2020 (10) TMI 616 - AT - Income Tax

Rectification u/s 154 - disallowance of interest on account of purchase of land - assessee has contended before the ld. CIT (A) that the said land was acquired by the assessee out of its own funds and not borrowed funds - HELD THAT - CIT (A) considered the fact that the assessee has availed cash credit limit on which the interest was paid during the year under consideration but no loan was taken by the assessee for purchase of land in question. Therefore, when the total borrowed funds is less than the total expenditure on the current assets then it becomes a matter of scrutiny to find out whether the borrowed fund has been utilized by the assessee for purchase of land in question. Prima facie, it appears that the assessee has made investment during the year in the current assets which is more than the borrowed funds, therefore, the borrowed funds was utilized by the assessee for the current assets and not for the acquisition of the land in question. While passing the order under section 154 AO has not issued any notice to the assessee and without giving an opportunity of hearing to the assessee the disallowance is made. Disallowance made by the AO on account of proportionate interest expenditure is highly arbitrary and not justified. The same is deleted. - Decided in favour of assessee.

Issues:
1. Disallowance of interest expenditure under section 154 of the IT Act for the assessment year 2012-13.
2. Whether the land purchase was funded by borrowed funds or the company's own funds.
3. Validity of disallowance of interest expenditure by the Assessing Officer.
4. Opportunity of hearing to the assessee before making disallowance.

Issue 1: Disallowance of interest expenditure under section 154 of the IT Act for the assessment year 2012-13:
The appeal contested the disallowance of ?3,15,300 under section 154 of the IT Act by the Assessing Officer, which was upheld by the ld. CIT (A). The assessee argued that the disallowance was incorrect both in law and fact and should be canceled. The AO disallowed the interest expenditure in relation to the purchase of industrial land for ?40 lakhs and registration charges of ?2.65 lakhs, as it was not used for business purposes during the relevant year. The disallowance was made without issuing a notice or providing an opportunity of hearing to the assessee. The Tribunal noted that the disallowance was highly arbitrary and not justified, leading to the deletion of the disallowance.

Issue 2: Whether the land purchase was funded by borrowed funds or the company's own funds:
The assessee contended that the land purchase was made using the company's own funds and not borrowed funds. The ld. CIT (A) acknowledged the cash credit account and unsecured loans utilized by the assessee for business purposes. However, the ld. CIT (A) observed that the total borrowed funds were less than the total expenditure on current assets, indicating that the borrowed funds were not used for the land purchase. The Tribunal agreed that the land was acquired out of the company's own funds and not borrowed funds, supporting the deletion of the disallowance.

Issue 3: Validity of disallowance of interest expenditure by the Assessing Officer:
The Assessing Officer disallowed the interest expenditure under section 154 of the IT Act without giving the assessee an opportunity of being heard. The ld. CIT (A) upheld the AO's order, stating that the interest disallowance was based on the use of borrowed funds for land purchase. However, the Tribunal found the disallowance to be arbitrary and not justified, emphasizing the lack of a direct nexus between the borrowed funds and the land acquisition. The Tribunal concluded that the disallowance was unfounded and ordered its deletion.

Issue 4: Opportunity of hearing to the assessee before making disallowance:
The Tribunal highlighted the absence of an opportunity for the assessee to present its case before the disallowance of interest expenditure was made under section 154 of the IT Act. The Tribunal deemed this lack of hearing as a procedural flaw, contributing to the arbitrary nature of the disallowance. Consequently, the Tribunal allowed the appeal of the assessee, emphasizing the importance of providing a fair hearing before making such decisions.

This comprehensive analysis of the judgment addresses the key issues raised in the appeal and provides a detailed overview of the Tribunal's decision regarding the disallowance of interest expenditure and the land purchase funding.

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