Employee Remuneration, Legal Expenses, Board Meeting Expenses etc. , Can’t Be Attributable To Interest From FDs: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), while refusing to allow the income tax deduction, has held that employee remuneration, salary, legal expenses, board meeting expenses, and director sitting fees cannot be attributable to the interest earned from the fixed deposits.

The bench of C. M. Garg (Judicial Member) and Dr. B. R. R. Kumar (Accountant Member) has observed that as per the provisions of Section 57(iii), all the expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income has to be allowed as a deduction.

The appellant/assessee filed a return of income on September 30, 2015, declaring an income of Rs. 56,46,930. The assessee company was incorporated in 2013 and is, as of March 31, 2015, waiting for a license in the field of life insurance business from the Insurance Regulatory and Development Authority of India (IRDA).

The case was selected for limited scrutiny. It was pointed out that there was a mismatch in profit before tax as per the P&L account and schedule BP of the return (verification of MAT liability) and a mismatch between income or receipt credited to the P&L account considered under other heads of income and income from other heads of income other than business or profession.

During the year, the assessee incurred expenditures amounting to Rs. 27,05,71,736 in the P&L account in the form of salary, maintenance, and other expenses that had been disallowed by the appellant itself in the computation.

The Assessing Officer noted that the appellant had earned interest amounting to Rs. 1,03,23,788 on FDRs, against which the appellant had claimed expenditure of Rs. 46,76,255, which was confirmed by the CIT (A).

The assessee contended that the company was incorporated in May 2013 to undertake and carry on the business of life insurance. As of March 31, 2015, the company’s applications for the issue of necessary licenses were pending before the IRDA. In view of the pending licenses, the business of the company has not commenced during the A.Y. year 2015–16. The employee remuneration and other expenses depicted in the table above have been incurred, which are statutory in nature and mandatorily required to be spent in order to maintain the corporate status of the company. It was argued that the expenses have a direct nexus with the earning of the interest income. The expenses for the A.Y. 2015-16 were accepted by the department.

The ITAT held that there should be a nexus between the expenditure incurred and the income earned.

Case Title: Avantha Consulting Services Ltd. Versus DCIT

Case No.: ITA No. 1239/Del/2019

Date: 21.04.2023

Counsel For Appellant: Upvan Gupta

Counsel For Respondent: Kanv Bali

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