Assessing Officer not justified in making Disallowance of Interest Expenditure as it was not subject matter of Limited Scrutiny: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench held that the AO is not justified in making disallowance of interest expenditure as it was not subject matter of limited scrutiny.

The AO in the instant case disallowed the deduction claimed by the assessee, Dharam Bhushan Jain under section 57 of the Income Tax Act, 1961 out of the interest income and deduction of interest expenses on the ground that assessee has paid interest at the rate of 18% on the borrowed capital which was invested for acquisition of agricultural land and repayment of earlier loans and advances and the assessee is receiving lower rate of interest.

The CIT(A) upheld the action of the AO, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the Learned Counsel for the Assessee that the case was selected for limited scrutiny for two reasons i.e., mismatch between the income/receipt credited to P&L account considered under other heads of income and income from heads of income other than business/ profession; and large cash deposits in savings bank accounts and the AO without following the proper procedure of obtaining approval from the concerned CIT/PCIT has travelled beyond the reasons for which the case was selected and, therefore, the addition made by the AO on account which was not the reason for selecting the case for limited scrutiny cannot be sustained.

The coram of Judicial Member, N.K.Choudhary and Accountant Member, R.K.Panda held that A.O. has not made any addition/disallowance on those two counts for which the case was selected for limited scrutiny, but he has made certain additions on an issue which was not the subject matter of limited scrutiny and there is nothing on record to suggest that the A.O. has taken necessary approval from the PCIT/CIT for converting the limited scrutiny to full scrutiny. Therefore, on this issue also the A.O. is not justified in making the disallowance of interest expenditure.

“In this view of the matter, we set aside the order of the CIT(A) and direct the A.O. to delete the addition. Grounds raised by the assessee are allowed,” the ITAT said.

Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.