Income Tax Act, 1961 – Section 143(3) – Assessment of income – Disallowance of interest expenses – Appellant/assessee filed its return of income for AY 2018-19 – Assessing Officer completed assessment under Section 143(3) of the Act by determining total income of assessee after making addition on account of disallowance of interest expenses – CIT(A) affirmed order of AO – Whether CIT(A) has erred in confirming addition made by AO on account of disallowance of interest paid on loans given to related parties – HELD – AO disallowed interest expenses on ground that assessee did not respond to query raised by him as to why proportionate interest income on advance given to Musaddilal Holdings Pvt. Ltd. has not been offered to tax – When assessee has filed requisite details before completion of assessment, observation of AO that assessee has not filed requisite details is incorrect – Submission of assessee is that if an opportunity is given, assessee is in a position to substantiate with evidence to satisfaction of AO that it has got sufficient funds to advance amount for business exigency and therefore, no disallowance can be made under provisions of law – Considering the totality of facts of case and in interest of justice, issue restored to file of AO with a direction to examine details already filed by assessee and decide issue as per fact and law after giving due opportunity of being heard to assessee – Appeal is allowed
2022-VIL-1641-ITAT-HYD
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD ‘A’ BENCH, HYDERABAD
ITA No.216/Hyd/2022
Assessment Year: 2018-19
Date of hearing: 14.12.2022
Date of pronouncement: 19.12.2022
EGWOOD BOARDS AND PANELS PVT.LTD
Vs
ACIT
Assessee by: Shri Sunil Kumar Jain, CA
Revenue by: Shri M.Murali Mohan, Sr.AR
BENCH
SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER
SHRI LALIET KUMAR, JUDICIAL MEMBER
ORDER
Per Shri Rama Kanta Panda, A.M.
This appeal filed by the assessee is directed against the order dated 25.03.2022 of the Learned Commissioner of Income Tax (Appeals)-11, Hyderabad relating to AY 2018-19.
2. Facts of the case, in brief, are that the assessee is a domestic private company and filed its return of income on 29.09.2019 declaring total income of Rs.24,69,380/-. The same was processed by the CPC u/s. 143(1) on 01.10.2019 determining the total income at Rs.28,85,060/-. Subsequently, the case was selected for scrutiny under CASS and statutory notices u/s. 143(2) and 142(1) were issued to the assessee. The assessee filed the requisite details from time to time and thereafter the AO completed the assessment determining the total income at Rs.56,20,370/- wherein he made addition of Rs.5,97,633/- towards Duty Draw Back received and Rs.21,37,677/- by disallowed the interest expenses.
3. So far as the disallowance of interest expenses is concerned, which is the issue before us, the AO noted that assessee has advanced an amount of Rs.3,19,92,978/- to M/s. Musadilal Holdings Pvt. Ltd. However, the corresponding interest income has not been offered to tax. He, therefore, asked the assessee on 10.05.2021 to explain as to why the proportionate interest expenses should not be disallowed. According to the AO, the assessee did not file any reply to the show-cause letter. In view of the above, the AO disallowed an amount of Rs.21,37,677/- being proportionate interest @12% on the advance of Rs.3,19,92,978/-.
4. In appeal, the ld. CIT (A) gave part relief to the assessee by observing as under:-
In the instant case, the assessment was completed u/s 143(3) by disallowing interest expenditure of Rs.21 ,37,677/- on account of being interest paid on loans given to related parties and addition of Rs.5,97,633/- received towards duty drawback.
With regard to duty drawback, the appellant stated that no duty drawback has been received on the export sales in the current financial year and that the duty draw back income has already been considered in the previous years. The appellant stated that the outstanding of the earlier year has been received in this year and the same has been accounted for as income in the earlier years. This being a factual matter, the appellant is directed to file relevant ledgers of duty drawback indicating the accounting of the same as income and that the outstanding of the earlier year has been received. The Assessing Officer is directed to consider the ledgers on a prima facie basis and delete the addition, if the same has been accounted in the earlier year and the present year being mere receipt of such outstanding. In view of the same, the ground no.1 is partly allowed subject to the directions given.
