GOPALAKRISHNAN PUKALAKKAT BALAKRISHNAN,ERNAKULAM vs. ASSISTANT COMMISSIONER, NON CORP CIRCLE 2(1), KOCHI

The brief facts of the case are that the assessee is an individual and he filed his return of income on 05/08/2016. Thereafter, the assessee’s case was selected for limited scrutiny for verification of the following issues: a) Large deduction claimed u/s. 57 and b) Low capital gains with respect to sale consideration

The assessee participated in the assessment proceedings and submitted that he obtained various loans from several banks and the said interest expenses were set off against the interest income earned by him through the term deposits made with various banks. The AO sought for the nexus between the interest income earned and the interest paid to the banks. The assessee also submitted the details of the capital gains earned by him. The AO not accepted the explanations and made an assessment u/s. 143(3) of the Act. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had elaborately discussed each and every issue and finally dismissed the appeal filed by the assessee.

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the Ld.AR submitted that the assessee had incurred expenditure on the various loans which he is entitled to set off as against the interest received from FDRs. The Ld.AR further submitted that the interest income earned by the assessee through the FDR is also an income classified under other sources and therefore the interest payment could be set off as against the said income. Insofar as the computation of the capital gains, the Ld.AR submitted that the cost of improvement and the expenditure were wholly and exclusively incurred in connection with the transfer of the properties and therefore the same are entitled for deduction for the purpose of arriving the capital gains. The Ld.AR also made an alternate argument that if the interest paid on the loan for acquiring the immovable property would not be set off as against the interest income earned through the FDRs, then the said interest income had to be added to the cost of acquisition of the properties. The Ld.AR also made a legal submission that the assessment was selected for limited scrutiny but the AO had made the complete scrutiny without getting any prior approval from the competent authorities and therefore submitted that the entire proceedings are an illegal one.

The Ld.AR also filed two paper books enclosing the written submissions and other documents in the first paper book and enclosed the judgments of the Hon’ble High Courts and orders of the Tribunal in the second paper book and prayed to consider the said judgments and orders and to allow the appeal filed by the assessee.

The Ld.DR submitted that the legal ground is not maintainable since the AO had made the assessment on the issues raised in the limited scrutiny. Insofar as the grounds on merit, the Ld.DR relied on the orders of the lower authorities.

We have heard the arguments of both sides and perused the materials available on record.

First we will take up the legal plea raised by the assessee that the limited scrutiny could not be converted into a complete scrutiny without getting any prior approval from the authorities. We have perused the assessment order in which the following reasons were stated for limited scrutiny which reads as follows: “1) Large deduction claimed u/s. 57 under the head Income from Other Sources and 2) Low Capital gains with respect to sale consideration.”

The assessment made by the AO is relating to the set off of the interest expenses against the interest income earned by the assessee. Admittedly, the assessee had claimed the interest expenses deduction u/s. 57 of the Act which is one of the reason for selecting the assessee’s case for limited scrutiny. Similarly, the capital gains issue was also cited as a reason for limited scrutiny. The AO also made the assessment in respect of the interest expenses as well as the capital gains issue and therefore we do not find that the legal plea raised by the assessee will survive. Therefore the legal submissions made by the assessee is not accepted.

Insofar as the merits are concerned, the Ld.CIT(A) had given a chart in para no. 8.1 in which the details of the interest claim and the interest disallowed and allowed are given. Now we will take up the issues one by one about the details given by the Ld.CIT(A) in its order. For the sake of easy understanding, we are extracting the statement given by the Ld.CIT(A) in para no. 8.1.

