TMI Blog2018 (3) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Accordingly, we hold that the assessee is not eligible to claim any deduction under section 57(iii) of the Act over and above the deduction earlier allowed by the Tribunal in assessee's own case to the extent of 7.5%. The second issue raised by the assessee is thus, dismissed. - ITA Nos.1068 And 1069/PUN/2014 - - - Dated:- 23-1-2018 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For The Appellant : Dr. Sunil Pathak /Shri Nilesh Khandelwal /Nitin Desai For The Respondent : Shri Vivek Aggarwal ORDER PER SUSHMA CHOWLA, JM: Both the appeals filed by the assessee are against separate orders of CIT(A)-II, Pune, both dated 29.11.2013 relating to assessment years 2008-09 and 2009-10 against respective orders passed under section 143(3) of the Income Tax Act 1961 (in short the Act‟). 2. Both the appeals relating to the same assessee on similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. Both the appeals were filed after the delay of 56 days. The assessee in this regard has filed an Affidavit for condonation of delay in filing the appeal late before the Tribunal. The appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tune of ₹ 75,63,440/- be treated as income forming part of the integral part of the mutual receipts and is governed by the principals of mutual receipts and therefore does not form of taxable income. Just and proper relief to be granted to the appellant. 3. Assuming and without admitting that the income from interest is not covered by principal of mutuality and without prejudice to ground no 2 and on facts and circumstances prevailing in the case and as per the provisions of the act it be held that proper and adequate deduction under section 57(iii) of the Income Tax Act be allowed from such interest income. 7. Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income taxable income of ₹ 76,62,500/-. The case of assessee was selected for scrutiny. The Assessing Officer noted that the assessee was a Members Club and was incorporated under the Companies Act. The Club was established for promotion of sports and activities connected with the sports. The existence of said Club was since 124 years and had about 5000 members. The Assessing Officer on scrutiny of the details produced by the assessee accepted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance sum of ₹ 69,96,182/- was declared as income in the return of income filed. However, reference was made to the ratio laid down by the Pune Bench of Tribunal in assessee‟s own case in earlier year in ITA No.6/PN/1995. It was contended by the learned Authorized Representative for the assessee before the CIT(A) that fixed deposits kept with the bank were derived from entrance fees of members at the time of admission into Club and the management of Club was obliged to use funds on investment made from entrance fees into fixed deposits under the above mandate of providing facilities, entertainment, upkeep of the club, etc., for the members. The assessee claimed that there existed nexus between entrance fees, deposits and ensuing obligations leading to various expenses required to be incurred from year to year. The assessee further pleaded that the said interest income was not taxable under the head Income from other sources‟ as income, after considering the deduction under section 57(iii) of the Act worked out to negative sum, as per the following details. 1 Interest received for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate the carrying on the activities, which was the source of income; the nexus must necessarily be between the expenditure incurred and income earned. Reliance was placed on the ratio laid down by the Hon'ble Supreme Court in Seth R Dalmia Vs. CIT (1977) 110 ITR 644 (SC) and the Hon‟ble Bombay High Court in Smt. Zubedabai Vs. CIT (1984) 148 ITR 104 (Bom). He further observed as under:- 4.1.1 It is well settled that deduction u/s 57 can be allowed if there is a nexus between the receipt of income and expenditure claimed as held in CIT Vs. Sponge Iron India Ltd. (1993) 201 ITR 770 (AP). Thus the expenditure laid out wholly and exclusively for the purpose of earning such income has first to be ascertained and then apportioned among several heads of income as was held in the case of CIT Vs. New India Investment Corp. Ltd. (1978) 113 ITR 778 (Cal). 13. The CIT(A) was of the view that it is the purpose of expenditure that was relevant in determining the applicability of section 57(iii) of the Act and that purpose must be making or earning the income. Where the assessee was a club and as per clause (I) of its Memorandum and Articles of Association, it invests and deals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was dismissed. 14. The assessee is in appeal against the order of CIT(A). 15. The first issue raised before us is in respect of assessability of interest income received from bank and MSEB to the tune of ₹ 75,63,440/- in the hands of assessee being not governed by the principle of mutuality. The learned Authorized Representative for the assessee fairly pointed out that the said issue is covered against the assessee by the order of Apex Court in Bangalore Club Vs. CIT Anr. (supra). In view thereof, we hold that interest income received from bank and MSEB to the tune of ₹ 75,63,440/- is not governed by the principle of mutuality. 