2024 (12) TMI 1330 - AT - Income Tax

CIT(A) cannot add personal withdrawals not considered by AO during assessment under section 251(1)

ITAT Mumbai ruled on CIT(A)'s enhancement powers under section 251(1). The tribunal held that CIT(A) exceeded jurisdiction by adding personal withdrawals ... Power of CIT(A) for enhancement granted u/s 251(1) - Addition on account of personal withdrawals - HELD THAT:- The power of enhancement available with the learned CIT(A) is restricted to the subject matter of the assessment or the source of income which has been considered expressly or impliedly by the AO. In the present case, AO computed the total income of the assessee after making additions under section 68 of the Act on account of capital balance and disallowance of interest expenditure. Thus, the addition on account of personal withdrawals was neither the subject matter of assessment nor the source of income which was considered expressly or impliedly by the AO. Accordingly, we are of the considered view that the learned CIT(A), in the present case, has transgressed its power of enhancement granted under section 251(1) of the Act while making the addition on account of personal withdrawals, and therefore the impugned addition is void ab initio. Accordingly, on this short point, the addition on account of personal withdrawals made by the learned CIT(A) is deleted. As a result, the impugned order on this issue is set aside and grounds no.2-3 raised in assessee’s appeal are allowed. Addition on account of drawings - We find that the amount shown as drawings in the ledger account for the financial year 2010-11 appears in Schedule A of the balance sheet of the year under consideration and thereby the capital account is reduced to that extent. Since the drawings in the books of the assessee for the year under consideration is nothing but the drawings of the financial year 2010-11, it appears that the same was reduced erroneously by the assessee from the capital account of this year and thus the direction of the learned CIT(A) to exclude the same, which resulted in the impugned addition, on the basis that same is not appropriately reflected is correct and we upheld the same. Accordingly, the impugned order on this issue is upheld and ground no.4 raised in assessee’s appeal is dismissed. Deduction of interest expenditure - CIT(A) dismissed the ground raised by the assessee on this issue and upheld the disallowance made by the AO u/s 57(iii) - HELD THAT:- In the present case, it is undisputed that the assessee has claimed interest expenditure amounting against the income under the head “income from other sources”. We find that for similar reasons as noted in the foregoing paragraph, similar disallowance was made in the case of assessee’s family member and while deleting the disallowance, the coordinate bench of the Tribunal in Pratima Hitesh Mehta [2023 (10) TMI 1474 - ITAT MUMBAI] held that the assessee is entitled to claim a deduction of interest expenditure u/s 57 of the Act since receipt of dividend is merely due to the shareholding of the assessee and the interest expenditure has nexus with the income under the head “income from other sources” including dividend income even though not direct. Accordingly, the AO is directed to allow the interest expenditure claimed by the assessee u/s 57. Calculation of interest u/s 234B - We find that a similar issue came up for consideration before the coordinate bench of the Tribunal in assessee’s own case for the assessment years 2011-12, 2012-13 and 2013-14 [2017 (12) TMI 1668 - ITAT MUMBAI] direct the AO to recompute the interest under section 234B of the Act in accordance with the directions therein. Issues Involved:1. Addition on account of personal withdrawals.2. Addition on account of drawings.3. Deduction of interest expenditure.4. Calculation of interest under section 234B of the Income Tax Act.Detailed Analysis:1. Addition on Account of Personal Withdrawals:The primary issue raised by the assessee was the addition of INR 21,60,000 on account of personal withdrawals, which was not originally considered by the Assessing Officer (AO). The assessee argued that the Commissioner of Income Tax (Appeals) [CIT(A)] exceeded its authority under section 251 of the Income Tax Act by enhancing the assessment with a new source of income not previously processed by the AO. The Tribunal agreed with the assessee, referencing the Supreme Court's decision in CIT v/s Rai Bahadur Hardutroy Motilal Chamaria, which restricts the CIT(A)'s power of enhancement to the subject matter of the assessment. Consequently, the addition made by the CIT(A) on account of personal withdrawals was deemed void ab initio and was deleted.2. Addition on Account of Drawings:The assessee contested the addition of INR 2,74,080 related to drawings, arguing that these were made during the financial year 2010-11 and properly reflected in the balance sheet. However, the CIT(A) found that the drawings were not appropriately reflected and needed to be excluded from the capital balance. The Tribunal upheld the CIT(A)'s decision, agreeing that the drawings were erroneously reduced from the capital account in the current year, thus confirming the addition.3. Deduction of Interest Expenditure:The assessee claimed a deduction of INR 1,25,72,847 as interest expenditure under section 57 of the Act. The AO disallowed this deduction, citing a lack of direct nexus between the expenditure and the income earned. The CIT(A) upheld this disallowance. However, the Tribunal, referencing a similar case involving the assessee's family member, found that the interest expenditure had a sufficient nexus with the income from other sources, including dividend income, even if the connection was indirect. Therefore, the Tribunal directed the AO to allow the interest expenditure claimed by the assessee.4. Calculation of Interest under Section 234B:The assessee challenged the calculation of interest under section 234B of the Act. The Tribunal noted that a similar issue had been addressed in the assessee's own case in previous assessment years, where it was directed that the interest liability should be recomputed after reducing the amount of tax deductible at source. Following this precedent, the Tribunal directed the AO to recompute the interest under section 234B accordingly.Conclusion:The appeal by the assessee was partly allowed for statistical purposes, with significant relief granted on the issues of personal withdrawals and interest expenditure, while the addition on account of drawings was upheld. The matter of interest calculation under section 234B was remanded for recomputation.