With regard to addition on account of interest expenses, the appellant stated that the loan was advanced to M/s Musaddilal Holding Pvt Ltd for furtherance of business and that no disallowance can be made when there is no exempt income. The case laws relied upon by the appellant arc on different facts and circumstances and thus cannot be applied to the appellant's present case.
It is to be noted that the appellant did not establish the business exigency for giving loan but merely making a statement in this regard. Further, the appellant did not establish that the loans were given out of existing reserves and surplus. The appellant needs to file a bank statement reflecting that the funds have not been advanced out of borrowings which it has failed to do so. Further, in the case laws relied upon, there is no blanket allowance of interest just because it is advanced to a sister concern, the appellant has to justify the business exigency and the business purpose for the same, This is not a disallowance u/s 14A for it to be invoked to the extent of exempt income asper judicial decisions, this being a dis allowance u/s 36(1)(iii) both the nexus of advance with free reserves through a bank merit and not a summary of affairs and the business exigency needs to established. The appellant docs not wish to file any evidences in support of contentions but for merely making statements. Further, the appellant in its submission has requested to dispose the appeal based on the facts submitted and from the same, it is clear that the appellant does not want to establish the facts with documentary evidence and also the same was the situation before the Assessing Officer.
In view of the above discussion, it is held that the appellant has nothing to establish regarding the business exigency for giving the loan and also the sources of the loan and in view of the same, it is held that giving interest free loans to related parties cannot be allowed and the disallowance of interest expenses at Rs.21,37,677/- is upheld and the ground no.2 is dismissed accordingly.
5. Aggrieved with such order of the ld. CIT (A), the assessee is in appeal before the Tribunal by raising the following grounds
1. The CIT (Appeals) has wrongly upheld the addition made by the learned assessing officer, i.e., disallowing interest paid on loans amounting to Rs.21,37,677 /- (calculated @ 12% p.a.) and added the same to the returned income.
2. The learned assessing officer has contended that a show cause notice was issued to the assessee on 10.05.2021 for which the assessee has not filed any reply. The CIT (Appeals) has wrongly upheld the contention of the learned assessing officer.
3. Neither the CIT (Appeals) nor the learned assessing officer has provided the opportunity to present the case u/s 36(1) (iii) which is in violation of principles of natural justice.
4. For that, your petitioner craves the right to put additional grounds at the time of appeal.
6. The ld. counsel for the assessee drew the attention of the Bench to the reply given by the assessee on 25.05.2021, which was uploaded. He submitted that despite the detailed reply given by the assessee, the AO stated that assessee has not filed any reply and the ld. CIT (A) also without going through the submissions made before the AO gave only part relief to the assessee. He submitted that since the assessee had given full details before the AO, therefore, the submissions of the assessee should be considered and the proportionate disallowance of interest should be deleted. In his alternate contention, the ld.counsel for the assessee submitted that the matter may be restored to the file of the AO for adjudication of the issue afresh after going through the details already submitted.
7. The ld. DR on the other hand, heavily relied on the orders of the AO and the ld. CIT (A). He, however conceded that since the reply of the assessee was not considered by the lower authorities, therefore, he has no objection, if the matter is restored to the file of the ld. CIT (A).
8. We have heard the rival arguments made by both the sides, perused the orders of the AO and ld. CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case disallowed interest expenses of Rs.21,37,677/- on the ground that assessee did not respond to the query raised by him as to why the proportionate interest income on advance of Rs.3,19,92,978/- to M/s. Musaddilal Holdings Pvt. Ltd. has not been offered to tax. We find the ld. CIT (A) partly sustained the action of the AO, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the ld. counsel for the 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 ld. 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. Considering the totality of the facts of the case and in the interest of justice, 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 dated 28.05.2021 and decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly, the grounds raised by the assessee are accordingly allowed for statistical purposes.
9. In the result, the appeal filed by the assessee is allowed for statistical purpose.
Order pronounced in the Open Court on 19th December, 2022.
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