2022 (5) TMI 512 - AT - Income Tax

Disallowance of loss - AO disallowed current year s entire loss and he has not given set off of loss of the current year from the other heads of income - assessee had not filed original return u/s.139(1) and also failed to file the return of income in response to notice u/s.153A within the due date specified , the loss declared by the assessee is not allowable and accordingly, he disallowed the same - assessee submitted that current year s loss has not been carried forward to the next year and only the assessee has set off the current year s loss from the other heads of income, which are allowed as per the provisions of the Act. Under Chapter VI, under the head, the assessee can set off, or carry forward and set off of loss as per section 70, 71, 71A, 71B, 72, 72A, 72AA, 72AB, 73, 73A, 74, 74A, 75, 78 79 - HELD THAT - We make it clear that the assessee can set off of current year s loss from other heads of income and assessee is not eligible to carry forward the balance loss of the current year for the reason that it did not file return of income within the due date of filing of return of income as mentioned in the notice dated 10/11/2014 issued u/s 153A of the Act. We find that the submissions made by both the sides are contrary In nature and, therefore, we deem fit and proper to restore this issue back to the file of the AO with a direction to find out or verify the exact claim of the set off of loss and carried forward, if any, and decide the issue in accordance with law and on merits after providing opportunity of hearing to assessee. Thus, this ground raised by the revenue is treated as allowed for statistical purposes. Addition on account of interest attributable to the debit balance of the partners - partners had withdrawn huge funds from the firm but no interest was charged on these drawings. Thus, according to AO, the interest bearing funds were diverted/misutilised by the partners in the form of interest free drawings - HELD THAT - On perusal of the balance sheet, it clearly shows that the assessee s capital account is showing debit balance and further observed that no interest has been charged by the assessee on the debit balance of the partner s capital account whereas the assessee is paying interest on loans. We observe that both the parties were unable to establish that the interest bearing funds were given to the partners by the assessee and also unable to substantiate that there was direct nexus between the interest bearing loans were given to partners. In view of these observations and considering the totality of the facts and circumstances of the case, we restore this issue to the file of the AO with a direction to examine whether the assessee has given interest bearing loans to the partners and thereafter decide the issue in accordance with law after providing opportunity of being heard to assessee. The assessee is directed to substantiate its claim that no interest bearing funds were utilized by the partners before the AO. Thus, the grounds raised on this issue are treated as allowed for statistical purposes.

Issues Involved:
1. Deletion of addition made towards disallowance of loss due to late filing of return.
2. Deletion of addition made on account of interest attributable to the debit balance of the partners.
3. Failure to furnish a fund flow statement showing interest-free advances for partners' withdrawals.
4. Assessment of total funds available versus partners' debit balance.
5. Proportional disallowance of interest attributable to the debit balance of the partners.

Detailed Analysis:

1. Deletion of Addition Made Towards Disallowance of Loss:
The primary issue was whether the CIT(A) was correct in deleting the addition made towards the disallowance of loss when the assessee did not file the return of income under section 139(1) and filed the return under section 153A beyond the allowed time. The AO disallowed the loss of Rs. 2,70,07,786/- declared by the assessee, citing non-compliance with section 139(3) of the Act. The CIT(A) deleted this disallowance, stating that the return filed in response to notice under section 153A was considered valid by the AO, and the books of accounts were not rejected. The ITAT observed that while the loss for the current year cannot be carried forward due to late filing, the assessee is entitled to set off the current year's loss against other heads of income. The issue was remanded to the AO to verify the exact claim of set off and carried forward, if any, and decide in accordance with the law.

2. Deletion of Addition Made on Account of Interest Attributable to the Debit Balance of the Partners:
The AO disallowed the interest expenditure of Rs. 83,71,583/- claimed by the assessee, stating that the partners had withdrawn huge funds without being charged interest, suggesting that interest-bearing funds were misutilized. The CIT(A) deleted this disallowance, noting that the direct connection between the interest-bearing funds and the partners' withdrawals was not established. The ITAT restored the issue to the AO to examine whether the assessee had given interest-bearing loans to the partners and decide accordingly after providing an opportunity for hearing.

3. Failure to Furnish a Fund Flow Statement:
The AO noted that the assessee did not furnish any fund flow statement to show that the partners' withdrawals were made out of interest-free advances available. The ITAT did not provide a separate analysis for this issue but implied that the AO should verify the exact nature of funds used by the partners during the remand proceedings.

4. Assessment of Total Funds Available Versus Partners' Debit Balance:
The AO observed that the total funds available with the assessee were Rs. 197.19 crores against the partners' debit balance of Rs. 138.09 crores. The CIT(A) found that the assessee had received huge interest-free advances, and the direct connection between the interest-bearing loans and the partners' withdrawals was not established. The ITAT directed the AO to re-examine this aspect during the remand proceedings.

5. Proportional Disallowance of Interest:
The AO suggested that, without prejudice to the other grounds, the interest attributable to the partners' debit balance should be disallowed proportionally to the total fund (interest-free and interest-bearing) to the total debit balance of the partners. The ITAT did not explicitly address this suggestion but directed the AO to verify the exact nature of the funds and decide accordingly.

Conclusion:
Both appeals of the revenue were allowed for statistical purposes, with directions to the AO to verify the exact claims of set off and carried forward losses and the nature of funds used by the partners, and to decide the issues in accordance with the law after providing an opportunity for hearing to the assessee.

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