2014 (5) TMI 276 - AT - Income Tax

Tribunal emphasizes reasoned orders & natural justice, remands cases for fresh adjudication. Consider funds utilization & commercial expediency.

The Tribunal remanded both cases back to the First Appeal Authority for fresh adjudication, emphasizing the necessity of reasoned orders and adherence to ... Disallowance of interest – Return of income declaring loss – Held that:- Following SA BUILDERS LTD. Versus COMMISSIONER OF INCOME-TAX [2006 (12) TMI 82 - SUPREME COURT] - The expression “commercial expediency” is one of wide importance and includes such expenditure as a prudent businessman it incurs for the purpose of business - The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency - an order without reasons is as good as no order - the issue of non-interest bearing fund and interest bearing fund had no relevance to decide the tax liability of the assessee - the FAA does not reveal the reasons for upholding the order of the AO – thus, the matter is remitted back to the FAA for fresh adjudication – Decided in favour of Assessee. Issues Involved:1. Disallowance of interest expenditure for AY 1997-98.2. Disallowance of interest expenditure for AY 2001-02.Issue 1: Disallowance of Interest Expenditure for AY 1997-98The core issue pertains to the disallowance of interest expenditure amounting to Rs. 9,23,148/-. The assessee-company declared a net loss of Rs. 30,05,061/- in its return of income. The Assessing Officer (AO) disallowed the interest expenditure and discounting charges, arguing that the interest-bearing funds were used for advancing interest-free loans to Indian Express Newspapers Ltd. (IENL), which was unrelated to the assessee's business. This disallowance was upheld by the First Appeal Authority (FAA).Upon appeal, the Tribunal initially restored the matter to the FAA to determine the nexus between interest-bearing and non-interest-bearing funds. The FAA allowed Rs. 10,71,038/- as deduction and disallowed Rs. 9,23,143/-. Both parties appealed, and the Tribunal directed the AO to re-examine the facts in light of the Supreme Court's decision in S.A. Builders, which emphasized 'commercial expediency' in such transactions.The AO, upon re-examination, maintained the disallowance, stating that the loans were not given under commercial expediency and that the borrowed funds were directly provided to IENL by HDFC, with the assessee merely being a confirming party. The FAA upheld this view without providing detailed reasoning.The Tribunal found that the FAA did not adhere to its directions to consider the utilization of funds and the commercial expediency aspect. It emphasized that judicial decisions must provide reasons, quoting several precedents that highlight the necessity of reasoned orders. Consequently, the Tribunal remanded the matter back to the FAA for fresh adjudication, directing a reasoned and speaking order.Issue 2: Disallowance of Interest Expenditure for AY 2001-02For AY 2001-02, the assessee declared a loss of Rs. 1.88 Crores, including interest payment to HDFC amounting to Rs. 1.59 Crores. The AO disallowed this interest, stating that interest-bearing funds were used for advancing interest-free loans, similar to the previous assessment year. The FAA dismissed the appeal, following the order for AY 1997-98.The Tribunal, consistent with its decision for AY 1997-98, restored the matter to the FAA for fresh adjudication. The appeal for AY 2001-02 was allowed in part, with the same directions for a reasoned and speaking order.Conclusion:The Tribunal emphasized the importance of providing reasons in judicial orders and remanded both matters back to the FAA for fresh adjudication, directing the FAA to pass reasoned and speaking orders in line with the Tribunal's directions and the principles of natural justice. Appeals for both assessment years were partly allowed.