Section 36(1)(iii) Addition Beyond Limited Scrutiny Scope Deleted: ITAT Delhi

ACIT Vs B. K. Sales Corporation (ITAT Delhi)

Summary: ITAT Delhi dismissed Revenue’s appeal and upheld deletion of an addition of Rs.3,83,08,176/- made under section 36(1)(iii) of the Income Tax Act, 1961, holding that the Assessing Officer had travelled beyond the parameters for which the case was selected for limited scrutiny. The appeal related to Assessment Year 2015-16. The AO had noted that the assessee debited interest expenditure of Rs.2,02,10,590/- and concluded that interest-bearing funds had been utilised for investment in short-term deposits having no connection with the assessee’s main business.

Revenue challenged the relief granted by the CIT(A). The assessee, however, contended that the addition itself was impermissible because none of the five limited scrutiny reasons authorised examination of the allowability of interest under section 36(1)(iii). One specified reason referred to “high interest expenditure against new capital added in work in progress or addition made to fixed assets”, but the Tribunal rejected Revenue’s argument that this permitted the impugned enquiry. It held that the words “high interest expenditure” had to be understood in their complete context, namely expenditure relating to new capital added or additions to fixed assets, whereas no such factual circumstance existed in the controversy before it.