Dharam Bhushan Jain Vs ACIT (ITAT Delhi)
We find the A.O. in the instant case disallowed the deduction of Rs.5,41,397/- claimed by the assessee under section 57 of the I.T. Act, 1961 out of the interest income of Rs.42,09,926/- and deduction of interest expenses of Rs.5,41,397/- on the ground that assessee has paid interest @ 18% on the borrowed capital which was invested for acquisition of agricultural land and repayment of earlier loans and advances and the assessee is receiving lower rate of interest.
We find the Ld. CIT(A) upheld the action of the A.O, the reasons of which have already been reproduced in the preceding paragraph.
It is the submission of the Learned Counsel for the Assessee that the case was selected for limited scrutiny for two reasons i.e., (a) mismatch between the income/receipt credited to P&L account considered under other heads of income and income from heads of income other than business/ profession (Schedule BP and Part B-TI of return); and (b) large cash deposits in savings bank accounts and the A.O. without following the proper procedure of obtaining approval from the concerned CIT/PCIT has travelled beyond the reasons for which the case was selected and, therefore, the addition made by the A.O. on account which was not the reason for selecting the case for limited scrutiny cannot be sustained.
The case was selected for limited scrutiny for two reasons, the details of which are given at Para Number.3.2 of this order. However, the A.O. has not made any addition/disallowance on those two counts for which the case was selected for limited scrutiny, but he has made certain additions on an issue which was not the subject matter of limited scrutiny and there is nothing on record to suggest that the A.O. has taken necessary approval from the PCIT/CIT for converting the limited scrutiny to full scrutiny. Therefore, on this issue also the A.O. is not justified in making the disallowance of interest expenditure.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the Assessee is directed against the order dated 25.05.2018 of the Ld. CIT(A)-20, New Delhi, relating to A.Y. 2014-15.
2. The grounds raised by the assessee are as under :
“1. That the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the order of assessment and has further erred in sustaining the disallowance made of an expenditure incurred of Rs.5,41,398/-representing the interest paid.
2. That the learned CIT(A) has failed to appreciate that despite the fact the proceedings had been initiated under ‘limited scrutiny’, yet the AO had exceeded in his jurisdiction to disallow the said sum (which was not subject matter of initiation of proceedings u/s 143(2) of the Act) and as such AO could not have either examined the claim and disallow the claim of expenditure incurred of Rs.5,41,398/-.
3. That without prejudice and in the alternative the learned CIT(A) has further erred in failing to appreciate that the Hon’ble High Court in the case of CIT vs. U. K. Bose reported in 212 Taxmann 399 has held that netting of interest is permissible while computing the total income and thus the claim of deduction made from interest income was a permissible deduction.
4. The finding of the learned CIT(A) in his order that the deduction is not allowable u/s 57of the Act is based on complete misconception of the facts and is in disregard of the fact that the deduction of interest had been claimed and had been allowed in all the preceding six years and was thus required to be allowed as a deduction, while computing the total income of the assessee for the instant year, since no sum had been borrowed during this year on which interest has been claimed.
5. That the learned CIT(A) has further erred in not directing the AO to allow the credit of tax deducted at source of Rs.2,95,029/- as had been deducted. The entire amount of tax deduced at source of Rs.2,95,029/- was thus required to be allowed.
6. That the learned CIT(A) has further erred in not deleting the interest levied u/s 234A, u/s 234B and u/s 234C of the sums of Rs.1,43,939/-, Rs.2,07,867/- and Rs.37,439/- respectively.”
3. Facts of the case, in brief, are that the assessee is a Chartered Accountant by profession and derived income from profession, house property, income from capital gain and income from other sources. He filed his return of income on 10.12.2015 declaring total income of Rs.78,23,352/-. The case was selected for limited scrutiny. Notice under section 143(2) of the I.T. Act, 1961 was issued and served upon the assessee. In response to the various statutory notices issued by the A.O, the Ld. A.R. of the assessee appeared before him and filed the requisite details.
3.1. During the course of assessment proceedings, the A.O. noted that assessee has claimed deduction of Rs.5,41,397.50 against the interest income of Rs.42,09,926.11. He, therefore, asked the assessee to furnish the rate of interest paid on borrowed capital and the utilisation of the same. From the various details furnished by the assessee, the A.O. noted that assessee has utilised the borrowed capital for the repayment of earlier loans / advances and for investment for acquisition of agricultural land. The A.O. further noted that assessee did not file the bank statement to substantiate the various entries reflected in the detailed chart filed by him. He further noted that assessee has paid interest on borrowed capital @ 12% whereas the assessee has earned interest income at lower rate. According to him, as per the provisions of Section 57 of the I.T. Act, 1961, deduction from income from other sources is allowed for those expenses which are laid out or expended wholly and exclusively for the purpose of earning of such income. Since the assessee in the instant case could not substantiate that borrowed capital on which assessee has paid interest of Rs.5,41,397.50 @ 18% was utilised for earning interest income, the A.O. disallowed the deduction of Rs.5,41,397.50 and added the same to the total income of the assessee. Accordingly, the A.O. determined the total income of the assessee at Rs.83,64,750/-.
3.2. Before the Ld. CIT(A) the assessee stated that his case was selected for limited scrutiny for the following two reasons :
(a) “mismatch between the income/receipt credited to P&L account considered under other heads of income and income from heads of income other than business/profession (Schedule BP and Part B-TI of return);
(b) large cash deposits in savings bank accounts.”
3.3. However, the A.O. without obtaining the necessary approval from the competent authority had expanded the scrutiny to other income which is not permissible under law.
3.4. So far as the merit of the case is concerned, it was argued that the A.O. was not framing the assessment of assessee’s income earned by him from business or profession. He was dealing with the income earned by the assessee from other sources i.e., interest received. It was argued that assessee had received interest on the personal savings only which are not taxable under the head income from profession. If income out of personal savings is taxable, interest paid for loans raised by the assessee for meeting the personal expenses is also allowable out of interest received as expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for making or earning of such income as is allowable under the provisions of Section 57(iii) of the I.T. Act, 1961. The assessee also submitted the following chart which was also filed before A.O.
