2015 (4) TMI 829 - HC - Income Tax

Interest Income Taxable After Deducting Proportionate Costs Under Section 57(3), Tribunal's Disallowance Overruled

The HC held that interest income classified under Section 56 as income from other sources is taxable only after allowing deductions for proportionate ... Disallowance to deduct the cost and expenditure incurred in earning income under the head 'income from other sources' - Held that:- Interest income earned by the appellant falls within the category of 'other income' what falls for reconsideration is to answer the question as to whether the Tribunal was right in law in holding that the income by way of interest was chargeable to tax under Section 56 of the Income Tax Act without allowing deductions in respect of proportionate costs incurred as permissible under Section 57. It is no doubt true that the appellant did initially claim deduction under Section 80P(2). Upon the pronouncement of the order by the Apex Court, in these appeals referred to supra, the income earned on the interest is declared as 'other income' falling under Section 56 of the Income Tax Act. Then the next immediate question that follows is as to whether the entire fund i.e., in deposit with the Bank is taxable or the proportionate expenditure incurred by the appellant requires deduction. It is logical that when the Revenue is permitted to assess and recover taxes from assessee under Section 56 by treating the income earned by interest as income from 'other sources', the appellant shall be entitled for proportionate expenditure cost incurred in mobilizing the deposit placed in the Bank/s. What can be taxed is only the net income which the appellant earns after deducting cost and expenditure incurred and administrative expenses incurred by the assessee. Answer the question of law and hold that the Tribunal was not right in coming to the conclusion that the interest earned by the appellant is an income from other sources without allowing deduction in respect of the proportionate costs, administrative expenses incurred in respect of such deposits. Appeals are allowed in part. Matter is remanded to the adjudicating authority for quantification of the cost incurred by the appellant and deduction thereof under Section 57(3) of the Act and to pass orders in accordance with law. ISSUES: Whether interest income earned on funds not required for business purposes constitutes 'income from other sources' under the Income Tax Act.Whether deduction under Section 80P(2)(a)(i) is allowable for interest income earned on deposits with Scheduled Banks, bonds, and securities.Whether the Assessing Authority can disallow deductions for cost of funds and proportionate administrative and other expenses incurred in earning interest income categorized as 'income from other sources'.Whether the Tribunal erred in holding that interest income is taxable under Section 56 without allowing deductions under Section 57.Validity of issuance of notice under Section 148 of the Income Tax Act without prior sanction from the Additional Commissioner. RULINGS / HOLDINGS: The interest income earned on funds not required for business purposes falls within the category of 'other income' and is taxable under Section 56 of the Income Tax Act, not eligible for deduction under Section 80P(2)(a)(i).The Tribunal was incorrect in disallowing deductions in respect of the cost of funds and proportionate administrative and other expenses incurred in earning such interest income; such deductions are permissible under Section 57(3) of the Income Tax Act.The Assessing Authority must allow deduction of proportionate expenditure actually incurred in mobilizing funds placed in deposits before taxing the net income under Section 56.The question regarding the validity of the notice under Section 148 without prior sanction was dismissed by the Commissioner of Income Tax (Appeals) and upheld by the Tribunal; this aspect was not overturned by the High Court in the present judgment. RATIONALE: The legal framework applied includes Sections 56, 57, 80P(2)(a)(i), 144A, and 148 of the Income Tax Act.The Supreme Court's prior ruling emphasized that 'the income in respect of which deduction is sought must constitute the operational income and not the other income,' leading to classification of interest earned on non-operational funds as 'other income'.The Court recognized that when income is taxable under Section 56 as 'income from other sources,' the assessee is entitled to deductions under Section 57(3), which provides for allowance of expenditure incurred wholly and exclusively in earning such income.The High Court remanded the matter to the adjudicating authority for quantification and allowance of such permissible deductions, reflecting a doctrinal clarification that net income after allowable deductions must be assessed under Section 56.No dissent or doctrinal shift was noted; the judgment follows the Supreme Court precedent and clarifies application of Sections 56 and 57 in the context of interest income earned by cooperative societies.