2021 (3) TMI 1095 - AT - Income Tax

Disallowance of interest paid to M/s GNIDA - AO disallowed the penal interest paid by the assessee on account of default in payment of installments to GNOIDA because Interest was not allowable as it was not on borrowed fund, As per the agreement there was no requirement to pay interest and No interest payment was allowable on acquiring a capital asset i.e. the lease rights of the land - CIT-A deleted the addition only on the ground that since the interest payment is not for violation of law or for the commission of an act purpose of which is an offence as contemplated in explanation 1 of Section 37(1) - HELD THAT - CIT (A) has not adjudicated on the ground nos. 9 to 12 in the appeal filed before him for which the revenue filed appeal before us. The main contention of the revenue is that the addition needs to be examined broadly in the light of allowability of the interest in acquiring the lease rights on the land but not narrowly on the issue, whether such interest is penal in nature or not. Since, the ld. CIT (A) has not adjudicated on the core of the issue, we hold that the interest of justice would be well served by remanding the matter to the file of the ld. CIT (A) to adjudicate on the grounds unadjudicated. Appeal of the revenue allowed for statistical purpose.

Summary

Issues: Appeal against deletion of addition of interest paid to M/s GNIDA by the assessee.

Analysis:
1. The revenue contended that the CIT(A) erred in law and on facts in deleting the addition of interest paid to M/s GNIDA, as the grounds for the addition were not adjudicated upon. The CIT(A) based the deletion on the premise that the interest payment was not for the violation of law or for the commission of an offense as per Section 37(1) of the IT Act, 1961.

2. The AO disallowed the interest paid by the assessee on the grounds that it was not on borrowed funds, there was no requirement to pay interest as per the agreement, and no interest payment was allowable on acquiring a capital asset, i.e., the lease rights of the land. The assessee challenged these grounds before the CIT(A) by arguing that the interest payment was necessary business expenditure, fully allowable, and the leasehold rights in land were stock-in-trade for real estate development business.

3. The CIT(A) deleted the addition, emphasizing that the interest payment was compensatory in nature and not for the infringement of law. The CIT(A) referred to case laws to support the decision. However, it was noted that the CIT(A) did not adjudicate on certain grounds raised by the assessee. Therefore, the matter was remanded back to the CIT(A) for further adjudication on the unaddressed grounds.

4. The Tribunal held that the interest in acquiring lease rights needed to be examined broadly, focusing on its allowability, rather than narrowly on whether it was penal in nature. As the CIT(A) did not fully address the core issue, the matter was sent back for proper adjudication. Consequently, the appeal of the revenue was allowed for statistical purposes.

This detailed analysis outlines the key arguments, decisions, and the rationale behind the judgment, providing a comprehensive understanding of the legal issues involved in the case.