CHOMANSINGH M. DEORA ,MUMBAI vs. PCIT-19, MUMBAI

The present appeal is delayed by 262 days. In the affidavit seeking condonation of delay filed by the assessee, it has been submitted that the impugned order was received by the assessee on 25/03/2022, and thus, the appeal was required to be filed on or before 24/05/2022, i.e. within 60 days.

On the other hand, the learned Departmental Representative („learned DR‟) vehemently opposed the condonation of delay in filing the appeal.

Having considered the submissions of both sides and perused the material available on record, we find that the reasons stated by the assessee for seeking condonation of delay fall within the parameters for grant of condonation 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. It is well established that rules of procedure are handmaid of justice. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. In the present case, nothing has been brought on record to show that the assessee shall stand to benefit by late filing of the present appeal. In view of the above and having perused the submissions made in the affidavit filed by the assessee, we are of the considered view that there exists sufficient cause for not filing the present appeal within the limitation period and therefore we condone the delay in filing the appeal by the assessee and we proceed to decide the appeal on merits.

In its appeal, the assessee has raised the following grounds:–

In the present appeal, the assessee is aggrieved against the invocation of revisionary proceedings under section 263 of the Act by the learned PCIT.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is an individual and for the year under consideration, filed its return of income on 29/09/2017, declaring a total income of Rs.46,56,450. The return filed by the assessee was selected for limited scrutiny assessment via CASS and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. Vide order dated 04/12/2019, passed under section 143(3) of the Act, the Assessing Officer (“AO”) completed the assessment at the returned income.

Subsequently, vide notice dated 25/02/2022, issued under section 263 of the Act, the learned PCIT initiated revisionary proceedings on the basis that the assessee has shown a loss of Rs.15,06,179 under the head “income from other sources”, which is arrived by claiming interest expenses of Rs.34,26,183, on unsecured loans against the interest income of Rs.6,25,525, and interest capitalised of Rs.12,94,479. It was alleged that the AO during the assessment proceedings has not verified the claim of expenses under section 57 of the Act and has also not established the nexus between the income earned and expenses claimed. Thus, the claim of interest expenses of Rs.34,23,183, has been allowed under section 57 of the Act without proper verification. To this extent, the learned PCIT alleged that the action of the AO is erroneous insofar as it is prejudicial to the interest of the Revenue.

In response to the aforesaid notice, the assessee submitted that the claim of expenses by the assessee was duly verified and thoroughly checked by the AO at the time of assessment proceedings before allowing the claim of the assessee under section 57 of the Act. The assessee submitted that the AO specifically asked the assessee about the genuineness of the claim made under section 57 of the Act and also asked to prove the allowability of the expenditure, which were duly responded with necessary details by the assessee during the assessment proceedings. The assessee further submitted 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.

The learned PCIT vide impugned order did not agree with the submissions of the assessee and held that to establish a direct nexus of the interest income and expenditure, the assessee has not submitted any documentary evidence apart from a chart showing the receipt of funds and their return. The learned PCIT further held that the assessee has earned interest income of Rs.6,25,525, which includes interest on income tax refund of Rs.3,77,131, saving account interest of Rs.1,55,596, and Rs.92,798, from three individual parties. However, no evidence has been submitted to show how this interest income is earned and its nexus with the interest expenditure of Rs.34,26,183. It was also held that the assessee has claimed that the funds received from various parties have been invested in the land from which interest of Rs.12,94,479, is capitalised as per AS 16 or in returning the loan, however, no documentary evidence is submitted by the assessee in support of the same during the assessment proceedings. Therefore, it was held that the nexus between the interest expenditure claimed under section 57 of the Act and the interest income is not established by the assessee. Accordingly, the PCIT set aside the assessment order passed under section 143(3) of the Act and directed the AO to examine the allowability of the claim of interest expenditure as per section 57 of the Act and reframe the assessment. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorised Representative submitted that the AO sought information regarding the income from other sources, details of expenditure claimed under section 57 of the Act, and supporting documents/proof of payments, during the assessment proceedings, which Chomansingh M. Deora ITA no.401/Mum./2023 were duly provided by the assessee. Accordingly, after considering the documents and submissions filed by the assessee, the AO concluded the scrutiny assessment accepting the returned income.

On the other hand, the learned DR vehemently relied upon the impugned order passed under section 263 of the Act and submitted that the nexus between the interest income and interest expenditure was not established by the assessee while claiming benefit of section 57 of the Act.

We have considered the submissions of both sides and perused the material available on record. Vide notice dated 28/08/2018, issued under section 143(2) of the Act, forming part of the paper book from pages 29-30, the return filed by the assessee was selected for limited scrutiny for examination of the following issues:- (a) Salary income (b) Deduction against income from other sources

During the assessment proceedings, notice dated 23/10/2019, was issued under section 142(1) of the Act, forming part of the paper book from pages 13-15, seeking the following details from the assessee:- (i) Details regarding income from other sources (ii) Details of expenditure claimed under section 57 against the head income from other sources (iii) Copy of ledgers of all such expenditures (iv) Supporting documents/proof of payments made (v) Details regarding TDS deducted for the expenses/payments (vi) Details of payment made for expenses to specified persons covered under section 40(A)(2)(b) of the Act

The aforesaid notice was replied to by the assessee and details as required were submitted during the assessment proceedings. From the paper book furnished by the assessee we find that the assessee filed bank account Page | 6

Further, the details of expenditure claimed under the head “income from other sources”, forming part of the paper book on page 35, is reproduced as under:-

As regards the interest payment, the assessee furnished the following extracts of the ledger account in its books, forming part of the paper book on page 36:-

Apart from the aforesaid details, it is evident from the record that neither any other information/clarification was sought by the AO nor any other explanation was furnished by the assessee. As per the assessee, after considering the aforesaid details the return of income filed by the assessee was accepted vide order dated 04/12/2019, passed under section 143(3) of the Act. However, as per the learned PCIT, the AO has not verified the nexus between the interest expenses claimed under section 57 of the Act with the interest income. Before proceeding further, it is relevant to note the provisions of section 57(iii) of the Act, which reads as under:-

Therefore, under section 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 from pages 8-11 to show the nexus between the interest income and interest expenditure claimed under section 57 of the Act. However, it is 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 Chomansingh M. Deora ITA no.401/Mum./2023 details of expenditure claimed under section 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 of the Act. 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 under section 263 of the Act is upheld and the grounds raised by the assessee are dismissed.

In the result, the appeal by the assessee is dismissed. Order pronounced in the open Court on 07/09/2023