2018 (5) TMI 2061 - AT - Income Tax

Interest income under the head other sources and claimed the interest paid under section 57 - Non-representation before the Ld.CIT(A) by assessee - HELD THAT - The assessee have not represented its case before the Ld.CIT(A). The reason for non-representation before the Ld.CIT(A) has been clarified by the Ld.AR stating that the Managing Director of the assessees company was in substantial problems which had resulted in him not being able to give adequate attention. Considering the fact that all the details in respect of the issue have not been considered by the AO and the fact that the assessee have not represented before the Ld.CIT(A) by restoring the issue to the file of the Ld.CIT(A), it would not serve any purpose in so far as any evidence produced before the Ld.CIT(A) on this issue would have to be sent to the AO for his Remand Report - we are of the view that the issue in this appeal is liable to be restored to the file of the AO for re-adjudication. AO is to verify whether the loan has actually been taken from the holding company and whether the interest has been paid to such holding company. If the loan has been taken by the assessees from any source and the assessees have paid interest on such loans taken clearly, if the assessees have used such loans for the purpose of giving further loans then the interest paid is liable to be allowed and it is only the net of the interest which is liable to be assessed as the income of the assessees. Appeals filed by the assessee are partly allowed for statistical purposes.

Summary

Issues:
Delay in filing appeals, disallowance of interest expenditure under section 57 of the Income Tax Act, levy of interest under section 234B of the Income Tax Act.

Analysis:
The appeals were filed by the assessee against the Order of Commissioner of Income Tax (Appeals) for different assessment years. The delay in filing the appeals was condoned as the Revenue did not raise any serious objection. The appeals were disposed of on merits as the issues in both appeals were identical. The main grounds raised by the assessees included challenging the order of the Commissioner of Income Tax (Appeals) as wrong and illegal, particularly regarding the disallowance of interest expenditure under section 57 of the Income Tax Act and the levy of interest under section 234B.

The assessees, involved in construction activities, had taken loans from sister concerns and paid interest on those loans. The assessees then lent the funds to their sister concerns, resulting in interest income. The assessees had netted off the interest received against the interest payments in their returns. However, the Assessing Officer (AO) disallowed the claim of interest expenditure, stating it was not wholly or exclusively for earning income. The AO brought the interest expenditure under the head of income from other sources, leading to a dispute. The assessees argued that the interest expenditure should be allowed under section 57(iii) as it was for the purpose of earning interest income.

The AO's contention was that the assessees did not prove the interest expenditure was solely for earning income. The assessees' loans from sister concerns were undisputed, but the AO questioned whether the interest payments were wholly for earning income. The assessees argued that the interest payments should be allowed against interest income earned, reducing the business income and resulting in a set-off. The dispute led to the issue being restored to the AO for re-adjudication to verify loan details, interest payments, and compliance with the company's Memorandum and Articles of Association.

The Tribunal found that the assessees did not represent their case adequately before the Commissioner of Income Tax (Appeals), leading to the issue being restored to the AO for re-adjudication. The AO was directed to verify loan details, interest payments, and the company's authority to give loans. The appeals were partly allowed for statistical purposes, emphasizing the need for proper representation and verification of facts before tax authorities.