SHAKTI MALT PVT. LTD.,JAIPUR vs. INCOME TAX OFFICER, WARD-4-2, JAIPUR

vkns'k@ ORDER PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 13.11.2018 of ld. CIT (A)-2, Jaipur arising from the order passed under section 154 of the IT Act for the assessment year 2012-13. The assessee has raised the following grounds :-

“ 1. That in the facts and circumstances of the case, the order passed by learned Assessing Officer (Income-tax Officer, Ward- 4, Jaipur), u/s 154 of Income Tax Act, 1961 making disallowance of Rs. 3,15,3000/- and same being upheld by learned CIT (Appeals)-2, Jaipur, is bad in law as well as on facts and same needs to be cancelled.

2(a) That ld. Assessing Officer has erred in making disallowance of Rs. 3,14,300/- out of interest, on the ground that Appellant Company has purchased an industrial land for Rs. 40 lacs and paid Rs. 2.65 lacs for registration, which is not correct statement of facts. Ld. CIT (A) has also erred in upholding the same.

(b) Full facts of the purchase of land was submitted and copy of Lease Deed was also filed before the ld. Assessing Officer, during the assessment proceeding and such Purchase of Land has no relevance to borrowed funds.

Therefore, no mistake apparent on the face of record and such type of disallowance cannot be made by way of rectification and passing the order u/s 154. The disallowance made is incorrect and not in accordance with the law and the same needs to be deleted.

3. Without prejudice to above, it is submitted that company is running in profit and there are adequate equity capital and reserve and surplus (Rs. 347.18 lacs as on 31.3.2012), etc. and investment in land was made out of such funds and had no link to borrowed funds. Thus, the disallowance of interest made is not correct and same needs to be deleted.

4. That the appellant reserves his right to add, alter, amend all or any grounds of Appeal before or at the time of hearing.”

The hearing of the appeal is concluded through Video Conference due to prevailing condition of COVID 19 pandemic.

Thereafter, the AO has passed the impugned order dated 19.09.2015 under section 154 of the IT Act whereby interest of Rs. 3,15,300/- was disallowed on account of the cost of acquisition of Rs. 42,65,000/- of the land purchased by the assessee during the year under consideration. The ld. CIT (A) has confirmed the order of the AO while passing the impugned order in para 2.3 as under :-

“ 2.3. I have perused the facts of the case, the rectification order and the submissions of the appellant. It is seen that assessee has purchased a piece of land this year and as per Assessing Officer borrowed funds were utilized for purchasing it. Interest to the extent of borrowed funds used for the same was not disallowed. Accordingly, Assessing Officer passed order under section 154 of the I.T. Act, 1061 and disallowed a sum of Rs. 3,15,300/-. The assessee contended that it is acquired out of its own funds not borrowed funds and that a debatable issue cannot be taken up under section 154 of the Act. The record shows that assessee has cash credit account and unsecured loans which according to assessee were utilized for business. Own capital and profit were used for acquiring of assets. However, in absence of direct nexus, this plea cannot be accepted.”

Thus it is clear that the assessee has contended before the ld. CIT (A) that the said land was acquired by the assessee out of its own funds and not borrowed funds.

Further, the issue of disallowance of interest on account of purchase of land is a debatable issue and cannot be a subject matter of section 154 of the IT Act. The ld. CIT (A) considered the fact that the assessee has availed cash credit limit on which the interest was paid during the year under consideration but no loan was taken by the assessee for purchase of land in question. Therefore, when the total borrowed funds of Rs. 5.92 crores is less than the total expenditure on the current assets of Rs. 7.43 crores then it becomes a matter of scrutiny to find out whether the borrowed fund has been utilized by the assessee for purchase of land in question.

Prima facie, it appears that the assessee has made investment during the year in the current assets which is more than the borrowed funds, therefore, the borrowed funds was utilized by the assessee for the current assets and not for the acquisition of the land in question. Further, while passing the order under section 154 of the Act, the AO has not issued any notice to the assessee and without giving an opportunity of hearing to the assessee the disallowance is made. Thus in the facts and circumstances of the case, the disallowance made by the AO on account of proportionate interest expenditure is highly arbitrary and not justified. The same is deleted.

Order is pronounced in the open court on 13/10/2020.