S. 57(iii) Deduction available only If Expenses were incurred to earn ‘Other Income’: ITAT [Read Order]

In M.J. Aravind vs. The Joint Commissioner of Income Tax, the Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that for availing deduction under Section 57(iii) of the Income Tax Act, 1961 the assessee has to establish that the expenditure has been exclusively laid out or expended wholly and exclusively for the purpose of making or earning such income taxable under the head ‘income from other sources’

The assessee while filing returns had claimed deduction under Section 57(iii) of the Income Tax Act,1961 on expenses incurred by way of PMS charges, professional fees, salary which he claimed was integral to the investment activity undertaken by him and to earn the income returned in the return of income for the previous year. The Assessing Officer rejected the contentions of the assessee. The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the orders of the A.O.

The Counsel for the Revenue argued that as per the provisions of section 57(iii) of IT Act, the expenditure is allowable only in respect of those expenditure for which it is proved that amount has been spent for exclusive purpose of making or earning interest and dividend admitted by the assessee but in spite of several opportunities having been provided to the assessee to produce the details of expenses exclusively incurred or the purpose of earning taxable interest and dividend, no such evidence was produced.

The Counsel for the assessee claimed that as per section 14A of IT Act, ½% of the investments have to be disallowed and the balance has to be allowed and the assessee computed the disallowance in that manner and claimed balance amount as the deduction. He further contended that the CIT(A) had erred in not accepting the contentions of the assessee that various expenses incurred by the assessee viz., PMS charges, professional fees, salary is integral to the investment activity undertaken by him and to earn the income returned in the return of income for the previous year.

The bench comprising of Judicial Member N.V. Vasudevan and Accountant Member Arun Kumar Garodia observed “In this regard, we observe that section 14A comes into picture in respect of those expenses which are otherwise allowable and therefore, the assessee has to first establish this that the expenses claimed by the assessee is allowable under any provisions of the law. For that, the assessee has to show that the claim of the assessee is allowable u/s. 57 of IT Act because the expenses are incurred in earning of income from other sources. Regarding the allowability of deduction under clause (iii) of section 57, it has to be established by the assessee that expenditure has been exclusively laid out or expended wholly and exclusively for the purpose of making or earning such income taxable under the head ‘income from other sources ‘and a categorical finding has been given by CIT (A) in para no. 6.2 of his order as reproduced above that no such detail was furnished by the assessee. Before us also, the assessee has made general arguments and has submitted general details but no specific details were furnished before us also. Hence, we hold that no deduction is allowable u/s 57 (iii) of the Income Tax Act, 1961.”