SALIM KAMRUDDIN JAFFER,MUMBAI vs. DCIT 19(3), MUMBAI

During the course of assessment proceedings, the Assessing Officer observed that the assessee had earned interest income of 27,58,200/- from fixed deposits and savings bank accounts and had claimed deduction of ₹38,84,008/- towards interest paid on loan taken against such fixed deposits along with legal and professional fees of ₹18,200/- under section 57 of the Act.

The assessee submitted that the loan was taken against fixed deposits and the interest paid thereon was allowable as deduction against the interest income, as the fixed deposits were not prematurely withdrawn and income had been offered to tax. However, the Assessing Officer held that the assessee failed to establish a direct nexus between the borrowed funds and the earning of interest income. It was further observed that the loan and corresponding fixed deposits were not properly reflected in the balance sheet and no supporting evidence was furnished to substantiate the claim. Accordingly, the AO disallowed the interest expenditure of 38,84,008/- and legal/professional fees of ₹18,200/- , aggregating to ₹39,02,208/- .

Aggrieved by the assessment order, the assessee preferred an appeal before the ld CIT(A). The Ld. CIT(A), after considering the material on record, upheld the action of the Assessing Officer and confirmed the disallowance, holding that the assessee failed to satisfy the condition of section 57(iii), i.e., that the expenditure was incurred wholly and exclusively for earning the income. The appeal of the assessee was accordingly dismissed. Aggrieved by the order of CIT-A, the assessee preferred this appeal before the ITAT raising the grounds as reproduced above.

Before us the Ld. Counsel for the assessee submitted that the impugned assessment order as well as the order passed by the Ld. CIT(A) are unsustainable in law and on facts, inasmuch as the

It is submitted that during the course of assessment proceedings, though certain details were furnished, the assessee could not place on record all the necessary documentary evidences such as complete bank statements, loan sanction documents, fixed deposit details, fund flow statements and supporting agreements, which would have clearly demonstrated the nexus between the borrowed funds and the earning of income. The Assessing Officer, in absence of complete evidences, proceeded to draw adverse inference and disallowed the claim of ₹39,02,208/- on the ground that the assessee failed to establish that the expenditure was incurred wholly and exclusively for earning such income.

It was further submitted that even during the appellate proceedings before the Ld. CIT(A), the assessee could not effectively represent the case. As evident from the appellate order, though

It was submitted that the assessee is now in a position to furnish complete documentary evidences, including detailed bank statements reflecting loan against fixed deposits, fixed deposit receipts, interest certificates, reconciliation of interest income and expenditure, fund flow statements establishing direct nexus, and supporting documents for legal and professional expenses. These evidences go to the root of the matter and are crucial for proper adjudication of the issue. The ld counsel submitted that non-filing of those documents earlier was neither intentional nor with any ulterior motive, but was due to inadvertent and technical lapses in the course of proceedings.

The ld Counsel submitted that it is a settled principle of law that justice should not be denied on account of technicalities and that the assessee should be afforded a reasonable opportunity to substantiate its claim with proper evidences. He submitted that the Hon'ble Courts have consistently held that where additions are

He submitted that in the present case that neither the Assessing Officer nor the Ld. CIT(A) has conclusively established that the claim of the assessee is bogus or non-genuine; rather, the disallowance has been made solely on the ground that the nexus between the expenditure and income could not be demonstrated due to lack of adequate documentation. Therefore, the issue is essentially factual in nature and requires proper verification of evidences.

The ld Counsel submitted that in view of the above facts and circumstances, the Tribunal may kindly set aside the order of the Ld. CIT(A) and restore the matter to the file of the Assessing Officer with a direction to examine the claim of the assessee afresh after considering the evidences to be furnished by the assessee and to pass an order in accordance with law after providing reasonable opportunity of being heard.

He submitted that the assessee undertakes to fully cooperate in the set-aside proceedings and to furnish all necessary documents and explanations as may be required.

We have heard the rival submissions and carefully perused the orders of the authorities below as well as the material placed on record. The assessee has also filed an affidavit explaining the circumstances which allegedly prevented him from effectively prosecuting the proceedings before the Assessing Officer and the learned CIT(A). In substance, it has been stated that the non- compliance before the lower authorities was neither wilful nor deliberate but was occasioned by his advanced age, absence of effective professional assistance, technical difficulties encountered during the faceless proceedings, and bona fide reliance upon inadequate professional advice. It has further been averred that, owing to these circumstances, the relevant documentary evidences establishing the nexus between the interest expenditure and the interest income, as also the supporting documents relating to the legal and professional expenses, could not be furnished before the authorities below. The assessee has further undertaken to place all the requisite documentary evidence on record and to extend full cooperation in the event the matter is restored for fresh adjudication.

Upon thoughtful consideration of the rival submissions and the material available on record, we find that the impugned disallowances have essentially been sustained on account of the assessee's inability to substantiate the claim by producing the requisite documentary evidence before the lower authorities. There

Accordingly, we set aside the impugned order of the learned CIT(A) and restore the matter to the file of the Assessing Officer with a direction to examine the assessee's claim afresh after considering all documentary evidence and explanations that may be furnished. The Assessing Officer shall thereafter pass a reasoned order in accordance with law after affording the assessee a reasonable opportunity of being heard. The assessee is also directed to extend full cooperation during the set-aside proceedings and to furnish all relevant documents and explanations within the time stipulated by

In the result, the appeal of the assessee is allowed for statistical purposes.