Escrow FD Interest of ₹48.08 Lakh Held Taxable, as Deduction u/s 57 Not Allowable Without Expenditure: ITAT Upholds addition [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal (ITAT) held that a deduction under Section 57 cannot be claimed against escrow FD interest of ₹48.08 lakh in the absence of any expenditure incurred for earning such income and upheld the addition made by the Assessing Officer on this issue.

The case arose from, petitioner, Nalini Tukaram Nikam, had entered into a development agreement in respect of certain land, under which part of the consideration was deposited in an escrow account through Fixed Deposits with a bank. As per the terms of the agreement, the funds were to be released upon fulfilment of certain conditions by the developer.

Following the cancellation of the development agreement, the interest of ₹48.08 lakh accrued on escrow Fixed Deposits was credited to the assessee’s bank account. The assessee disclosed the interest in her return but claimed a deduction under section 57, contending that the income did not belong to her.

The assessee contended that the interest accrued on the Fixed Deposits maintained under the escrow arrangement should not be taxed in her hands, as the underlying development agreement had already been cancelled during the relevant assessment year.

It is also submitted that although an interest of ₹48.08 lakh was credited to her bank account, she had no enforceable right over the funds lying in the escrow account. It was further argued that the said interest did not constitute her real income and was credited in her name only due to the escrow mechanism.

The Department submitted that the interest had accrued on the FD held in the assessee’s name during the relevant assessment year. The same was also reflected in her bank account and “Form 26AS”, and the FD were made out of funds received pursuant to the development agreement and continued to remain in the assessee’s name throughout the year. Hence, the interest income had rightly accrued to her.

It was also submitted that a deduction under Section 57 could not be allowed, as no expenditure had been incurred by the assessee for earning such interest income.

The Tribunal observed that a deduction under Section 57 of the Income Tax Act,1961, is permissible only where expenditure has been actually incurred for the purpose of earning such income, which was not demonstrated in the present case.

The Bench comprising Shri Vinay Bhamore (Judicial Member) and Dr Manish Borad (Accountant Member) held that the interest amounting to ₹48.08 lakh accrued on Fixed Deposits maintained in the assessee’s name was rightly taxable in her hands, as the income had been credited to her bank account and duly reflected in Form 26AS with corresponding TDS deduction.

The tribunal also noted that the interest income had accrued on Fixed Deposits maintained in the petitioner’s name and was duly reflected in her bank account as well as in Form 26AS. Therefore, the contention that the income did not belong to the assessee could not be accepted in the absence of any supporting material or actual expenditure incurred to earn the said interest.

Accordingly, the appeal was dismissed, and the addition made by the Assessing Officer was directed that due credit of Tax Deducted at Source (TDS) be granted to the assessee in accordance with law.

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