No Disallowance can be made on Issues which are not subject matter of limited scrutiny

Fact and Issue of the case

Facts of the case, in brief, are that the assessee is a Chartered Accountant by profession and derived income from profession, house property, income from capital gain and income from other sources. He filed his return of income on 10.12.2015 declaring total income of Rs.78,23,352/-. The case was selected for limited scrutiny. Notice under section 143(2) of the I.T. Act, 1961 was issued and served upon the assessee. In response to the various statutory notices issued by the A.O, the Ld. A.R. of the assessee appeared before him and filed the requisite details. During the course of assessment proceedings, the A.O. noted that assessee has claimed deduction of Rs.5,41,397.50 against the interest income of Rs.42,09,926.11. He, therefore, asked the assessee to furnish the rate of interest paid on borrowed capital and the utilisation of the same. From the various details furnished by the assessee, the A.O. noted that assessee has utilised the borrowed capital for the repayment of earlier loans / advances and for investment for acquisition of agricultural land. The A.O. further noted that assessee did not file the bank statement to substantiate the various entries reflected in the detailed chart filed by him. He further noted that assessee has paid interest on borrowed capital @ 12% whereas the assessee has earned interest income at lower rate. According to him, as per the provisions of Section 57 of the I.T. Act, 1961, deduction from income from other sources is allowed for those expenses which are laid out or expended wholly and exclusively for the purpose of earning of such income. Since the assessee in the instant case could not substantiate that borrowed capital on which assessee has paid interest of Rs.5,41,397.50 @ 18% was utilised for earning interest income, the A.O. disallowed the deduction of Rs.5,41,397.50 and added the same to the total income of the assessee. Accordingly, the A.O. determined the total income of the assessee at Rs.83,64,750/-.

Before the Ld. CIT(A) the assessee 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.”

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 expended wholly and exclusively for making or earning of such income as is allowable under the provisions of Section 57(iii) of the I.T. Act, 1961. The assessee also submitted the following chart which was also filed before A.O.

Date	Amount (Rs.f	Loan raised from –	Utilisation of loan
02/12/2010	11,00,000/-	Makan Lai Jain	Paid to Desh Bhushan Jain for reimbursement of payment made on behalf of me.
19/03/2011	10,00,000/-	Makan Lai Jain	1. Rs. 1,00,000/- towards D.B.Jain & Co. (CA firm of the assessee)
			2. Rs. 40,000/- towards payment of LIC
			3. Rs. 1,63,500/- towards Foreign Travels Expenses.
			4. Rs. 1,00,000/- towards payment of Advance Tax to the Government
			5. Rs. 1,00,000/- towards M/s New Delhi Estates Private Limited.
			6. Rs. 63,000/- towards furniture & fixtures.
			7. Rs. 2,15,000/- to daughter Sanyogita Jain, etc.
04/12/2007	2,00,000/-	Makan Lai Jain	Paid to Bharat Bhushan Jain for reimbursement of payment made on behalf of me.’
23/08/2008	1,00,000/-	Makan Lai Jain	Payment made for purchase of agricultural land at Tijara.
28/04/2010	2,00,000/-	Makan Lal Jain	1. Rs.20,000/-, Rs.30,000/- & Rs.18,000/- towards drawings.
			2. Rs.22,500/- & Rs.19,874/- towards payment of interest
			3. Rs.15,000/- for College Fees of Daughter.
			4. Rs.20,000/- again towards drawings etc.,
04/12/2007	3,00,000/-	Shakuntala Jain	Paid to Bharat Bhushan Jain for reimbursement of payment made on behalf of me.
23/08/2008	2,00,000/-	Shakuntala Jain	Payment made for purchase of agricultural land at Tijara.

It was further argued that the amount raised as loans were used for repayment of earlier loans/ advances and for investments for acquisition of agricultural land. It was argued that the addition made by the A.O. is not sustainable.

