2018 (10) TMI 932 - AT - Income Tax

Disallowance on account of pro-rate interest on loan u/s 36(i)(iii) - Held that - Hon ble Supreme Court in the case of CIT vs. Munjal Sales Corporation 2008 (2) TMI 19 - SUPREME COURT , wherein held that if assessee has huge interest free funds including the profit earned by the assessee during the year which is sufficient to cover the advancement of loan, then no interest should be disallowed. The assessee has demonstrated that the huge amount of money was lying in the capital of the partners and the profit earned during the relevant assessment year itself was approximately ₹ 1.19 crores. Therefore, such an availability of funds interest free is sufficient to cover up a small interest free loan of ₹ 16 lacs given to sister concern. Additions for the business purpose relating to furniture and fixtures and commercial expediencies - Held that - Assessing Officer also ignored the loans and advances given to the sister concern. Therefore, this needs to be verified and therefore, we remand back this issue to the file of the Assessing Officer to adjudicate upon it as per the evidence produced before the Assessing Officer by the assessee. Needless to say, the assessee be given opportunity of hearing by following principals of natural justice. AO as well as the CIT(A) has not taken the cognizance of the evidence produced before the Assessing Officer more particularly that of balance sheet and its profit. Therefore, this issue also needs to be remanded back to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing by following principals of natural justice. Ground No. 4 is partly allowed for statistical purpose.

Summary

Issues involved:
1. Disallowance of deduction under section 80IB for purported export incentives.
2. Disallowance of pro-rata interest on loan under section 36(i)(iii) of the Income Tax Act.
3. Addition of short-term capital gain arising on the sale of land.
4. Violation of principles of natural justice in framing the assessment.

Issue 1: Disallowance of deduction under section 80IB for purported export incentives:
The assessee, a partnership concern, claimed a deduction under section 80IB for purported export incentives received. The Assessing Officer disallowed the claim, stating that the incentives were not profits derived from an industrial undertaking. The CIT (A) upheld this decision. The Tribunal referred to a previous case involving the same issue and dismissed the appeal, citing the decision in the earlier case. Therefore, Ground No. 1 & 2 were dismissed.

Issue 2: Disallowance of pro-rata interest on loan under section 36(i)(iii) of the Income Tax Act:
The Assessing Officer disallowed an amount on account of pro-rata interest on a loan under section 36(i)(iii) of the Act. The assessee argued that the advances made were interest-free and should not have been disallowed. The Tribunal found that the Assessing Officer and the CIT (A) did not consider the business purpose of the advances and loans given to sister concerns. The issue was remanded back to the Assessing Officer for proper adjudication, with the assessee given an opportunity of hearing. Therefore, Ground No. 3 was partly allowed for statistical purposes.

Issue 3: Addition of short-term capital gain arising on the sale of land:
The Assessing Officer made an addition on account of short-term capital gain arising from the sale of land. The assessee contended that the details were not properly verified by the authorities. The Tribunal agreed that the evidence presented, including the balance sheet, needed further examination. The issue was remanded back to the Assessing Officer for proper verification and adjudication, with the assessee granted an opportunity of hearing. Hence, Ground No. 4 was partly allowed for statistical purposes.

Issue 4: Violation of principles of natural justice in framing the assessment:
The assessee raised concerns about the assessment being framed in violation of principles of natural justice and without adequate opportunity of hearing. However, these grounds were considered general in nature and were not pressed by the assessee's representative. As a result, Ground No. 5 & 6 were dismissed.

In conclusion, the appeal of the assessee was partly allowed for statistical purposes, with certain issues being remanded back to the Assessing Officer for proper verification and adjudication, ensuring the principles of natural justice are followed.