Whether, for expenses to be allowed against 'income from other sources' a nexus between expenditur and income is mandatory? [Sec 57(iii)]

Sec 57(iii) - Whether, for expenses to be allowed against 'income from other sources' a nexus between expenditur and income is mandatory?

-YES, says ITAT

BANGALORE, DEC 21, 2010: THE issues before the ITAT are - whether, for expenses to be allowed against 'income from other sources' u/s 57, nexus between the expenditure and the receipt is mandatory. YES, says Tribunal. The nex questin is - Whether such expenses can be allowed in the manner business expenditure is allowed. NO, says the Tribunal.

Facts of the case

The assessee is the owner of a hotel property at Bangalore consisting of land, building and other facilities, which was given on lease to Taj Group of Hotels. The assessee receives lease rent computed on the basis of the profit of the business. In the previous year relevant to the assessment year under appeal, the assessee received a license fee of Rs.3,59,88,998/-. It is the principal source of income of the assessee company. It has also received an interest income of Rs.13,36,240/. After claiming the expenditure under different heads, a total income of Rs.3,07,71,200/- was returned by the assessee company. The assessee had always claimed that the lease income was received under the head `business income'. But this proposition was not accepted by the Revenue. The Revenue treated the license fee and other incidental income as `income from other sources'. This dispute reached up to the High Court of Karnataka and the HC held that the Revenue was right in treating the income under the head `income from other sources'. Thus, the dispute on the head of income was resolved and the assessee also accepted the same.

In the course of assessment proceedings, the Assessing Officer found that the assessee company had claimed expenditure to the extent of Rs.68,09,588/- under different heads. The Assessing Officer observed that the assessee company was earning income as licence fee under the head `income from other sources' and it was not carrying on defacto business and, therefore, the expenses allowable in the computation of income must be confined to the rule provided u/s 57 of the Income-tax Act. The Assessing Officer held that the expenses cannot be held as deduction in the nature of business expenditure. The expenses can be allowed only to the extent permitted u/s 57. Initially he proposed to disallow all the expenditure claimed by the assessee company. In response to that proposal, the assessee submitted that the expenses were allowable under the head `income from other sources' and the claim of the assessee has already been accepted by the ITAT Bangalore Bench in its own case relating to the assessment years 1995-96 to 1998-99 and, therefore, based on the order of the ITAT, expenses need to be allowed.

The Assessing Officer accepted some of the contentions of the assessee and agreed to allow essential expenditure in the nature of salaries, PF, ESI etc. The Assessing Officer allowed expenditure necessary for the assessee company to retain its corporate status and other establishment expenses. But the Assessing Officer held that many of the expenses claimed by the assessee company as deduction are not directly connected to its income assessed under the head `income from other sources'. For eg. he found that salary, wages and bonus amounting of Rs.17,08,300/- included the commission of Rs.15,26,770/- paid to the executive Chairman of the assessee company which cannot be allowed. Finally, the Assessing Officer disallowed expenditure to the extent of Rs.49,27,648/- as against a total amount of Rs.68,09,588/- claimed by the assessee company. The CIT (A) confirmed the additions made by the assessing officer except depreciation allowance.

On further appeal, the Tribunal held,

• it is one thing that the assessee company might have incurred expenses under the above heads and it is another thing that whether all those expenses could be allowed as deduction in computing income from other sources;
• expenses could be allowed as deduction u/s 57(iii) only if the assessee has established the nexus between the expenditure and the income earned;
• in the present case, the assessee was not able to establish any nexus between the various disallowances confirmed by the CIT(A) and the income earned by the assessee company by way of lease rentals. The assessee could not produce evidence to prove the nexus of the traveling expenses of the directors, entertainment expenses and the commission expenses with the income from other sources that whether these have resulted into any increase in lease rentals. Hence, addition is confirmed.