2016 (6) TMI 420 - AT - Income Tax

Disallowance of interest - AO disallowed the claim on the ground that the assessee had more than enough interest free funds, i.e. to the tune of ₹ 128.84 crores at its disposal whereas the ICD given to M/s. Kinetic Engineering was amounting to ₹ 30 crores only - Held that - The assessee has not used the ICD from M/s. Jaya Hind Sciaky Ltd. for the purpose of its own business and the assessee could not establish the nexus of interest income with that of the interest expenditure. We find the CIT(A) rejecting the additional evidence filed before him upheld the action of the AO. The reasons given by CIT(A) have already been reproduced in the preceding paragraphs. As submitted by the assessee that there is a clear nexus between the ICD taken from M/s. Jaya Hind Sciaky Ltd. and given to M/s. Kinetic Engineering Ltd. which is routed through and reflected in the bank account. Although such evidence was filed during the course of hearing before CIT(A) he has not admitted the same on the ground that there was no prayer for admission of the additional evidence and there is no justifiable reason as to why the same was not filed during the assessment proceedings. Although the assessee has explained that there is direct nexus between the ICD taken from M/s. Jaya Hind Sciaky and given to M/s. Kinetic Engineering Ltd., however, it is a fact that such nexus was not explained properly before the AO and the CIT(A) has not accepted the additional evidence filed before him as mentioned earlier. Thus we deem it proper to restore the matter to the file of the AO with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the nexus of such ICDs taken and loan given and the nexus of interest income and the interest expenditure. - Decided in favour of assessee for statistical purposes.

Summary

Issues: Disallowance of interest expenses

Analysis:

Issue 1: Disallowance of interest expenses
The appeal was against the disallowance of interest amounting to ?70,19,178/- by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO noted that the assessee had interest-free funds of ?128,84,01,051/- available but had borrowed funds and paid interest on an Inter-corporate Deposit (ICD) taken from a sister concern. The AO questioned the business purpose of borrowing funds when interest-free funds were available.

Issue 2: CIT(A) decision
The CIT(A) upheld the AO's decision, stating that the ICD from the sister concern was not used for the business. The CIT(A) also rejected additional evidence submitted by the assessee regarding the nexus between the ICD and interest income. The CIT(A) concluded that there was no merit in the submissions and upheld the disallowance of ?70,19,178/-.

Issue 3: Appellate Tribunal decision
The Appellate Tribunal set aside the CIT(A)'s decision and directed the AO to provide the assessee with another opportunity to explain the nexus between the ICD taken and the interest expenditure. The Tribunal found that although the assessee had presented evidence during the proceedings, the CIT(A) did not admit it due to procedural reasons. The Tribunal emphasized the need for the assessee to substantiate the nexus between the ICDs and interest income/expenditure. The matter was remanded to the AO for fresh consideration.

In conclusion, the appeal was allowed for statistical purposes, and the Tribunal directed the AO to re-examine the issue after giving the assessee a chance to provide further evidence regarding the nexus between the ICD transactions and interest expenses.