2011 (2) TMI 1121 - AT - Income Tax

Rectification of mistakes - assessee had claimed the interest payment against income from other sources in the statement of total income filed by it along with the return & AO passed the order under section 143(3) and specifically referred to the returned income as per statement of total income - whether the AO s view that this treatment constitutes a mistake apparent on face of record is correct or not? - Held that this cannot be treated a mistake, which is so obvious or patent that the same may come within the ambit of section 154. The AO had duly applied his mind to this issue as he accepted the income as per computation of total income while determining taxable income. It is true that under section 57, only that expenditure is allowable which is incurred wholly and exclusively for such income. It is not a case where interest expenditure incurred by assessee per se was not allowable. But, it is a case where after examining all facts only conclusion could be arrived at regarding allowability or otherwise of the expenditure. Further, the assessee s alternative claim of allowing expenditure, in any case, as business expenditure also cannot be ignored because the funds had been invested in assessee s proprietary business. Thus, conclusion either way could be arrived at after long drawn reasoning. Under such circumstances, the learned CIT(A) rightly observed that it was highly debatable issue for which section 154 could not be invoked.

Summary

Issues: Disallowance of interest expenses under section 154 of IT Act

Analysis:
The appeal by the Department challenged the deletion of disallowance of interest expenses amounting to Rs. 4,24,569 under section 154 of the IT Act. The assessment was completed under section 143(3) after considering interest payments and receipts. The AO issued a notice under section 154 pointing out that the interest expenditure claimed by the assessee against 'income from other sources' was not allowable as it did not fulfill the conditions under section 56 of the Act. The AO made an addition of Rs. 4,26,569, which was later deleted by the learned CIT(A).

The learned CIT(A) based the deletion on the principle that section 154 can only be invoked for obvious and patent mistakes, not for debatable points of law. The Departmental Representative supported the AO's order, while the counsel for the assessee argued that the interest payment was claimed against income from other sources as per the original assessment proceedings. The counsel contended that the issue of whether the income should be assessed under 'Income from other sources' or 'Income from business' was highly debatable.

Upon review, the Tribunal found that the AO had accepted the assessee's contention during the original assessment that the interest expenditure was incurred for earning income taxable under 'Income from other sources'. The Tribunal concluded that this treatment was not a clear mistake under section 154, as the AO had applied his mind to the issue. The Tribunal noted that the allowability of the expenditure required a detailed examination of facts and could lead to different conclusions. Additionally, the alternative claim of treating the expenditure as business expenditure due to investment in the assessee's proprietary business was also considered. Therefore, the Tribunal upheld the decision of the learned CIT(A) that the issue was highly debatable and not suitable for rectification under section 154.

In conclusion, the Tribunal dismissed the appeal of the Revenue, affirming the deletion of the disallowance of interest expenses under section 154 of the IT Act.