2016 (7) TMI 914 - HC - Income Tax

High Court affirms Tribunal's decision on total expenditure for earning income under Income Tax Act

Pr. Commissioner of Income Tax Versus Manibhai Virchandbhai Patel

The High Court upheld the Tribunal's decision to allow the total expenditure incurred for earning income, rather than restricting it to a proportion of ... Disallowance on account of interest expenses - ITAT allowed the claim - Held that:- While the Department has consistently accepted the claim of the assessee in the earlier years when the income under the head “income from other sources” was more than the interest expenditure, such claim is sought to be disallowed in the year under consideration only because the interest expenditure exceeds the interest income. Having regard to the past history of the assessee, this court is of the view that the Tribunal was wholly justified in holding that the total expenditure incurred for earning the income has to be allowed and cannot be restricted to a proportion of the income and deleting the disallowance made by the Assessing Officer on account of interest expenses. - Decided in favour of assessee. Issues:Challenge to order under section 260A of the Income Tax Act regarding disallowance of interest expenses.Analysis:The appellant challenged the order passed by the Income Tax Appellate Tribunal regarding the disallowance of interest expenses. The original return was filed after the due date, and the revised return reduced the claimed loss. The Assessing Officer disallowed a portion of the interest expenses claimed by the assessee. The Commissioner of Income Tax (Appeals) partly allowed the appeal, considering the relationship between interest income and expenditure. The Commissioner allowed a portion of the interest expenditure based on the presumption of how much expenditure was necessary to earn the interest income. Both the assessee and the revenue appealed to the Tribunal, which ruled in favor of the assessee, leading to the current appeals.In the appeal, the revenue argued that the Tribunal erred in allowing the total expenditure incurred for earning income, instead of restricting it to a proportion of income. The revenue contended that there was no established nexus between the interest paid and income earned, as required by section 57 of the Act. The Tribunal's decision was based on the presumption that the assessee would have incurred a certain percentage of interest expenditure to earn the interest income, which was allowed in previous years. The Tribunal highlighted the consistency in the treatment of the assessee's claims in earlier and subsequent years by the department.The High Court observed that the Tribunal was justified in allowing the total expenditure incurred for earning income, as opposed to restricting it to a proportion of income. The court noted the past acceptance of the claim by the department when the income exceeded interest expenditure. The court held that the Tribunal's decision to delete the disallowance of interest expenses was valid, considering the history of the assessee's claims and the principle that total expenditure for earning income must be allowed. Consequently, the court dismissed the appeals, finding no legal infirmity in the Tribunal's order.