SHRI. CHANDRAKANT R AGRAWAL,MUMBAI vs. PR CIT (A)-30, MUMBAI

O R D E R

PER RAVISH SOOD, JM

1. The learned Principal Commissioner of Income-tax (Pr.CIT) erred in revising the assessment order dated November 21,2017 passed under section 143(3) of the Income-tax, Act, 1961 (Act) with respect to the issue of claiming deduction under section 57 of the Act without appreciating that the case of the appellant was selected for scrutiny specifically for the issue of deduction form Income from other sources inter alia, and after considering the submissions of the appellant and judicial precedents placed on record, passed an order and 2 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 hence assessment order was neither erroneous nor prejudicial to the interest of the revenue and hence the order of revision is bad in law.

2. The learned Pr. CIT failed to appreciate the direct nexus between earning and payment of interest by appellant and erred in holding that the expenditure on interest claimed by the Appellant under Section 57(iii) of the Act is not tenable in law, by applying the wrong principle of law and ignoring the judicial precedents relevant to the facts of the appellant and hence the revision is bad in law.

3. Without prejudice, that the learned Pr.CIT failed to appreciate that on the issue of claiming deduction from Income from other sources, two possible view exist and thus when two views are possible than the assessment order cannot be termed as erroneous and prejudicial to the interest of the revenue and hence the order of revision is bad in law.

4. The appellant craves leave to add, amend, alter or delete and of the above grounds of appeal.”

2. Briefly stated, the assessee who is a director of M/s Brijwasi Bengali Sweets Pvt. Ltd. had e-filed his return of income for A.Y. 2015-16 on 29.03.2016, declaring a total income of Rs. 76,37,800/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under the “Computer Assisted Scrutiny Selection” (for short “CASS”). Assessment under Sec. 143(3) was framed by the A.O vide his order passed under Sec. 143(3), dated 21.11.2017, determining the income of the assessee at Rs.76,37,800/-.

3. After culmination of the assessment proceedings the PCIT called for the assessment records of the assessee. On a perusal of the records, it was observed by the PCIT that the assessee had in his return of income after setting off the interest of Rs. 48,14,940/- paid on loan against the interest income of Rs. 51,03,256/- received on FDR‟s, had offered the net balance amount of Rs. 2,88,316/- for tax under Sec. 56 of the Act. It was noticed by the PCIT that the A.O while framing the assessment had accepted the aforesaid claim of deduction raised by the assessee. Holding a conviction that the deduction of the aforesaid interest expenditure against the interest income was not in accord with the provisions of Sec. 57 of the Act, the PCIT was of the view that allowing of the same by the A.O without verifying the records had 3 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 rendered the order passed by him under Sec. 143(3), dated 21.11.2017 as erroneous in so far it was prejudicial to the interest of the revenue. Backed by his aforesaid conviction the PCIT issued a „Show cause‟ notice (for short „SCN‟) under Sec. 263 and called upon the assessee to explain as to why the assessment order may not be revised. In reply, it was submitted by the assessee that as its aforesaid claim for deduction of the interest expenditure was as per the mandate of Sec. 57 of the Act and was allowed by the A.O only after making necessary verifications in the course of the assessment proceedings, thus, the same was not amenable for revision under Sec.263 of the Act. However, the PCIT not finding favour with the aforesaid claim of the assessee rejected the same. Observing, that the assessee was liable to be assessed on the gross amount of interest received by him on his FDR‟s, and no deduction of the interest paid on the loan taken against the security of the said deposits was permissible under law, the PCIT was of the view that the A.O while framing the assessment had erred in accepting the assessee‟s claim for deduction of the interest expenditure against the interest income. In the backdrop of his aforesaid observation the PCIT „set aside‟ the assessment order passed under Sec.143(3), dated 21.11.2017, and directed the A.O to frame a de novo assessment, in accordance with law, after giving a proper opportunity of being heard to the assessee.

