2020 (9) TMI 369 - AT - Income Tax

Allowability interest expenditure - Advances to subsidiary companies/sister concern - HELD THAT - Availability of interest-free funds has to be decided after verification of facts of the each year and cannot be allowed merely by following the decisions of the Tribunal in the case of the assessee in earlier years. This issue of availability of interest free funds has not been raised by the assessee before the Assessing Officer during assessment proceedings. As before AO the assessee argued only utilisation of loan funds by the subsidiary companies/sister concern for business purposes and for that too also no documentary evidences were submitted before the Assessing Officer. Before the Ld. CIT(A), the assessee did not appear and not filed any submissions. The argument of availability of interest free funds and giving of loans to subsidiary companies/sister concern out of such interest-free funds, has been raised for the first time before us, therefore in the interest of natural justice, we feel it appropriate to restore this issue back to the file of AO for deciding afresh in accordance with law after providing adequate opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act.
2. Violation of principles of natural justice in passing the order without giving the assessee a proper opportunity to be heard.

Issue 1: Disallowance of interest under section 36(1)(iii) of the Income Tax Act:
The appellant contested the disallowance of an amount of ?11,49,085 made by the Assessing Officer (AO) on account of interest under section 36(1)(iii) of the Act. The AO observed discrepancies in the treatment of interest in the profit and loss account and the computation of income. The AO disallowed the claim as it was not supported by a revised return of income. Additionally, the AO noted that the assessee had provided interest-free advances to related parties while paying interest on borrowed capital. The AO relied on the decision of the Hon'ble Allahabad High Court in a similar case and disallowed the interest expenditure. The assessee's appeal before the Learned CIT(A) was upheld as the assessee failed to provide evidence of having interest-free funds available and their utilization for business purposes. The Tribunal acknowledged the assessee's argument that sufficient own funds were available for the interest-free advances but noted that this aspect was not raised before the lower authorities. Consequently, the issue was remanded back to the Assessing Officer for fresh consideration, emphasizing the need for documentary evidence to support the claim.

Issue 2: Violation of principles of natural justice:
The appellant raised concerns about the violation of principles of natural justice, alleging that the order passed by the Learned CIT(A) was both legally and factually flawed. The appellant argued that they were not given a proper and adequate opportunity to be heard during the assessment proceedings. Despite the appellant's contentions, the Learned CIT(A) upheld the disallowance without any submissions from the appellant. The Tribunal recognized the appellant's argument regarding the availability of interest-free funds and their utilization for business purposes, which was raised for the first time during the Tribunal proceedings. In the interest of natural justice, the Tribunal decided to remand the issue back to the Assessing Officer for a fresh decision in accordance with the law, providing the appellant with an opportunity to present their case adequately.

In conclusion, the Tribunal allowed the appeal of the assessee for statistical purposes, remanding the issues back to the Assessing Officer for a fresh determination, emphasizing the importance of providing documentary evidence to support claims and ensuring the principles of natural justice are upheld throughout the assessment process.