16. In respect of second issue i.e. claim of deduction under section 57(iii) of the Act, the learned Authorized Representative for the assessee referred to the activities undertaken by the assessee club. He further stated that the assessee club admits members to its club and on admission, entrance fees is charged, which varies from year to year and 60% of the entrance fees is required to be put in club‟s cash reserve account. Reference was made to the clauses in Memorandum and Articles of Association dated 01.10.2008. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d during the year were ₹ 2.12 crores, placed at page 107 of Paper Book, the learned Authorized Representative for the assessee pointed out that total investment in Fixed Deposits was to the tune of ₹ 7.31 crores. He further stressed that for claiming the deduction under section 57(iii) of the Act, expenditure could be direct or indirect expenditure. In this regard, he placed reliance on the ratio laid down by the Hon‟ble High Court of Gujarat in CIT Anr. Vs. Kasturbhai Lalbhai Anr. (1968) 70 ITR 267 (Guj) and the Hon‟ble Bombay High Court in CIT Vs. H.H. Maharani Shri Vijaykuverba Saheb of Morvi (1975) 100 ITR 67 (Bom). He further pointed out that majority of expenditure claimed was on establishment and administration and some expenses had to be allowed in the hands of assessee. In respect of rule of consistency which has been propounded by the Hon'ble Supreme Court in Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC), he pointed out that percentage of expenditure could be deviated from earlier year by allowing the same at 7.5%. 17. The learned Departmental Representative for the Revenue pointed out that the assessee in return of income had decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out. He then referred to the aims of club mentioned in the Memorandum and Articles of Association and also pointed out that out of total revenue of ₹ 9.94 crores, interest income was only to the extent of ₹ 75.63 lakhs; hence, percentage of interest income to the total income was 7.6%. He stressed that first onus was on the assessee to explain the expenditure incurred for earning interest income. The other expenses which are attributed to club activities which are not taxable in the hands of assessee because of principle of mutuality, cannot be allowed as deduction against interest income earned on fixed deposits. The first ground on which the same needs to be denied that the assessee had not maintained any separate details in this regard. Secondly, expenditure to the tune of 7.5% expenses has been allowed and accepted by the assessee in all the earlier years. He further pointed out that if we take turnover as basis, then also it works out to 7.5% which has been so allowed in the hands of assessee. Our attention then was invited to the details / break-up of expenses filed by the assessee vis- -vis total expenses incurred as per audited Profit and Loss Account. He furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee stressed that the claim made in the return of income had been extended which was arising out of documents / accounts, which already were on record and hence, no fresh plea was made. The learned Authorized Representative for the assessee also explained the proposition laid down by the Hon‟ble Bombay High Court in M/s. Ultratech Cement Ltd. Vs. The Addl.CIT in Income Tax Appeal No.1060 of 2014, judgment dated 18.04.2017 and pointed out that 80IA deduction was claimed first time before the Tribunal and even audit report was not available and hence, the plea of assessee was not accepted. 20. The learned Departmental Representative for the Revenue referred to page 24 of the decision of Hon‟ble Bombay High Court in M/s. Ultratech Cement Ltd. Vs. The Addl.CIT (supra) and pointed out that the observation of the Hon‟ble High Court was that where no material was brought on record that what material change had occurred to claim expenses, then the same is not to be allowed. He explained that in assessment year 2008-09, there was no claim before the Assessing Officer. Before the CIT(A), for the first time, this claim was made. In assessment year 2009-10, whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted nexus between entrance fees, deposits and obligation of providing facilities, entertainment and upkeep of club for the members. Before the CIT(A), against the interest income of ₹ 75,63,440/- the assessee claimed operating expenses of ₹ 65,59,370/- and repairs and maintenance of ₹ 81,67,190/-, totaling ₹ 1,47,26,562/-. The CIT(A) taking note of provisions of section 57(iii) of the Act observed that the expenditure should have been incurred for the purpose of making or earning such income and there should be nexus between expenditure incurred and income earned. In the absence of the same, the CIT(A) held the assessee not entitled to claim the said deduction under section 57(iii) of the Act. 22. The case of assessee before us is slightly changed. Though before the CIT(A), the assessee claimed expenditure of ₹ 1,47,26,562/-; however, before us the assessee has prepared segmental profit statement i.e. against receipts under different heads, it has apportioned the expenditure as per details furnished at page 142 of Paper Book for assessment year 2008-09 and at page 143 of Paper Book for assessment year 2009-10. As against the income of ₹ 75,63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57(iii) of the Act. However, the case of assessee remains constant that the interest income has to be assessed under section 56 of the Act, against which it has claimed expenditure under section 57(iii) of the Act. 24. Now, coming to section 57(iii) of the Act, which provides as under:- 57. The income chargeable under the head Income from other sources shall be computed after making the following deductions, namely:- (i) .. (ii) . (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income; (iv) . 