2023 (1) TMI 162 - AT - Income Tax

Disallowance of interest expenses - AO disallowed interest expenses on the ground that assessee did not respond to the query raised by him as to why the proportionate interest income on advance to M/s. Musaddilal Holdings Pvt.Ltd. has not been offered to tax - CIT(A) partly sustained the action of the AO - HELD THAT - It is the submission of assessee that when he has filed the requisite details before the completion of the assessment on 28.05.2021 and the assessment order was passed on 27.05.2021, therefore, the observation of the AO that assessee has not filed the requisite details is incorrect and the CIT(A) also is incorrect in stating that the assessee has not filed any reply before the AO. It is also the submission of the ld.counsel for the assessee that given an opportunity, the assessee is in a position to substantiate with evidence to the satisfaction of the AO that it has got sufficient funds to advance the amount for business exigency and therefore, no disallowance can be made under the provisions of law. We deem it proper to restore the issue to the file of the AO with a direction to examine the details already filed by the assessee vide letter and decide the issue as per fact and law after giving due opportunity of being heard to the assessee. Grounds raised by the assessee are accordingly allowed for statistical purposes.

Summary

Issues:
1. Disallowance of interest expenses on loans given to related parties.
2. Opportunity to present the case under section 36(1)(iii) not provided by lower authorities.

Issue 1: Disallowance of Interest Expenses on Loans Given to Related Parties
The appeal was against the order of the Learned Commissioner of Income Tax (Appeals)-11, Hyderabad for the assessment year 2018-19. The Assessing Officer (AO) disallowed interest expenses of Rs.21,37,677/- as the assessee did not offer proportionate interest income on an advance to a related party for taxation. The AO issued a show-cause notice, but the assessee allegedly did not respond. The CIT(A) partly upheld the disallowance, stating the assessee failed to establish the business exigency for giving the loan and the source of funds. The appellant argued that sufficient details were provided, and the matter should be reconsidered. The Tribunal found discrepancies in the lower authorities' observations and directed the AO to re-examine the details submitted by the assessee and decide the issue after providing a proper opportunity for explanation. The Tribunal allowed the appeal for statistical purposes, emphasizing the importance of substantiating claims with evidence and providing a fair chance for the assessee to present their case.

Issue 2: Opportunity to Present the Case under Section 36(1)(iii)
The appellant contended that neither the CIT(A) nor the AO allowed the opportunity to present the case under section 36(1)(iii), alleging a violation of natural justice principles. The Tribunal did not directly address this specific issue in its analysis of the case. However, the Tribunal's decision to remand the matter back to the AO for re-examination can be seen as a step towards providing the assessee with a fair opportunity to present their case under the relevant section. By directing the AO to consider the details already submitted and decide the issue based on fact and law after giving the assessee a chance to be heard, the Tribunal indirectly addressed the concern raised by the appellant regarding the opportunity to present the case under section 36(1)(iii).

In conclusion, the Tribunal's judgment focused on the disallowance of interest expenses on loans given to related parties and the need to provide a fair opportunity for the assessee to present their case effectively. The decision highlighted the importance of substantiating claims with evidence and ensuring a thorough examination of the facts before making any disallowances.