TaxTMI 
TaxTMI 
2022 (1) TMI 423
X X X X Extracts X X X X
X X X X Extracts X X X X
....he said sum (which was not subject matter of initiation of proceedings u/s 143(2) of the Act) and as such AO could not have either examined the claim and disallow the claim of expenditure incurred of Rs. 5,41,398/-. 3. That without prejudice and in the alternative the learned CIT(A) has further erred in failing to appreciate that the Hon'ble High Court in the case of CIT vs. U. K. Bose reported in 212 Taxmann 399 has held that netting of interest is permissible while computing the total income and thus the claim of deduction made from interest income was a permissible deduction. 4. The finding of the learned CIT(A) in his order that the deduction is not allowable u/s 57of the Act is based on complete misconception of the facts and is in disregard of the fact that the deduction of interest had been claimed and had been allowed in all the preceding six years and was thus required to be allowed as a deduction, while computing the total income of the assessee for the instant year, since no sum had been borrowed during this year on which interest has been claimed. 5. That the learned CIT(A) has further erred in not directing the AO to allow the credit of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e stated that his case was selected for limited scrutiny for the following two reasons : (a) "mismatch between the income/receipt credited to P&L account considered under other heads of income and income from heads of income other than business/profession (Schedule BP and Part B-TI of return); (b) large cash deposits in savings bank accounts." 3.3. However, the A.O. without obtaining the necessary approval from the competent authority had expanded the scrutiny to other income which is not permissible under law. 3.4. So far as the merit of the case is concerned, it was argued that the A.O. was not framing the assessment of assessee's income earned by him from business or profession. He was dealing with the income earned by the assessee from other sources i.e., interest received. It was argued that assessee had received interest on the personal savings only which are not taxable under the head income from profession. If income out of personal savings is taxable, interest paid for loans raised by the assessee for meeting the personal expenses is also allowable out of interest received as expenditure not being in the nature of capital expenditure laid out or exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....borrowed capital @ 18% which was invested for acquisition of agriculture land and repayment of earlier loans and advances. The Assessing Officer has also claimed that the appellant has shown interest income at the lower rate than 18% as per detailed discussion made by the Assessing Officer in the assessment order mentioned supra in Para 4. 6.2. The appellant on the other hand has filed detailed written submission mentioned supra in Para 5 and claimed that the entire interest expense is allowable u/s 57 of the Act. 6.3. The contention of the Assessing Officer and the submission of the appellant has been considered and from the submission of the appellant, it is gathered that in Para 4.10 of the written submission, the appellant has given the chart of loan taken and utilization of its loan. This shows that none of the loan taken from the parties are utilized to earn the interest income which is a pre condition for claiming any expenditure u/s 57(iii) of the Act. To appreciate this position, the provision of section 57(iii) is reproduced as under: - "Deductions. 57. The income chargeable under the head "Income from other sources" shall be computed a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the loans raised for making personal expenses or any tax free investment. Learned Counsel for the Assessee submitted that unless and until the assessee had borrowed the funds and had not substantial capital of its own and there is nexus between the amount borrowed and personal expenses or making such investment on which no tax is payable, the disallowance could be made, otherwise, deduction is admissible either under section 36(1)(iii) or Section 57(iii) of the I.T. Act, 1961. He submitted that it is not the case where the assessee had no income from business or the assessee had no substantial capital. On the contrary, it is a case wherein the expenditure has been incurred and allowed in the preceding and succeeding assessment year. Learned Counsel for the Assessee accordingly submitted that when such interest expenditure has been allowed in the preceding and subsequent assessment year in order passed under section 143(3) of the I.T. Act, 1961, therefore, following the rule of consistency itself the disallowance made by the A.O. and upheld by the Ld. CIT(A) is not in accordance with law. The Learned Counsel for the Assessee referred to the chart filed before Ld. CIT(A) and submit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st day of the previous accounting year. Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years' assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognising the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot subsequently be held by it have become bad prior to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pparently no connection with the business of the assessee. It is noticed that the assessee is in the business of textile and garment manufacturing. The disallowance has been made on presumption and the disallowance is an ad-hoc disallowance. The details of the expenditure have been found to have been produced before the Assessing Authority. Ld. CIT(A) not found any defect in the claim of expenses, could not now make a change in the stand of the Assessing Authority to say that apparently the travel to Paris, London, Amsterdam and Hong Kong was not for business purposes. Further, as the revenue has not been able to point out as to which expenses of foreign travel as claimed by the assessee is not for the business purpose and as the assessee has produced the evidences in relation to the foreign travel before the Assessing Authority and the same has also been accepted by the Ld. CIT(A), the addition on this account more so on ad-hoc basis, is unjustified and the same is deleted. In these circumstances, ground No. 5 of the assessee's appeal stands allowed." 7. Keeping in view the aforesaid conclusion on facts by ITAT, which is the final fact finding authority, we are of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Ld. D.R. on the other hand heavily relied on the orders of the A.O. and the Ld. CIT(A). She submitted that when the assessee has utilised the borrowed funds for meeting the personal expenses and acquisition of agricultural land, the A.O. has rightly disallowed the interest claimed as deduction and the Ld. CIT(A) is fully justified in upholding the same. 6. We have considered the rival arguments made by both the sides, perused the orders of the A.O. and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the A.O. in the instant case disallowed the deduction of Rs. 5,41,397/- claimed by the assessee under section 57 of the I.T. Act, 1961 out of the interest income of Rs. 42,09,926/- and deduction of interest expenses of Rs. 5,41,397/- 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. We find the Ld. CIT(A) upheld the action of the A.O, the reasons of which have already been reproduced in the preceding paragraph. It i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 6.4. We find the Hon'ble Karnataka High Court in the case of CIT vs., Sridev Enterprises (supra) has held that consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. It was held in the said decision that where the assessee advanced certain sums to another Firm having common partners, free of interest and assessee is paying interest on money borrowed since in past years assessee's claim for deduction of interest paid was allowed on the assumption that those advances were not out of borrowed funds, advances to Firm shown on 1st Day of the Accounting Year exclude for the purpose of computing t....