25. The Statute provides that against the income chargeable under head Income from other sources‟, the deduction on account of expenditure, not being in the nature of capital expenditure, laid out or expended wholly or exclusively for the purpose of making or earning such income is deductible. In other words, the assessee has to establish its claim of expenditure within parameters laid out or expended wholly and exclusively for the purpose of making or earning such income . Both the learned Authorized Representatives before us has pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y High Court allowed the said claim because the expenditure was incurred for the purpose of preserving particular source of income. The learned Authorized Representative for the assessee relying on the said decision has pointed out that in the case of assessee also, source of interest income is the club activities carried on, wherein expenditure is incurred for upkeep of the club. In order to attract more persons as new members, the amount received from new members as membership fees is parked in fixed deposits, on which interest is earned and for attracting the members whatever expenditure is incurred on the activities of club, its preservation, its upkeep, etc. is for the purpose of earning interest income and hence, part of the said expenditure merits to be allowed in the hands of assessee. 28. Now, coming to the next reliance placed upon by the learned Authorized Representative for the assessee on the Hon‟ble High Court of Punjab Haryana in the case of CIT Vs. Maruti Employees Co-operative House Building Society (supra), wherein the interest was earned on deposits made by the members of society, which was floated for maintenance of their houses and the expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee is not entitled to the claim of expenditure under section 57(iii) of the Act. Even if we see the decision of the Hon‟ble High Court of Punjab Haryana in the case of CIT Vs. Maruti Employees Co-operative House Building Society (supra), which has been heavily relied upon that there is direct nexus between expenditure claimed and interest earned on the deposits. The Co-operative housing society was formulated for the purpose of maintenance of houses. The members were the owners of houses who require the maintenance and out of interest income, the Co- operative society was incurring expenses for maintenance of houses of members and hence, the decision by the Hon‟ble High Court to allow the same as deductible from interest income. 32. Now, coming to the facts of the present case, the assessee claims that club activities have nexus with earning of interest income. For determining the applicability of section 57(iii) of the Act what has to be seen is the purpose of expenditure and the purpose must be for earning the income. The link is between expenditure incurred and income earned. To be eligible for deduction under section 57(iii) of the Act, expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so refer to the ratio laid down by the Hon‟ble High Court of Madras in Procon Systems P. Ltd. Vs. ITO (2008) 296 ITR 636 (Mad), wherein the issue was also the claim of deduction to be allowed against income from other sources. The assessee was engaged in the manufacturing and export of computer software and had obtained loans which were deposited in its bank account. The assessee filed the return of income for assessment year 2001-02 declaring Nil income. The assessment was completed after rejecting the claim of assessee that interest paid on loans had direct relation to the interest received and had to be allowed as deduction from interest income. The Tribunal upheld the order of Assessing Officer. The Hon‟ble High Court of Madras observed that the assessee had admitted that the expenditure on account of interest had already been debited to the Profit and Loss Account, so there was no separate deduction possible. The Hon‟ble High Court thus, held that when the assessee had already debited the expenditure in the Profit and Loss Account, it is not proper for the assessee to claim a separate deduction. 34. In the facts of the present case also, the assessee had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-02 onwards had held the assessee to be entitled to claim the expenditure against interest income to the tune of 7.5% of interest income, which has been allowed and accepted by the assessee / Assessing Officer in all the earlier years. The assessee / Revenue has not filed any appeal against the order of Tribunal in allowing 7.5% of income as expenditure. In case, for the year under consideration, where the total revenue earned by the assessee is about ₹ 9.94 crores, interest income is also to the extent of ₹ 75.63 lakhs and the percentage of interest income to the total income works out to 7.6%. If the turnover is taken as the basis for working out the percentage of expenditure, then the same works out to 7.6% and expenditure to the extent of 7.5% has been allowed to the assessee. The learned Authorized Representative for the assessee had made several submissions with regard to fresh claim being made before the CIT(A). We have already decided the issue vis- -vis fresh claim made before the CIT(A) and hence, we are not addressing the case laws relied upon by the assessee in this regard. 36. Before parting, we may also point out that the assessee has time and again st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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