However, the Ld. CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the addition made by the A.O. by observing as under :

“6.1 The Assessing Officer has disallowed the deduction of Rs.5,41,397/- claimed by the appellant u/s 57 of the Act as the appellant has shown interest income of Rs.42,09,926/- and claimed deduction of interest expense of Rs.5,41,397/- whereas this interest was paid by the appellant on 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.

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. 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)

The claim of the appellant that the interest paid for loans raised are utilizing towards personal expenses and allowable expense u/s 57(iii) is not acceptable as the provision of section 56 and section 57 clearly stipulates that only those expenses are allowable u/s 57(iii) of the Act; which has a direct nexus with earning of ‘Income From Other Sources’. Hence, any expenditure incurred for earning such interest income is allowable to the appellant under section 57(iii) of the Act. Apparently, the interest income which is earned on FDR and interest from other parties have no nexus with the interest expense claimed by the appellant. In this light, I find no reason to interfere in the decision of the Assessing Officer and ground No.l and 2 of the appeal deserves to be dismissed.” Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.

Observation of the court

The Tribunal 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 is the submission of the Learned Counsel for the Assessee that the case was selected for limited scrutiny for two reasons i.e., (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); and (b) large cash deposits in savings bank accounts and the A.O. without following the proper procedure of obtaining approval from the concerned CIT/PCIT has travelled beyond the reasons for which the case was selected and, therefore, the addition made by the A.O. on account which was not the reason for selecting the case for limited scrutiny cannot be sustained.

It is also his submission that the A.O. in the A.Y. 2013-14 and in the A.Y. 2016-17 in the orders passed under section 143(3) of the I.T. Act, 1961 has not made any disallowance of interest expenditure and, therefore, following the rule of consistency alone, the disallowance made by the A.O. and sustained by the Ld. CIT(A) is not justified especially when the assessee has not taken any fresh loan during the F.Y. 2013-14 and the assessee has huge capital of his own and the assessee does not maintain any separate bank account of borrowed fund and self-acquired fund. Tribunal found some force in the above arguments advanced by the Learned Counsel for the Assessee. A perusal of the chart filed before the A.O. as well as the Ld. CIT(A) show that assessee has not raised any loan during the impugned assessment year. Further the A.O. in the order passed under section 143(3) of the I.T. Act, 1961 for the A.Y. 2013-14 and in the order passed under section 143(3) of the I.T. Act, 1961 for the A.Y. 2016-17 has not made any disallowance of interest, a statement made by the Learned Counsel for the Assessee at the Bar and not controverted by the Ld. D.R.

Tribunal found that the Hon’ble Calcutta High Court in the case of Indian Explosives Ltd., vs., CIT reported in 147 ITR 392 (Cal.) has held that where interest paid on overdraft account maintained with bank for purpose of business and all receipts are deposited in the overdraft account and all payments including taxes made from that account, the entire interest paid would be allowable deduction.

The Hon’ble Supreme Court recently in the case of South India Bank Ltd. vs., CIT reported in [2021] 130 taxmann.com 178 (SC) has held that 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. Tribunal found that 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 the disallowance of deduction.

The tribunal found that the Hon’ble Delhi High Court in the case of CIT vs., Givo Ltd., (supra) following the Judgment of Hon’ble Kamataka High Court in the case of CIT vs. Sridev Enterprises (supra), has held that since in the past assessment years, the interest expenditure had been allowed, it was not open to the A.O. to disallow the said expenditure in the year under consideration. The Hon’ble Delhi High Court further held that it would not be equitable to permit the Revenue to take a different stand in respect of expenses which were the subject matter of previous years’ assessments. It was 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 is not ignored without actually reopening the assessment.

Similar view has been taken by the Coordinate Benches of the Tribunal in the decisions relied on by the Learned Counsel for the Assessee. Under these circumstances, since in the instant case the A.O. in the past and subsequent assessment years has not made any disallowance of such interest expenditure and the assessee has not raised any fresh loans during the impugned assessment year, we are of the considered opinion that no disallowance of interest is called for during the impugned assessment year. Accordingly, the order of the Ld. CIT(A) is set aside and A.O. is directed to delete the addition.