- as deductible against the interest income. The AO's rationale was that the brokerage was paid for both principal and interest recovery, thus only the portion related to interest was deductible under Section 57(iii).

3. Applicability of Judicial Precedents:
The assessee argued that the brokerage was a lump sum payment for recovering the entire amount due from the builder, without bifurcation into principal and interest components. The assessee relied on the Gujarat High Court decision in Virmati Ramakrishna vs. CIT, which laid down principles for claiming deductions under Section 57. The Tribunal noted that the AO's proportional disallowance was not in accordance with these principles. The Tribunal emphasized that the expenditure must be wholly and exclusively for earning the income, and the AO cannot estimate or bifurcate the expenditure without a clear basis.

Tribunal's Findings:
- The Tribunal found that the brokerage payment was genuine and bona fide, and the entire amount was incurred to recover the total dues from the builder, including both principal and interest.
- The Tribunal highlighted that Section 57(iii) does not permit partial disallowance based on proportionality unless explicitly provided by law.
- The Tribunal referred to the Gujarat High Court's principles, emphasizing that the expenditure must be wholly and exclusively for earning the income, and the AO's bifurcation approach was incorrect.
- The Tribunal also cited the Gujarat High Court decision in Atir Textile Industries (P.) Ltd. vs DCIT, which held that the transaction must be considered as a whole and not split into parts for disallowance purposes.

Conclusion:
The Tribunal concluded that the brokerage expense of Rs. 50,00,000/- was incurred wholly and exclusively for recovering the amount due from the builder, including the interest income. Therefore, the entire amount was deductible under Section 57(iii). The appeal of the assessee was allowed, and the disallowance made by the AO was deleted.

Result:
The appeal of the assessee is allowed. The order was pronounced in the open court on 30 August, 2024.

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