4 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 by the ld. A.R that as the A.O‟s view that the interest received on the FDR‟s, as rightly claimed by the assessee, was to be adjusted against the amount of interest paid on the loans taken on security of such deposits was a plausible view, the same, thus, could not have been held to be erroneous within the meaning of Sec. 263 of the Act. In order to support his aforesaid contention the ld. A.R relied on certain judicial pronouncements. Our attention was specifically drawn to the judgment of the Hon’ble Supreme Court in the case of Hero Cycles Pvt. Ltd. Vs. CIT(Central), Ludhiana (2015) 63 taxmann.com 308 (SC). Relying on the said judicial pronouncement, it was averred by the ld. A.R that as observed by the Hon‟ble Apex Court once it is established that there is a nexus between the expenditure and purpose of businesses, the department cannot justifiably claim to put itself in the arm- chair of the businessman or in the position of Board of Directors and decide as to how much of expenditure could be reasonably allowed having regard to the circumstances of the case. It was further averred by the ld. A.R that as the A.O had made detailed inquiries while allowing the assessee‟s claim for deduction of the interest expenditure, thus, his order could not have been revised by the PCIT. In order to substantiate his claim that the A.O had made detailed enquiries as regards the issue in question and the same were from time to time duly replied to his satisfaction by the assessee, the ld. A.R took us through the relevant pages of the assessee‟s paper book (for short „APB‟). In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon’ble Supreme Court in PCIT-8, Mumbai, Vs. Sumatichand Tolamal Gouti (2019) 111 taxmann.com 287 (SC). It was further submitted by the ld. A.R that the non-mentioning of the queries raised by the A.O and the replies filed by the assessee as regards the issue of deduction of the interest paid on loan against the interest received on FDR‟s in the body of the assessment order could not lead to a conclusion that the A.O had not enquired into the said aspect. In support of his aforesaid contention the ld. A.R relied on the orders of the Hon‟ble High Court of Bombay in the case of viz. (i) CIT vs. Fine Jewellery (I) Ltd., 372 ITR 303 (Bom); and (ii) CIT Vs. Reliance

5 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 Communications Ltd. (2016) 69 taxmann.com 103 (Bom). On the basis of his aforesaid contentions, it was submitted by the ld. A.R that as the PCIT had clearly exceeded his jurisdiction and had dislodged the well reasoned order passed by the A.O under Sec. 143(3), dated 21.11.2017, the same, thus, could not be sustained and was liable to be vacated.

6 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 Estate, Junction of I.B. Patel Road & Sonawala Lane, Goregaon (East), Mumbai. Against the interest income of Rs. 51,03,256/- received on the FDR‟s held by him with the bank, the assessee had claimed deduction of the interest paid on the loans that were raised from the bank (on security of the aforesaid FDR‟s). Resultantly, the assessee had offered the net interest income of Rs.2,88,316/- for tax under Sec. 56 of the Act. Observing, that the assessee was liable to be assessed on the gross amount of interest income received by him on his FDR‟s, and no deduction of the interest paid on loan raised from the bank (on security of the FDR‟s) was allowable under Sec. 57 of the Act, the PCIT was of the view that the A.O had erred in not bringing the entire amount of interest received on FDR‟s to tax in the hands of the assessee.

“1. Whether, on the facts and in the circumstances of the case, the assessee is to be assessed on the gross amount of interest received by him on his fixed deposit or on the interest received as reduced by the amount of interest paid on the loan taken on the security of such deposit ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding; (i) the act of making deposit and the act of borrowing on such deposit cannot be viewed as representing two different transactions, (ii) there is thus a nexus between the deposit and the borrowing; (iii) the principle of mutual dealings could be inferred."

7 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 Answering the aforesaid issues which were inextricably interlinked or in fact interwoven, it was observed by the Hon‟ble Apex Court, as under:

8 Shri Chandrakant R. Agrawal Vs. PCIT (Central)-30 taken by the PCIT that the A.O had wrongly allowed the assessee‟s claim for deduction of the interest paid on the loans against the interest received on the FDR‟s, we uphold the order passed by him under Sec. 263 of the Act. Before parting, we may herein observe that the reliance placed by the assessee in his write up/factsheet on the judgment of the Hon‟ble High Court of Kerala in the case of Dr. V.P Gopinathan (supra) would not assist his case, for the reason, that the same as observed by us hereinabove had thereafter been reversed by the Hon‟ble Supreme Court. Accordingly, finding no infirmity in the order passed by the PCIT u/s 263, we uphold the same. The Grounds of appeal Nos. 1 to 4 are dismissed.

Order pronounced in the open court on 22.01.2021