2016 (2) TMI 85 - AT - Income Tax

Deduction U/S 57 - deduction of of interest expenditure against interest income - nexus between borrowing of funds from the bank and interest income earned on the FDR - Held that - CIT(A) has not applied his mind to decide the evidentiary value of the documents sought to be brought on record by the assessee rather acted as a post office to tow the line of Assessing Officer. When the assessee has specifically come up with the defense that the deduction claimed by her (the assessee) u/s 57 of the Act are based upon the documents sought to be brought on record by way of additional evidence, it was incumbent upon Ld. CIT(A) to decide the application on merit and not without disputing the documents (agreement to sell) in question sought to be brought on record by the assessee. The claim of the assessee cannot be thrown into the dustbin on the basis of conjectures and surmises that the agreement does not prove any nexus between the interest income earned form FDR and interest paid on OD account claimed u/s 57 of the Act without declaring the agreement as false and frivolous document. Without entering into the merits of the case, we are of the considered view that the file is required to be restored to Ld. CIT(A) for fresh adjudication by taking out into account the loan documents relied upon by the assessee. Needless to say that Ld. CIT(A) is require to provide adequate opportunity of being heard to the parties before passing fresh order. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Dismissal of appeal without adequate opportunity of being heard.
2. Non-admission of additional evidence violating Rule 46A of the Income tax Rules, 1962.
3. Disallowance of interest paid by the appellant and failure to recognize the nexus between interest income and interest paid on overdraft account.
4. Disallowance of interest claimed as deduction under section 57 of the Act without considering the business activity nexus.
5. Disregarding precedents and upholding addition made by the Assistant Commissioner of Income tax.

Issue 1 - Dismissal of appeal without adequate opportunity of being heard:
The appellant sought to set aside the order passed by Ld. CIT(A) on the grounds of not being provided with adequate opportunity of being heard. The appellant contended that the impugned order was bad in law and deserved to be set aside due to the dismissal of the appeal without proper hearing.

Issue 2 - Non-admission of additional evidence violating Rule 46A:
The appellant argued that the learned CIT (A) erred in not admitting additional evidence, violating Rule 46A of the Income tax Rules, 1962. The appellant claimed that the additional evidence, specifically agreements to sell, established a clear nexus between interest income earned on fixed deposit receipt and interest paid on overdraft account, which was crucial for the case.

Issue 3 - Disallowance of interest paid and failure to recognize nexus:
The disallowance of interest paid by the appellant was contested on the grounds that there was a clear nexus between the interest income earned on fixed deposit receipt and interest paid on overdraft account for making advance payments for property purchases. The appellant argued that the borrowed funds were utilized for business activities, and the disallowance was erroneous and deserved to be set aside.

Issue 4 - Disallowance of interest claimed as deduction under section 57:
The appellant challenged the disallowance of interest claimed as a deduction under section 57 of the Act, emphasizing that the payment of interest was an allowable deduction and had a nexus with business activities. The rejection of the appellant's arguments without proper reasons was deemed erroneous and warranted setting aside the impugned order.

Issue 5 - Disregarding precedents and upholding addition made by Assistant Commissioner:
The learned CIT (A) was criticized for disregarding the decision of the Hon'ble Rajasthan High Court and upholding the addition made by the Assistant Commissioner of Income tax. The appellant argued that the precedents supported the appellant's position regarding the borrowings against fixed deposits and their utilization for business purposes, which should have allowed the deduction of interest paid on borrowings against interest earned on fixed deposits.

In conclusion, the Tribunal accepted the appeal for statistical purposes and ordered the case to be restored to Ld. CIT(A) for fresh adjudication, emphasizing the need to consider the loan documents relied upon by the appellant and provide adequate opportunity for both parties to be heard before passing a new order.