2013 (12) TMI 638 - AT - Income Tax

Disallowance of interest u/s.36(1)(iii) The assessee borrowed Rs. 2.45 crores for working capital requirements The assessee has invested Rs. 1.53 crores in share application money and Rs. 1 crore in shares in its sister concern - Held that -The assessee produced before CIT(A) the additional evidences which were not produced before AO - The CIT(A) deleted the disallowance without giving an opportunity of being heard to the AO - The issue set aside for fresh adjudication.

Summary

Issues:
1. Disallowance of interest u/s.36(1)(iii) of the I.T. Act, 1961.
2. Admission of fresh evidence without allowing AO to examine under Rule 46A of I.T. Rules, 1962.

Issue 1: Disallowance of interest u/s.36(1)(iii) of the I.T. Act, 1961:
The department appealed against the deletion of Rs.23,39,723 disallowance of interest under section 36(1)(iii) by the ld CIT(A). The AO disallowed the interest as the assessee borrowed funds for working capital but invested in a sister concern without proving commercial expediency. The AO observed no evidence supporting the borrowed money's business use. The AO disallowed Rs.25,81,334 as interest. The assessee argued before the ld CIT(A) that interest received from the sister concern exceeded interest paid. The ld CIT(A) analyzed ledger extracts and cash flow statements. It was found that the investment in the sister concern was from money received on LC discounting, on which interest was paid. The ld CIT(A) directed to disallow Rs.2,41,611 out of the total disallowed amount. The department contended that the ld CIT(A) considered additional evidence without following Rule 46A of the I.T. Rules, leading to the matter being restored to the AO for fresh assessment.

Issue 2: Admission of fresh evidence without allowing AO to examine under Rule 46A of I.T. Rules, 1962:
The departmental representative argued that the ld CIT(A) admitted additional evidence without giving the AO a chance to review it, violating Rule 46A of the I.T. Rules, 1962. The department requested the matter to be sent back to the AO. The counsel for the assessee acknowledged the submission of additional evidence before the ld CIT(A). The Tribunal found that the ld CIT(A) admitted extra evidence without providing the AO an opportunity to respond, leading to setting aside the ld CIT(A)'s order and remanding the case to the AO for a fresh decision based on the evidence provided by the assessee, ensuring a fair hearing process. The department's appeal was allowed for statistical purposes, resulting in the appeal being allowed.

In conclusion, the judgment addressed the issues of disallowance of interest under section 36(1)(iii) and the admission of fresh evidence without allowing the AO to examine it properly. The Tribunal emphasized the importance of following procedural rules and ensuring a fair opportunity for both parties in the assessment process, ultimately leading to the matter being remanded to the AO for a fresh decision.