2022 (7) TMI 115 - AT - Income Tax

Rectification u/s 154 - Disallowance of interest on account of the fact that the money was invested in the capital of the firms, to earn exempt income - as noted that the appellant was neither deriving any interest income nor remuneration from these partnership firms and the interest expenditure was thus disallowed - HELD THAT - The assessee in the instant case is a partner in the firm M/s. Vivilash Digital Colour Labs Pvt.Ltd and has invested in the firm by borrowing from financial institutions i.e Chola-IDBI on which she has paid interest of Rs. 15,85,752/-. There is also a provision in the partnership deed to pay interest on capital to the partners. Since, there was no sufficient profit, interest was not provided by the firm on the capital. The assessee claimed interest income as expenditure and set-off the same against other income. This was also accepted by the AO in the order passed u/s. 143(3). It has been held in various decisions, which are relied on by the ld.counsel for the assessee that there need not be income to claim the expenditure u/s. 57. It is also held that such interest expenditure is allowable, even when there is no income. Thus, the issue as to whether the assessee has correctly claimed the set-off such interest paid to Chola-IDBI, in absence of any interest income for the firm is a highly debatable issue. It has been held in various decisions that provisions u/s. 154 for rectification of the order cannot be applied to debatable issues. The Hon ble Supreme Court in the case of T.S.Balaram vs Volkart Brothers 1971 (8) TMI 3 - SUPREME COURT has held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points which there may be conceivably two opinions. It was held that a decision on a debatable point is not a mistake apparent from the record. Therefore set aside the order of the ld.CIT(A) on this issue and the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Disallowance of interest expenditure claimed by the assessee.
3. Applicability of Section 154 for rectification of debatable issues.
4. Nexus between borrowed funds and exempt income.

Issue-wise Detailed Analysis:

1. Delay in Filing the Appeal:

For ITA No. 144/Hyd/2020, there was a delay of 10 days in filing the appeal. The assessee filed a condonation application, and after considering the contents and hearing the ld. DR, the appeal was admitted for adjudication. Similarly, for ITA No. 148/Hyd/2020, there was a delay of 15 days. The assessee filed a condonation application along with an affidavit, and after hearing both sides, the delay was condoned, and the appeal was admitted for adjudication.

2. Disallowance of Interest Expenditure Claimed by the Assessee:

In ITA No. 144/Hyd/2020, the AO disallowed the interest expenditure of Rs. 15,85,752/- claimed by the assessee, as the loan amount from Chola-IDBI was utilized in earning exempt income and no business income was derived during the year. The ld.CIT(A) upheld the AO's action, stating that the interest expenditure was incurred for earning exempt income and could not be allowed as a business expenditure under Section 36(1)(iii) of the Income Tax Act.

In ITA No. 148/Hyd/2020, the AO disallowed the interest expenditure of Rs. 12,65,808/- claimed by the assessee, as the loan amount was utilized in earning exempt income. The ld.CIT(A) upheld the AO's action, stating that the loans obtained were for personal/house loan purposes and not for any business purposes, and the interest earning was contingent in nature.

3. Applicability of Section 154 for Rectification of Debatable Issues:

In ITA No. 144/Hyd/2020, the assessee argued that debatable issues cannot be rectified under Section 154 of the I.T. Act. The Tribunal found that the issue of whether the assessee correctly claimed the set-off of interest paid to Chola-IDBI in the absence of any interest income from the firm was a highly debatable issue. The Tribunal referred to various decisions, including the Hon'ble Supreme Court's decision in the case of T.S. Balaram vs Volkart Brothers, which held that a mistake apparent on the record must be an obvious and patent mistake and not something that can be established by a long drawn process of reasoning on points where there may be two opinions. Therefore, the Tribunal set aside the order of the ld.CIT(A) on this issue and allowed the appeal filed by the assessee.

4. Nexus Between Borrowed Funds and Exempt Income:

In both ITA No. 144/Hyd/2020 and ITA No. 148/Hyd/2020, the AO and ld.CIT(A) disallowed the interest expenditure claimed by the assessee, stating that the borrowed funds were utilized in earning exempt income and there was no nexus between the income admitted and the expenditure. The Tribunal in ITA No. 144/Hyd/2020 found that the issue was debatable and could not be rectified under Section 154. However, in ITA No. 148/Hyd/2020, the Tribunal upheld the ld.CIT(A)'s decision, stating that the interest expenditure could not be set-off as the loans obtained were for personal/house loan purposes and not for any business purposes.

Conclusion:

In ITA No. 144/Hyd/2020, the appeal filed by the assessee was allowed, and the order of the ld.CIT(A) was set aside. In ITA No. 148/Hyd/2020, the appeal filed by the assessee was dismissed, and the order of the ld.CIT(A) was upheld.