Appeal allowed for deduction under Section 36(1)(iii) on interest expenditure

The Tribunal allowed the appeal for statistical purposes, directing fresh adjudication by the CIT(A) on the limited aspect of the assessee's entitlement for deduction under Section 36(1)(iii) regarding interest expenditure related to certain advances. The Tribunal vacated the disallowance of interest expenditure concerning a specific amount recoverable from a company, finding no nexus with borrowed funds. The matter was remanded to the CIT(A) for further examination and providing the assessee with a reasonable opportunity to present its case.

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Issues Involved:
1. Disallowance of interest expenses claimed under Section 57(iii) of the Income Tax Act, 1961.
2. Deduction of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961.
3. Procedural fairness in the assessment process.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses Claimed Under Section 57(iii):
The assessee company filed its return of income for A.Y. 2013-14, declaring a total income of Rs. 21,49,860/-. During the assessment, the Assessing Officer (A.O) observed that the assessee had claimed a deduction for interest expenditure amounting to Rs. 2,97,77,635/- against interest income. The A.O noted that the assessee had raised interest-bearing loans totaling Rs. 33,84,87,388/- and had diverted these funds by providing interest-free loans and advances to various companies. Consequently, the A.O restricted the deduction of interest expenditure to Rs. 1,73,70,287/-, correlating to the interest-bearing funds used for earning interest income from fixed deposits. The balance amount of Rs. 1,24,07,347/- was disallowed under Section 57(iii) of the Act.

2. Deduction of Interest Expenses Under Section 36(1)(iii):
The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the interest-bearing funds were either used for business purposes or for advancing interest-bearing loans to third parties. The CIT(A) dismissed this claim, stating that the assessee had initially claimed the deduction under Section 57(iii) and could not now seek deduction under Section 36(1)(iii). The assessee raised additional grounds before the Tribunal, arguing that if the interest expenses were not allowable under Section 57(iii), they should be allowed under Section 36(1)(iii). The Tribunal admitted these additional grounds based on the judgment of the Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC), which allows adjudication of legal issues based on facts available on record.

3. Procedural Fairness in the Assessment Process:
The assessee argued that the CIT(A) did not provide a reasonable and sufficient opportunity to present its case. The Tribunal observed that the CIT(A) had summarily rejected the assessee's claim for deduction under Section 36(1)(iii) without proper consideration. The Tribunal noted that the CIT(A) should have adjudicated the claim based on the facts already available on record, as per the judgment of the Hon'ble High Court of Bombay in CIT Vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom).

Tribunal's Decision:
The Tribunal found merit in the assessee's claim that the interest expenditure related to the amount recoverable from M/s Aristo Shelters Pvt. Ltd. (Rs. 72,81,370/-) should not be disallowed, as it had no nexus with the borrowed funds. The Tribunal directed the A.O to vacate the disallowance of interest expenditure in respect of this amount.

Regarding the advances to the remaining four parties, the Tribunal noted that the CIT(A) had not adjudicated the claim on merits. The Tribunal restored the matter to the CIT(A) for fresh adjudication, directing the CIT(A) to verify the assessee's entitlement for deduction under Section 36(1)(iii) concerning the advances to M/s Atiti Builders and Constructors Pvt. Ltd., Ayyappa Developers Pvt. Ltd., Crystal City Mall Pvt. Ltd., and Rikki Ronie Developers. The CIT(A) was instructed to provide a reasonable opportunity of being heard to the assessee.

Conclusion:
The appeal was allowed for statistical purposes, with directions for fresh adjudication by the CIT(A) on the limited aspect of the assessee's entitlement for deduction under Section 36(1)(iii). The order was pronounced in the open court on 20.02.2020.

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