25 January 2022
Facts of the case: I invested in a housing project being built by a private builder to get a residential house in the financial year 2013-14. But the builder failed to build the property as promised. I complained regarding the same to local authorities, then to National Consumer Disputes Redressal Commission and finally Supreme Court of India. The Supreme Court ordered the builder to pay interest @9% to me, which I received in the financial year 2021-22.
Query: I am taking this interest income as Income from Other Sources in my income tax return. I want to deduct expenses from this interest income as per sec 57(iii) of the income tax act, 1961. I have incurred legal expenses and traveling/hotel expenses to fight the case in various courts in different cities every year since the financial year 2013-14. Whether I can deduct expenses that I incurred every year since 2013-14?
( As one of the four conditions under 57(iii) is that the expense must be laid out or expended in the relevant previous year and not in any prior or subsequent year.)
[Any other Expenses for Earning Income [Section 57(iii)] Any other expenditure is deductible under section 57(iii) if the following four basic conditions are satisfied: the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning the income; the expenditure must not be in the nature of capital expenditure; it must not be in the nature of personal expenses of the assessee; it must be laid out or expended in the relevant previous year and not in any prior or subsequent year.]
11 July 2024
Based on the facts provided and the provisions of Section 57(iii) of the Income Tax Act, 1961, here’s how you can approach the deduction of expenses incurred in pursuing the interest income from the builder:
### Conditions under Section 57(iii):
1. **Wholly and exclusively for the purpose**: The expenditure (legal and traveling/hotel expenses in your case) must have been incurred solely for the purpose of earning the interest income. Given that these expenses were incurred in pursuing your case against the builder, and they directly relate to the interest income received as ordered by the Supreme Court, this condition is likely satisfied.
2. **Not capital in nature**: The expenses must not be of a capital nature. Legal expenses incurred for pursuing a legal claim are typically considered revenue expenditures unless they are of a capital nature, which doesn’t seem to be the case here based on your description.
3. **Not personal expenses**: The expenses must not be personal in nature. Legal expenses and traveling/hotel expenses incurred in pursuing a legal matter are considered allowable deductions if they are directly related to the income earned.
4. **Incurred in the relevant previous year**: This is a critical condition. According to Section 57(iii), the expenses must be laid out or expended in the relevant previous year in which the income is earned.
### Application to your Case:
- **Nature of Expenses**: Legal expenses and traveling/hotel expenses incurred annually since the financial year 2013-14 to pursue the case against the builder would qualify as expenses laid out for the purpose of earning the interest income. These expenses are directly attributable to the legal proceedings that resulted in the interest income.
- **Relevant Previous Year**: Since the interest income was received in the financial year 2021-22, you can deduct the legal and traveling/hotel expenses incurred in that particular year. Expenses incurred in prior years (such as 2013-14 onwards) cannot be directly offset against the interest income of the financial year 2021-22 unless they were specifically related to activities in that year.
### Conclusion:
- **Deductibility**: You can deduct the legal and traveling/hotel expenses that were specifically incurred in the financial year 2021-22 for pursuing the case against the builder. These expenses should be documented and substantiated with supporting evidence such as invoices, receipts, and details of the legal proceedings.
- **Prior Years**: Expenses incurred in prior years (before 2021-22) cannot be deducted against the interest income received in 2021-22 unless they were related to actions taken in that specific year.
Ensure to maintain proper records and consult with a tax advisor or accountant to accurately claim these deductions in your income tax return under the appropriate head of income (Income from Other Sources).
CAclubindia
