Deduction allowable on Expenditure if purpose of incurring Expenditure is to earn Income: Karnataka HC [Read Order]

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The Karnataka High Court held that the deduction is allowable on expenditure if the purpose of incurring expenditure is to earn income.

The assessee, West Palm Development LLP is engaged in development and purchases, sells, constructs and leases properties. The assessee was sanctioned a loan on 26.09.2008 for a sum of Rs.35 Crores from Union Bank of India. The assessee paid a sum of Rs.33,50,00,000/- to Prestiges Estates Project Limited (PEPPL) as advance towards purchase of properties vide cheques dated 30.09.2008 and 13.10.2008. However, on account of adverse market conditions, the assessee decided to withdraw from the transaction and requested PEPPL to refund the earnest money. PEPPL refunded the earnest money vide cheques dated 23.10.2008 and 29.10.2008. The assessee thereafter lent money to other shareholders and made inter corporate deposits to the tune of Rs.35,62,450/- for which total interest earned was to the extent of Rs.2,02,52,131/- as against an interest of Rs.2,84,47,557/-.

The assessee submitted that deduction for interest paid to Union Bank of India ought to have been allowed under Section 57(iii) of the Act. It is also urged that authorities could not have gone into the motive of the transaction. Alternatively it was urged that if the borrowing is for the purpose of business, the interest paid thereon would be allowable under Section 36(i)(iii) of the Act. It is urged that in any case, the tribunal does not have the power to take back the benefit granted by the Assessing Officer.

The division bench of Justice Alok Aradhe and Justice Anant Ramanath Hegde held that Section 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 court held that 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.

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