2015 (4) TMI 829 - KARNATAKA HIGH COURT

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.