The Ld.CIT(A) had considered the loans at Sl.Nos. 1,4,5,7 & 8 which were taken against the FDs obtained by way of overdrafts. The AO had disallowed the interest expenditure because the said expenditure was not made for the purpose of earning income. The Ld.CIT(A) also approved the finding of the AO since the interest expenditure could not be netting off against the interest income earned from the FDs since the expenditure was not incurred for earning the income for which the Ld.CIT(A) also relied on the Hon’ble Supreme Court judgment. The present facts involved in this case is that the assessee is an individual and had made some FDs in various banks and received interest income out of that and therefore the said income is an income from other sources. Similarly, the assessee had obtained loans not for any business purpose or for any of the incomes classified under the various heads and therefore the interest expenses

Insofar as the interest expenditure mentioned in Sl.Nos. 2 & 3, it is the case of the assessee that the said loan was taken for the purchase of the immovable property and the said interest was claimed as deduction u/s. 57 of the Act. We have also perused the records and from the records, we found that admittedly the interest mentioned in S.Nos. 2 & 3 are against the loan taken for the purpose of immovable property and therefore the said expenses could not be adjusted as against the income declared u/s. 56 of the Act. At the maximum, the said expenses could be taken into

The Ld.CIT(A) had not accepted the claim of the assessee only for the reason that the said claim was not made in the return and therefore the appellate authority could not decide the issue at this stage. The said finding of the Ld.CIT(A), in our considered opinion, is not correct. The restrictions to claim a particular income and expenditure, other than the claim made in the returns may be applicable to the assessing officers but not to the appellate authorities. We are considering this issue based on the judgment of the Hon’ble Delhi High Court reported in 435 ITR 85 in which it was held that “the Commissioner (Appeals) in the exercise of his powers u/s. 254 of the IT Act is entitled to call for production of documents or materials to satisfy himself as to whether or not the deductions claimed were sustainable and viable in law”.

In the above said judgment, the Hon’ble Delhi High Court had an occasion to consider the claim of the assessee u/s. 80JJAA of the Act which was not a claim in the original returns filed u/s. 139(1) but later on it was claimed in the assessment proceedings which was rejected by the AO for the reason that the said claim was not made in the return of income. The Ld.CIT(A) had allowed the appeal after getting the details of the claim made by the assessee which was reversed and remitted by the Tribunal. In that circumstances, the Hon’ble Delhi High Court has clarrified that the appellate authorities has powers to call for the details / documents in order to satisfy himself whether or not the deduction claimed were sustainable and viable in law. On examining the documents, if the Ld.CIT(A) had satisfied himself that the assessee is eligible for the said claim, then naturally the benefit should be given to the assessee. Since in the said case,

In the present case also, the assessee had made a plea that if the interest payment expenditure was not eligible u/s. 57 of the Act, it should be considered for including the same in the cost of acquisition. Admittedly, the assessee had claimed the said interest expenditure in the return of income but made an alternate plea that it can be considered while calculating the capital gains. We do not find that the said claim that too an alternate argument, is barred by any law or by any judgement of the higher authorities. If the assessee is able to prove that the interest expenditure is in respect of the loan borrowed for the purchase of immovable property, at the best it can be taken up for consideration while calculating the capital gains. In order to arrive a correct conclusion, we also remit this issue to the file of Ld.CIT(A).

Insofar as the payment of interest in S.No. 6, the AO had disallowed the interest expenditure incurred on the loan amount of Rs. 70 Lakhs since the assessee has not proved that the said amount was used for making FDs with any bank. As already discussed, in respect of the interest expenditure mentioned in S.Nos. 1,4,5,7 & 8 if the loan has been availed for earning any income mentioned under the different heads, the AO can very well disallow the claim made u/s. 57 but in the present case, it was not clear for what purpose the loan has been obtained. If the loan is not obtained for any earning of income under the different heads, then naturally, the assessee can claim the said interest expenditure from the interest earned from the FDRs. From the perusal of the orders of the AO as well as the Ld.CIT(A), we are not able to find out the nature of the loan obtained by the assessee. We, therefore, remit this issue to the Ld.CIT(A) to ascertain the facts on the said loan amount of Rs. 70 Lakhs and if the said loan account is not for the

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