2025 (1) TMI 752 - AT - Income Tax

Disallowance of interest expenditure in respect of assessee s minor son - assessee in her return of income had also accounted for income of her minor son under the provisions of section 64(1A) - HELD THAT - The income of minor child of assessee is clubbed with the assessee u/s. 64(1A). The minor child has earned interest income which was offered to tax. Purportedly, there was some payment of interest by the minor child as well on loans taken. Assessee in computation of income claimed interest expenditure against the interest income of the minor child. AO and CIT(A) disallowed the claim of interest expenditure as the assessee failed to substantiate that the interest expenditure was related to the loans allegedly taken by the minor child. We observe, that findings of the AO on this issue are cryptic. AO has failed to conduct proper inquiry regarding alleged loans taken by the minor child. CIT(A) has also passed the impugned order on the basis of shallow assessment order. Therefore, we deem it appropriate to restore this issue back to the file of AO for fresh adjudication. Appeal of the assessee is allowed for statistical purpose.

1. ISSUES PRESENTED and CONSIDERED

The core legal question in this judgment is whether the disallowance of interest expenditure claimed by the assessee in relation to her minor son's income is justified under the provisions of the Income Tax Act, 1961. Specifically, the issue revolves around the applicability and interpretation of Section 64(1A) of the Act, which pertains to the clubbing of a minor's income with that of the parent, and whether the interest expenditure claimed can be netted against the interest income earned by the minor.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The relevant legal framework involves Section 64(1A) of the Income Tax Act, 1961, which mandates that the income of a minor child is to be included in the total income of the parent. The issue at hand is whether the interest expenditure incurred by the minor can be deducted from the interest income for tax purposes.

Court's Interpretation and Reasoning

The court noted that the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the interest expenditure claimed by the assessee on the grounds that the assessee failed to substantiate that the interest expenditure was related to the loans allegedly taken by the minor child. The court found the AO's findings to be cryptic and lacking a proper inquiry into the loans taken by the minor child. The CIT(A) upheld the AO's decision without a thorough examination of the facts and submissions.

Key Evidence and Findings

The court observed that the assessee had claimed netting of interest income and interest expenditure in respect of her minor child, which was disallowed by the AO and the CIT(A). The department's representative argued that the assessee failed to provide sufficient details about the borrowings and the nature of advances received by the minor son. The court found that there was no material evidence on record to substantiate the assessee's claim.

Application of Law to Facts

The court applied the provisions of Section 64(1A) to the facts of the case, noting that the income of the minor child was clubbed with that of the assessee. However, the court found that the AO did not conduct a thorough inquiry into the relationship between the loans taken and the interest expenditure claimed. As a result, the court deemed it appropriate to remand the issue back to the AO for a fresh adjudication.

Treatment of Competing Arguments

The court considered the arguments from both sides. The assessee's counsel argued for the netting of interest income and expenditure, while the department's representative emphasized the lack of evidence linking the expenditure to the minor's income. The court found merit in the need for a detailed examination of the facts and evidence, which was not adequately done by the lower authorities.

Conclusions

The court concluded that the issue should be remanded back to the AO for fresh adjudication, allowing the assessee an opportunity to furnish relevant documents and submissions. The AO is directed to conduct a proper inquiry and provide a reasonable opportunity for the assessee to make submissions before deciding the issue in accordance with the law.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

"The AO has failed to conduct proper inquiry regarding alleged loans taken by the minor child. The CIT(A) has also passed the impugned order on the basis of shallow assessment order."

Core Principles Established

The judgment emphasizes the necessity of a thorough and detailed inquiry by tax authorities when disallowing claims related to interest expenditure. It underscores the importance of substantiating claims with adequate evidence and providing taxpayers with a fair opportunity to present their case.

Final Determinations on Each Issue

The court decided to remand the issue back to the AO for fresh adjudication, allowing the assessee to present further evidence and submissions. The appeal was allowed for statistical purposes, indicating that the substantive issue remains open for determination upon further examination by the AO.

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