The Mumbai Bench of Income Tax appellate Tribunal (ITAT) has held that income tax deduction is allowable on expenditure incurred on brokerage recovery from builders.
The bench of Kavitha Rajagopal (Judicial Member) and Girish Agrawal (Accountant Member) has observed that in order to recover not only the principal amount but also the interest thereon from the Builder, assessee took up the matter by availing the services of the brokers and their associates by agreeing to pay them a lump sum amount of Rs. 50 lakhs which ultimately resulted into the recovery of the entire amount including the principal and interest thereon. Assessee has duly offered the interest component as income in his return under the head ‘income from other sources’ and has thus claimed a deduction of 50 lakhs plus other expenses, from the said interest income which was received by him only after the services of the brokers.
The appellant/assessee filed his return of income on reporting total income which included interest income where from a deduction was claimed under section 57 of the Income Tax Act. This deduction consisted of an amount of Rs. 50,00,000 paid as brokerage in order to recover investment made by the assessee in a project of M/s. Concrete Builders. The builder had failed to commence the project and had also refused to return the money due to which the assessee had to take the services of a group of brokers.
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In the course of assessment proceedings, Assessing Officer enquired from the builder about the said transaction which was confirmed in the statement recorded by him. As per the builder, the project in which the assessee had invested was cancelled due to non-receipt of necessary permissions from the government which therefore required it to refund the money paid by the assessee for booking the property in the said project.
The Assessing Officer had summoned the brokers also who appeared before him and confirmed about the transaction for which copies of memorandum of understanding entered into, between the brokers and the assessee was placed on record. Copies of bank statements were also furnished, evidencing payment of brokerage by the assessee as per the memorandum of understanding to the brokers who were engaged and responsible for obtaining the refund of amount due from the builder. Statements recorded by the Assessing Officer in the course of assessment proceedings were made available to the assessee for cross- examination.
Assessee has claimed that he has paid the brokerage under clear and specific understanding that he shall receive the full amount due from the builder which will include both the principal amount as well as the interest there on. The amount of brokerage agreed between the two parties is a lumpsum amount of ₹ 50 lakhs which is wholly and exclusively paid for recovering the total amount due from the builder.
Section 57 provides for allowing such expenditure which is wholly and exclusively laid out or expended for the purpose of earning such income. It does not provide for such expenditure to be partly allowed on an estimation basis if in the opinion of the Assessing Officer, the expenditure is partly laid out or expended for earning such income.
The ITAT held that AO cannot have presumption that exemption of expenditure is partly laid out or expended for earning the income.
The tribunal while allowing the appeal held that it proper to delete the addition made by the AO by disallowing a portion of the total expense of Rs.50 lakhs incurred by the assessee towards recovery of brokerage from total amount due from the builder.
Case Title: Deepak N Sippy v/s Assistant Commissioner of Income Tax
Case No.: ITA No. 775/MUM/2024
Date: 30.08.2024
Counsel For Appellant: Dr. Gopalakrishna, CA
Counsel For Respondent: Smt. Mahita Nair, Sr. DR