2021 (10) TMI 559 - AT - Income Tax

Disallowance u/s.36(1)(ii) of interest expenditure on loans availed - As pleaded that AO has failed to consider that assessee has incurred expenditure on account of interest on various loans that assessee has made advance loans to directors and sister concerns received for business purpose and out of that advances they have earned interest income - HELD THAT - We note that AO in the assessment order has opined that assessee has incurred abnormally high expenditure as compared to income declared. This is an abstract observation without any figures given for comparison - As mentioned that similar interest on loans taken from the parties were disallowed in earlier years as assessee has failed to prove the nexus between interest expenditure incurred and income earned - AO observed that assessee failed to justify the nexus of interest paid and income earned as there was no business activity during the year. This again is an abstract observation in contrast to the earlier observation that there was income declared by the assessee. AO further mentioned that assessee was asked to explain as to why the entire interest payment should not be disallowed and added. After putting this issue in the order sheet that question was issued to the assessee, there is no mentioned as to whatsoever was the reply of the assessee. The AO simply says that in earlier years the disallowance was done and assessee had not made cogent or convincing explanation, hence the AO disallowed the amount of interest paid to these parties. Thus without any application of mind, the authorities below are passing orders year after year for reason best known to them when assessee has given the necessary details and no disallowance was done in earlier years as noted by the Tribunal. Without any change in facts and circumstances and without any application of mind, the revenue authorities are going on making the additions in abstract manner without bringing on record, cogent material. Such a relinquishment of statutory duties cannot be rewarded by remitting the matter for fresh inning every time. In this view of the matter, in our considered opinion, the orders of the authorities below shows complete lack of application of mind and in the background of aforesaid discussions, we are inclined to set aside the order of the authorities below and decide the issue in favour of the assessee. Admission of fresh claim - ITAT power in admitting fresh claims otherwise that by revised return - HELD THAT - Authorities below have declined to accept the fresh claim of the assessee on the touchstone of Hon ble Supreme Court in the case Goetz( India) Ltd 2006 (3) TMI 75 - SUPREME COURT wherein as held that their decision in that case will not impinge upon the ITAT power in admitting fresh claims otherwise that by revised return. Accordingly, we remit the issue to the file of AO and direct him to examine the factual veracity of assessee s claim and decide the same after giving due opportunities of being heard to the assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure.
2. Rectification of apparent mistakes under Section 154.
3. Disallowance of indexation benefit on capital gains.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The primary issue pertains to the disallowance of ?82,41,006/- claimed as interest expenditure by the assessee. The Assessing Officer (AO) noted that the interest expenditure was abnormally high compared to the income declared and disallowed the claim, citing a lack of nexus between the interest expenditure incurred and income earned. The AO referenced similar disallowances in previous years (A.Y. 2010-11, 2012-13, 2013-14, and 2014-15) where the assessee failed to justify the nexus. The CIT(A) upheld the AO's decision, noting that the assessee did not provide adequate explanations or participate in the proceedings.

Upon appeal, the Tribunal observed that the AO's and CIT(A)'s orders lacked detailed reasoning and failed to consider the assessee's submissions adequately. The Tribunal noted that the ITAT, in the assessee's own case for A.Y. 2010-11, had remanded the matter to the CIT(A) for fresh adjudication after observing that the loans were genuine and interest was allowed in prior years. The Tribunal criticized the abstract observations by the AO and CIT(A) and decided in favor of the assessee, setting aside the disallowance of interest expenditure.

2. Rectification of Apparent Mistakes under Section 154:
The assessee contended that there was an apparent mistake in the assessment order regarding the computation of interest expenditure, which should be rectified under Section 154 of the Income Tax Act. The AO did not respond to the rectification application, and the CIT(A) did not address this issue adequately. The Tribunal noted that the AO's refusal to rectify clear mistakes was unjustified, referencing the case of ACIT vs. Rupam Impex (ITAT Ahmedabad), where it was held that apparent mistakes should be rectified to avoid making Section 154 redundant. The Tribunal found the AO's inaction on the rectification application to be incorrect.

3. Disallowance of Indexation Benefit on Capital Gains:
The AO disallowed the indexation benefit of ?24,76,860/- claimed by the assessee on the sale of Shop No. 1, which was shown under "Profit from Business Income" but also claimed as a capital gain in the computation of income. The AO relied on the Supreme Court decision in Goetze (India) Limited vs. CIT (284 ITR 323), which requires the filing of a revised return for new claims. The CIT(A) upheld the AO's decision, noting the absence of complete facts and proper submissions from the assessee.

The Tribunal acknowledged the Supreme Court's ruling but noted that it does not restrict the ITAT's power to admit fresh claims. Therefore, the Tribunal remitted the issue back to the AO to examine the factual veracity of the assessee's claim for indexation benefit and decide accordingly after providing due opportunities to the assessee.

Conclusion:
The Tribunal partly allowed the appeal, setting aside the disallowance of interest expenditure and remitting the issue of indexation benefit back to the AO for re-examination. The Tribunal criticized the lack of application of mind by the lower authorities and emphasized the need for a detailed and reasoned approach in such matters.