2020 (10) TMI 716 - AT - Income Tax

Tribunal quashes reassessment order, allows appeal, deletes disallowed interest expenses

Shri Ashok Kumar Goyal Versus The Income Tax Officer, Ward 1, Beawar.

The Tribunal allowed the appeal, quashing the reassessment order due to non-disposal of objections and deleting the disallowance of interest expenses ... Reopening of assessment - non disposal of the objections before passing the reassessment order - HELD THAT:- There are divergent views of different High Courts on the issue whether non disposal of the objections before passing the reassessment order would render the reassessment order invalid or it is only a procedural irregularity. Since the decision of the Hon’ble Jurisdictional High Court is binding on the Tribunal, therefore, this Tribunal in the said case of Shri Manoj Dubey SH. GOVIND SHARAN GUPTA [2020 (5) TMI 574 - ITAT JAIPUR] has followed the decision of Hon’ble Jurisdictional High Court being a binding precedent. Accordingly following the earlier order as well as the decision of Hon’ble Jurisdictional High court, decide this issue in favour of the assessee Disallowance of interest expenses against the income from other sources - HELD THAT:- Order of the AO itself reveals the fact that the borrowed fund was not fully utilized for giving the loans on which the assessee has earned the interest income under section 56 of the IT Act and claimed the interest deduction under section 57(3) of the Act. Once the part of the borrowed fund is utilized for the purpose of business being introduction of capital in the proprietorship concern and partnership firm from where the assessee has earned the business income and offered to tax then the proportionate interest expenditure is an allowable business expenditure. Thus it is only an error of claiming the deduction under correct head but the entire interest was claimed against the income from other sources. As relying on disallowance made by the AO in respect of interest expenditure is deleted. Issues Involved:1. Validity of reassessment order under section 147 of the IT Act.2. Disallowance of interest expenses claimed by the assessee.Issue-wise Detailed Analysis:1. Validity of Reassessment Order under Section 147 of the IT Act:The primary issue is the validity of the reassessment order passed under section 147 of the IT Act. The assessee filed his return of income under section 139(1) on 27.08.2013, declaring a total income of Rs. 7,47,850/-. The assessment was completed under section 143(3) at a total income of Rs. 8,23,430/- on 30th January 2016. Later, the AO reopened the assessment by issuing a notice under section 148 on 23rd February 2018 to assess the income on account of excess deduction of interest paid under section 57(3) of the IT Act. The reassessment was completed on 26th November 2018, disallowing interest of Rs. 2,64,318/- claimed against the income from other sources. The assessee challenged the validity of the reopening and reassessment order before the CIT (A), who dismissed the ground raised by the assessee but did not provide a finding on the objections against the reassessment order.The Tribunal noted that the AO did not dispose of the objections raised by the assessee before passing the reassessment order, which is a procedural requirement as per the Supreme Court's decision in GKN Driveshafts (India) Ltd. vs. ITO, 259 ITR 19 (SC). The Tribunal referenced the case of Manoj Dubey vs. ITO, where it was held that non-disposal of objections before passing the reassessment order renders the reassessment invalid. The Tribunal followed the decision of the Hon'ble Rajasthan High Court in M/s K.C. Mercantile vs. CIT, which emphasized that reassessment proceedings completed without disposing of objections cannot be sustained. Consequently, the Tribunal quashed the reassessment order for want of disposal of the objections raised by the assessee against the notice issued under section 148.2. Disallowance of Interest Expenses Claimed by the Assessee:The second issue pertains to the disallowance of interest expenses of Rs. 2,64,318/- claimed by the assessee against the business income. The assessee claimed an interest payment of Rs. 4,50,147/- against the income from other sources, being the interest income of Rs. 1,85,829/-. The AO disallowed the proportionate interest on the ground that the excess interest paid of Rs. 2,64,318/- could not be allowed under section 57(3) as it was not incurred for earning the interest income. The assessee argued that the borrowed fund had been utilized for capital contribution in a proprietorship concern and a partnership firm, from which the assessee declared business profit of Rs. 14,96,823/-. Thus, the interest expenditure should be an allowable business expenditure against the business income.The Tribunal noted that the borrowed fund was not fully utilized for giving loans on which the assessee earned interest income under section 56 of the IT Act. Part of the borrowed fund was used for business purposes, making the proportionate interest expenditure an allowable business expenditure. The Tribunal referenced the decision in Govind Sharan Gupta vs. ACIT, where it was held that a mistake in claiming the entire interest expenditure under one head instead of bifurcating it proportionally does not bar the allowance of such expenditure under respective heads.Following the decisions of the Hon'ble Jurisdictional High Court and the Coordinate Bench, the Tribunal deleted the disallowance made by the AO in respect of interest expenditure.Conclusion:The Tribunal allowed the appeal of the assessee, quashing the reassessment order for want of disposal of objections and deleting the disallowance of interest expenses. The order was pronounced in the open court on 15/10/2020.