2025 (9) TMI 1647 - AT - Income Tax

Appeal allowed where taxpayer proved interest income net of interest expense and supplied documents, reversal of disallowance

ITAT CHANDIGARH - AT allowed the appeal, holding that the assessee had shown interest income net of interest expense and later supplied supporting ... Addition on account of interest claimed - nexus between the interest income and interest expense - HELD THAT:- In the return of income, under the head “income from other sources”, the assessee has offered interest income after claiming deduction for the interest expense. There is no dispute which has been raised in terms of establishing the nexus between the interest income and interest expense and the former has been brought to tax and the latter has been disallowed for want of supporting documentation which the assessee couldn’t submit earlier due to paucity of time and has now been placed on record and on perusal thereof, find that the Mr. Vivek Jindal has confirmed that the assessee has paid an amount to him for the financial year relevant to impugned assessment year. Assessee has duly demonstrated the incurrence of the interest expenditure and there is thus no basis to disallow the same and the disallowance so made is hereby directed to be deleted. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the addition of Rs. 10,12,400 made by the Assessing Officer on account of disallowance of interest expense is sustainable where the assessee has shown corresponding interest income and later produced confirmation of interest paid. 2. Whether the Assessing Officer's alleged inadequate time to furnish documentary proof/preventions of natural justice in the assessment proceedings vitiates the disallowance of the claimed interest. 3. Whether other grounds raised (validity/recording of reasons for issuance of notice under section 148, jurisdiction of AO, and making additions unrelated to reason for reopening) required independent adjudication in view of the tribunal's decision on the interest-disallowance issue. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of disallowance of interest expense of Rs. 10,12,400 Legal framework: When a taxpayer claims an expense (here, interest paid) that is deductible against taxable income (here, interest received offered under 'income from other sources'), the assessee bears the evidential onus to substantiate the incurrence of the expense and its nexus to the income claimed. The revenue may disallow an expense for want of supporting documentary evidence; however, that disallowance is subject to reassessment if the assessee subsequently establishes the expense with admissible evidence demonstrating both incurrence and nexus. Precedent treatment: No earlier judicial precedents were cited or applied by the Tribunal in the decision; the Tribunal adjudicated on the documentary evidence produced in the record and the contemporaneous tax treatment (interest income offered to tax). Interpretation and reasoning: The Tribunal noted that the assessee had declared interest income of Rs. 2,689,960 and claimed interest expense of Rs. 10,12,400 in the return, resulting in net interest income offered to tax. During assessment the AO disallowed the claimed interest expense for want of documentary proof and after giving a short opportunity concluded assessment under section 147 r.w.s. 143(3). The assessee subsequently placed on record a confirmation from the counterparty (Mr. Vivek Jindal) confirming receipt of Rs. 10,12,400 for the relevant year. The Tribunal accepted that (a) the interest income was brought to tax, (b) the interest expense has a direct nexus with the taxed interest income, and (c) the confirmation constitutes evidence of incurrence of the expense. On that composite factual and legal basis the Tribunal found no justification to sustain the disallowance and directed deletion of the addition. Ratio vs. Obiter: Ratio - Where interest income has been offered to tax and the assessee furnishes subsequent documentary confirmation demonstrating payment of interest which establishes incurrence and nexus, a prior disallowance for want of documents cannot be sustained; the disallowance ought to be deleted. The Tribunal's finding on acceptance of the later-produced confirmation as sufficient evidence is binding on the outcome. There are no notable obiter dicta in the reasoning relevant to other points. Conclusion: The addition of Rs. 10,12,400 on account of interest expense is deleted because the assessee successfully established the incurrence of the expense and its nexus to taxed interest income by producing a confirmation of payment. Issue 2 - Allegation of denial of adequate opportunity / natural justice due to short time to procure old documents Legal framework: Principles of natural justice require that an assessee be given a reasonable opportunity to produce evidence against proposed adverse findings in assessment. The sufficiency of opportunity is assessed in context (age of transactions, time requested, why evidence could not be produced earlier, and whether the AO afforded reasonable time). Precedent treatment: No precedents were cited or applied; the Tribunal relied on facts and the subsequent production of confirmation. Interpretation and reasoning: The Tribunal observed that the assessee had requested time to obtain old documentation and that only a short period had been afforded by the AO before finalization. While noting that the assessee had initially failed to produce evidence, the Tribunal focused on the fact that the confirmation has now been placed on record and establishes the requisite facts. The Tribunal did not set aside the assessment on procedural grounds alone but effectively remedied any prejudice by admitting the later evidence and deleting the disallowance. Ratio vs. Obiter: Ratio - Where prejudice arising from limited opportunity to produce aged documents is remedied by subsequent production of credible evidence (admitted and relied upon by the Tribunal), the appropriate remedy is to allow the claimed deduction rather than uphold the disallowance. Observations about the short time given by the AO are factual and not treated as a separate binding legal principle beyond this remedial approach. Conclusion: Any inadequacy in opportunity did not prevent the Tribunal from admitting the subsequently produced confirmation; the disallowance is deleted on merits. The Tribunal did not annul the assessment on procedural grounds alone. Issue 3 - Other grounds concerning validity of reopening under section 148, jurisdiction, sufficiency of reasons for reopening, and additions beyond reasons for reopening Legal framework: Questions regarding validity of reopening (section 148), sufficiency of recorded reasons, and jurisdiction are distinct legal issues requiring examination of the reasons recorded, factual matrix, and statutory limits on AO's authority. Additions beyond the scope of reasons for reopening raise the issue of exigibility of the reassessment power. Precedent treatment: The Tribunal did not rely upon or distinguish any precedents on these procedural/reopening issues in its order. Interpretation and reasoning: The Tribunal expressly observed that having adjudicated the substantive claim regarding interest expense in favour of the assessee, the remaining grounds relating to reopening, jurisdiction, sufficiency of reasons and scope of additions became academic. The Tribunal did not undertake a detailed examination or ruling on those procedural/reopening issues and therefore made no determination on their legal validity. Ratio vs. Obiter: Obiter - The Tribunal's statement that the other grounds became academic is not a judicial determination on the merits of the reopening/jurisdictional complaints. No ratio is settled on those procedural questions. Conclusion: Procedural grounds (reopening under section 148, jurisdiction, sufficiency of recorded reasons, and scope of additions) were not decided on merits and were dismissed as infructuous because the substantive relief granted rendered them unnecessary to consider. Final Disposition The appeal is partly allowed: the addition of Rs. 10,12,400 on account of disallowed interest expense is deleted; other procedural and reopening grounds are rendered academic and not adjudicated on merits.