2023 (9) TMI 436 - AT - Income Tax

Revision u/s 263 - nexus between the interest income and interest expenditure was not established by the assessee while claiming benefit of section 57 of the Act - HELD THAT - As u/s 57(iii) of the Act, any expenditure which is not in the nature of capital expenditure and has been expended wholly and exclusively for the purpose of earning income chargeable under the head income from other sources is allowable as a deduction. In the present case, there is no dispute regarding the nature of the expenditure and the only claim of the learned PCIT is that the nexus between the interest expenditure and interest income is not examined by the AO during the assessment proceedings. We find that in response to the notice issued under section 263 of the Act, the assessee made a claim that all the borrowed funds have been invested mostly in the land and in repaying the previous loans from various persons, therefore the interest payment has been made to earn interest income only and it is directly related to each other. In support of the aforesaid submission, the assessee furnished various charts, forming part of the paper book to show the nexus between the interest income and interest expenditure claimed under section 57 of the Act. As evident from the record that neither the aforesaid submission/the details regarding the nexus of the interest expenditure with interest income was sought by the AO during the assessment proceedings nor the same was furnished by the assessee. As noted above during the assessment proceedings, the AO only sought the details of expenditure claimed u/s 57, ledgers of all such expenditures, and supporting documents/proof of payment made. Thus, there was no examination of the nexus between interest income and interest expenditure. As noted above under section 57(iii) of the Act the expenditure claimed as a deduction, while charging the income under the head income from other sources , should be expended wholly and exclusively for the purpose of making or earning such income. Since the return filed by the assessee was selected for limited scrutiny, inter-alia, regarding deduction against income from other sources, the AO was required to examine not only the details and proof of payment of such expenditure but also its nexus with the interest income chargeable under the head income from other sources as per section 57. Since there is no material available on record to show that this aspect was examined during the assessment proceedings, we find no infirmity in the revision order passed by the learned PCIT under section 263 of the Act, whereby the assessment order passed under section 143(3) of the Act was set aside and the AO was directed to reframe the assessment after examining the allowability of interest expenses as per section 57 of the Act. Accordingly, the impugned order passed u/s 263 of the Act is upheld and the grounds raised by the assessee are dismissed.

Summary

Issues Involved:
1. Condonation of Delay
2. Invocation of Section 263 of the Income Tax Act, 1961

Condonation of Delay:
The appeal was delayed by 262 days. The assessee attributed the delay to the departure of his old accountant post-Covid-19 and the subsequent delay in appointing a new accountant. The learned Departmental Representative opposed the condonation. However, the tribunal found the reasons for the delay to be within the parameters for condonation as laid down by the Hon'ble Supreme Court in the case of Collector Land Acquisition, Anantnag Vs. MST Katiji and others: 1987 SCR (2) 387. The tribunal emphasized that "rules of procedure are handmaid of justice" and preferred substantial justice over technical considerations. Consequently, the delay was condoned, and the appeal was decided on merits.

Invocation of Section 263:
The assessee challenged the invocation of Section 263 by the learned Principal Commissioner of Income Tax (PCIT), arguing it was merely a change of opinion without pointing out any error in the Assessing Officer's (AO) order. The PCIT initiated revisionary proceedings on the basis that the AO failed to verify the nexus between the interest income and the interest expenses claimed under Section 57 of the Act. The assessee contended that the AO had duly verified the claim during the assessment proceedings and that the borrowed funds were invested in land and repaying previous loans, making the interest payment directly related to earning interest income.

The PCIT, however, held that the assessee did not provide documentary evidence to establish the nexus between the interest income and the interest expenditure. The tribunal noted that during the assessment proceedings, the AO sought details of the expenditure claimed under Section 57 but did not examine the nexus between the interest income and the interest expenditure. The tribunal upheld the PCIT's order, stating that the AO was required to examine not only the details and proof of payment of such expenditure but also its nexus with the interest income as per Section 57 of the Act. The tribunal found no infirmity in the revision order passed by the PCIT, setting aside the assessment order and directing the AO to reframe the assessment after examining the allowability of interest expenses as per Section 57 of the Act.

Conclusion:
The appeal by the assessee was dismissed, and the order pronounced in open Court on 07/09/2023.