2020 (4) TMI 780 - AT - Income Tax

Entitlement for deduction of interest expenditure - deduction of the interest expenditure in respect of the amounts advanced by to 5 parties - HELD THAT - As the amount that was recoverable by the assessee during the year under consideration from the party Aristo Shelters Pvt. Ltd.had no nexus with the interest bearing funds which were borrowed by the assessee from the banks, therefore, on the said count itself no disallowance of any interest expenditure pertaining to the said amount was called for under Sec. 36(1)(iii). Appeal of the assessee is allowed for statistical purposes. As the assessee had advanced the loan to M/s Aristo Shelters Pvt. Ltd. on interest, therefore, no disallowance of any part of the interest expenditure in respect of the said interest bearing advance could have been validly made in the hands of the assessee. As such, we direct the A.O to vacate the disallowance of the interest expenditure. Additional ground before the appellate authorities - Amounts advanced by the assessee to the remaining 4 parties - CIT(A) being of the view that the assessee had in its return of income as well as in the course of the the assessment proceedings claimed deduction of the interest expenditure under Sec.57 (iii) therefore, it was disentitled from raising the claim for deduction of the aforesaid amount under Sec. 36(1)(iii) - HELD THAT - We are unable to persuade ourselves to subscribe to the same - assessee had raised a claim for deduction under Sec. 36(1)(iii), based on the facts which were already available on record, therefore, the CIT(A) was well within his jurisdiction to have adjudicated upon the same. CIT(A) had summarily scrapped the aforesaid claim of the assessee, for the reason, that the same was raised for the very first time before him. See Pruthvi Brokers and Shareholders Pvt. ltd 2012 (7) TMI 158 - BOMBAY HIGH COURT observed that assesses is entitled to raise an additional ground before the appellate authorities not merely in terms of legal submissions, but also additional claims to wit claims which were not made in the return of income filed by it. Accordingly, we are of the considered view that the CIT(A) ought to have considered the assesse‟s claim for deduction of the interest expenditure under Sec.36(1)(iii) of the Act, specifically, when the same was being raised on the basis of the facts which were already available on record - No declining on the part of the CIT(A) to consider the assesse‟s claim for deduction under Sec. 36(1)(iii). Entitlement for deduction of the interest expenditure under Sec. 36(1)(iii) - CIT(A) had summarily rejected the assesse‟s entitlement for claim of deduction under Sec.36(1)(iii), therefore, there was no occasion for him to adjudicate upon the maintainability of such claim on merits. Accordingly, we are of the considered view that in all fairness the matter requires to be restored to the CIT(A), with a direction to verify the assesses entitlement for claim of deduction under Sec. 36(1)(iii) for remaining 4 parties. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest expenses claimed under Section 57(iii) of the Income Tax Act, 1961.
2. Deduction of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961.
3. Procedural fairness in the assessment process.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses Claimed Under Section 57(iii):
The assessee company filed its return of income for A.Y. 2013-14, declaring a total income of ?21,49,860/-. During the assessment, the Assessing Officer (A.O) observed that the assessee had claimed a deduction for interest expenditure amounting to ?2,97,77,635/- against interest income. The A.O noted that the assessee had raised interest-bearing loans totaling ?33,84,87,388/- and had diverted these funds by providing interest-free loans and advances to various companies. Consequently, the A.O restricted the deduction of interest expenditure to ?1,73,70,287/-, correlating to the interest-bearing funds used for earning interest income from fixed deposits. The balance amount of ?1,24,07,347/- was disallowed under Section 57(iii) of the Act.

2. Deduction of Interest Expenses Under Section 36(1)(iii):
The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the interest-bearing funds were either used for business purposes or for advancing interest-bearing loans to third parties. The CIT(A) dismissed this claim, stating that the assessee had initially claimed the deduction under Section 57(iii) and could not now seek deduction under Section 36(1)(iii). The assessee raised additional grounds before the Tribunal, arguing that if the interest expenses were not allowable under Section 57(iii), they should be allowed under Section 36(1)(iii). The Tribunal admitted these additional grounds based on the judgment of the Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC), which allows adjudication of legal issues based on facts available on record.

3. Procedural Fairness in the Assessment Process:
The assessee argued that the CIT(A) did not provide a reasonable and sufficient opportunity to present its case. The Tribunal observed that the CIT(A) had summarily rejected the assessee's claim for deduction under Section 36(1)(iii) without proper consideration. The Tribunal noted that the CIT(A) should have adjudicated the claim based on the facts already available on record, as per the judgment of the Hon'ble High Court of Bombay in CIT Vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom).

Tribunal's Decision:
The Tribunal found merit in the assessee's claim that the interest expenditure related to the amount recoverable from M/s Aristo Shelters Pvt. Ltd. (?72,81,370/-) should not be disallowed, as it had no nexus with the borrowed funds. The Tribunal directed the A.O to vacate the disallowance of interest expenditure in respect of this amount.

Regarding the advances to the remaining four parties, the Tribunal noted that the CIT(A) had not adjudicated the claim on merits. The Tribunal restored the matter to the CIT(A) for fresh adjudication, directing the CIT(A) to verify the assessee's entitlement for deduction under Section 36(1)(iii) concerning the advances to M/s Atiti Builders and Constructors Pvt. Ltd., Ayyappa Developers Pvt. Ltd., Crystal City Mall Pvt. Ltd., and Rikki Ronie Developers. The CIT(A) was instructed to provide a reasonable opportunity of being heard to the assessee.

Conclusion:
The appeal was allowed for statistical purposes, with directions for fresh adjudication by the CIT(A) on the limited aspect of the assessee's entitlement for deduction under Section 36(1)(iii). The order was pronounced in the open court on 20.02.2020.