2010 (12) TMI 1350 - AT - Income Tax

Tribunal remands case for fresh assessment on interest expenses, requires details on fund utilization

Kaushikbhai Nandubhai Patel HUF Versus Assistant Commissioner of Income Tax,

Kaushikbhai Nandubhai Patel HUF Versus Assistant Commissioner of Income Tax, - TMI Issues Involved:1. Disallowance of interest expenses.2. Initiation of penalty proceedings u/s 271(1)(c) of the I.T. Act.Summary:1. Disallowance of Interest Expenses:The assessee HUF filed a return of income for the assessment year 2005-06, declaring a total income of Rs.4,65,340/-. The Assessing Officer (AO) observed discrepancies in the interest received and paid by the assessee, leading to a disallowance of Rs.46,876/-. The AO noted that the assessee received interest from deposits at rates between 6% to 15% but paid interest on unsecured loans at 10% to 12%, resulting in a loss under 'income from other sources.' The AO disallowed the excess interest paid, citing that the expenditure under this head is allowable only when it is incurred to earn taxable income.On appeal, the assessee argued that the disallowance was incorrect, emphasizing that u/s 57(iii) of the I.T. Act, it is not necessary for the expenditure to produce income. The assessee contended that the interest paid was for the purpose of earning income and met the conditions of section 57. However, the Learned Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the assessee failed to demonstrate adequate funds of its own for investments and did not provide details to prove that borrowed funds were not used for exempted income.The Tribunal, after hearing both sides, noted that the assessee did not furnish details of how the borrowed money was utilized. The Tribunal decided to set aside the order of the Learned Commissioner of Income Tax (Appeals) and remanded the matter back to the AO. The AO was directed to reassess the allowance of interest after the assessee provides complete details of the utilization of borrowed funds. The AO will then determine the interest income under 'other sources' and allow the interest paid to the extent it is used for earning income. If the assessee fails to provide the necessary details, the AO may disallow the deficit of interest based on the principles laid down by the Hon'ble Gujarat High Court in the case of Virmati Ramakrishna.2. Initiation of Penalty Proceedings u/s 271(1)(c):The assessee also contested the initiation of penalty proceedings u/s 271(1)(c) of the I.T. Act. However, the Learned Commissioner of Income Tax (Appeals) did not entertain this ground. The Tribunal did not provide specific directions on this issue in the summarized judgment.Conclusion:The appeal filed by the assessee is treated as allowed for statistical purposes, with the matter remanded to the AO for fresh adjudication on the disallowance of interest expenses. The Tribunal emphasized the need for the assessee to furnish detailed utilization of borrowed funds to determine the allowability of interest expenses.