2022 (1) TMI 423 - AT - Income Tax

Disallowance of an expenditure incurred representing the interest paid - disallowance of deduction claimed by the assessee under section 57 out of the interest income and deduction of interest expenses - case was selected for limited scrutiny - Expansion of scope of scrutiny to other income - addition 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 - HELD THAT - A perusal of the chart filed before the A.O. as well as the Ld. CIT(A) show that assessee has not raised any loan during the impugned assessment year. A.O. in the order passed under section 143(3) for the A.Y. 2013-14 and in the order passed under section 143(3) for the A.Y. 2016-17 has not made any disallowance of interest, a statement made by the Learned Counsel for the Assessee at the Bar and not controverted by the Ld. D.R. Hon ble Calcutta High Court in the case of Indian Explosives Ltd., vs., CIT 1982 (8) TMI 10 - CALCUTTA HIGH COURT has held that where interest paid on overdraft account maintained with bank for purpose of business and all receipts are deposited in the overdraft account and all payments including taxes made from that account, the entire interest paid would be allowable deduction. Hon ble Supreme Court recently in the case of South India Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT has held that where interest free own funds available with assessee-banks exceeded their investments in tax-free securities; investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A on the ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income. Similar view has been taken by the Coordinate Benches of the Tribunal in the decisions relied on by the Learned Counsel for the Assessee. Under these circumstances, since in the instant case the A.O. in the past and subsequent assessment years has not made any disallowance of such interest expenditure and the assessee has not raised any fresh loans during the impugned assessment year, we are of the considered opinion that no disallowance of interest is called for during the impugned assessment year. Accordingly, the order of the Ld. CIT(A) is set aside and A.O. is directed to delete the addition. As mentioned earlier the case was selected for limited scrutiny for two reasons - 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. In this view of the matter, we set aside the order of the Ld. CIT(A) and direct the A.O. to delete the addition. Grounds raised by the assessee are allowed.

Issues Involved:

1. Disallowance of interest expenditure of ?5,41,398.
2. Jurisdictional overreach by the Assessing Officer (AO) in a limited scrutiny case.
3. Applicability of the principle of netting of interest.
4. Consistency in allowing interest deduction in preceding and succeeding years.
5. Non-credit of tax deducted at source (TDS) of ?2,95,029.
6. Levy of interest under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Disallowance of Interest Expenditure:

The AO disallowed the interest expenditure of ?5,41,398 claimed by the assessee under Section 57 of the Income Tax Act, 1961, on the grounds that the borrowed capital was used for acquiring agricultural land and repaying earlier loans, not for earning interest income. The CIT(A) upheld this disallowance, stating that the interest expenses were not directly related to the interest income earned, as required under Section 57(iii).

2. Jurisdictional Overreach by the AO:

The assessee argued that the case was selected for limited scrutiny for specific reasons: mismatch between income credited to the P&L account and income from other heads, and large cash deposits in savings accounts. The AO expanded the scope of scrutiny without obtaining necessary approval from the competent authority, which is not permissible under law. The Tribunal found merit in this argument, noting that the AO made additions beyond the scope of limited scrutiny without proper authorization.

3. Applicability of the Principle of Netting of Interest:

The assessee contended that netting of interest is permissible as per the judgment in CIT vs. U.K. Bose, where the High Court held that netting of interest is allowable while computing total income. The Tribunal agreed that the interest paid should be allowed as a deduction if it is laid out or expended wholly and exclusively for earning income, as per Section 57(iii).

4. Consistency in Allowing Interest Deduction:

The assessee highlighted that the interest expenditure had been allowed in preceding and succeeding years without disallowance. The Tribunal emphasized the principle of consistency, citing the judgments in CIT vs. Sridev Enterprises and CIT vs. Gio Ltd., which held that disallowing previously allowed deductions without reopening past assessments is inequitable. The Tribunal noted that the AO had not disallowed interest expenditure in the assessment years 2013-14 and 2016-17, and no fresh loans were raised in the impugned year.

5. Non-Credit of TDS:

The assessee claimed that the CIT(A) erred in not directing the AO to allow the credit of TDS amounting to ?2,95,029. However, this issue was not elaborated upon in the Tribunal's order, indicating that the primary focus was on the disallowance of interest expenditure and jurisdictional overreach.

6. Levy of Interest under Sections 234A, 234B, and 234C:

The assessee contested the levy of interest under sections 234A, 234B, and 234C, amounting to ?1,43,939, ?2,07,867, and ?37,439, respectively. The Tribunal's decision to allow the appeal implicitly addresses this issue, as the primary disallowance leading to these interest charges was found to be unjustified.

Conclusion:

The Tribunal allowed the appeal, directing the AO to delete the addition of ?5,41,398 and emphasized the need for consistency in tax assessments. It also highlighted the procedural lapse of the AO in expanding the scope of limited scrutiny without proper authorization. The appeal was allowed in favor of the assessee.

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