2020 (6) TMI 48 - AT - Income Tax

Disallowance of interest expenses u/s.36(1)(iii) on the ground that it was not incurred for business purposes - A plea of Rule of consistency has been raised to submit that since the assessee fulfilled the conditions laid down in Sec.36(1)(iii), entire interest-disallowance including suo-moto disallowance made by the assessee, was to be deleted - HELD THAT - Correct facts need to be ascertained and brought on record in view of our observations - we are left with no option but to set-aside the impugned order and remit the issue back to the file of Ld.AO for adjudication de-novo. The Ld. AO is directed to reappreciate assessee s claim in the light of our observations. The assessee, in turn, is directed to substantiate its claim. All the issues are kept open. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Coordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.
2. Additional ground of appeal regarding the disallowance of interest amounting to ?27,50,62,799/-.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii):

The primary issue in the appeal was the disallowance of interest expenses amounting to ?5,01,43,016/- under Section 36(1)(iii) of the Income Tax Act. The assessee, a corporate entity engaged in real estate development, was assessed for the AY 2011-12, where the income was determined at ?20.81 Lacs after the disallowance of ?501.43 Lacs as against a returned loss of ?480.62 Lacs. The assessee issued secured, non-marketable, non-transferable debentures aggregating to ?1618 Crores to its holding company, and the interest and finance charges netted to ?1633.57 Lacs.

The Assessing Officer (AO) noted that the assessee did not engage in any real estate projects during the year and primarily acted as a middleman in advancing loans to group concerns. Consequently, the AO disallowed the interest expenditure, asserting that the assessee could not establish the business expediency or need for such financial expenses, leading to accumulated business losses. The AO concluded that part of the interest expenditure funded these losses and disallowed ?3252.05 Lacs, comprising net interest expenditure and miscellaneous expenditure written-off.

2. Additional Ground of Appeal:

The assessee raised an additional ground of appeal, arguing that the disallowance of ?27,50,62,799/- suo moto made by the appellant was not required as per the provisions of the Income Tax Act and should be allowable under Section 36(1)(iii)/37(1). The assessee contended that similar methodology for disallowance was accepted by the revenue in earlier and subsequent years, invoking the rule of consistency. The assessee also argued that the investments in subsidiary companies were for business purposes, thus qualifying the interest expenditure for deduction.

Proceedings and Findings:

During the assessment proceedings, the AO observed that the assessee reflected a loss of ?3229.45 Lacs in its Profit & Loss Account, with significant expenditures including interest and finance charges. The assessee claimed interest income of ?42911.89 Lacs against total interest expenditure of ?44545.46 Lacs, resulting in a net interest expenditure of ?1633.57 Lacs. The AO disallowed this expenditure, reasoning that the assessee did not carry out any business activity and merely acted as a conduit for advancing loans to group concerns.

On appeal, the CIT(A) upheld the AO's decision, noting that the assessee diverted debenture proceeds towards interest-free investments in sister concerns. The CIT(A) observed that even applying a simple interest of 12% on these investments would result in a higher disallowance than what the AO determined.

Tribunal's Decision:

Upon careful consideration, the Tribunal found that the correct facts needed to be ascertained and brought on record. The Tribunal noted inconsistencies in the assessee's submissions during assessment and appellate proceedings, leading to a lack of clarity on the factual matrix. Consequently, the Tribunal set aside the impugned order and remitted the issue back to the AO for de novo adjudication, directing the AO to reappreciate the assessee's claim in light of the observations made.

Conclusion:

The appeal was allowed for statistical purposes, with the Tribunal emphasizing the need for a thorough re-evaluation of the facts by the AO. The Tribunal also addressed the delay in pronouncement due to the COVID-19 pandemic, citing exceptional and extraordinary circumstances that warranted exclusion of the lockdown period for computing the limitation period under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963. The order was pronounced under Rule 34(4) by placing the details on the notice board.

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