ITAT Bangalore Remands Interest Disallowance Issue to AO; Relief Subject to Rs. 10,000 Cost Payment

The ITAT, Bangalore, allowed the appeal of the assessee and remanded the interest disallowance issue to the AO for fresh examination, subject to payment of Rs. 10,000.

The present appeal was filed by Mehul Parekh against ITO in the ITAT Bangalore, challenging the order passed by CIT(A), dated August 6, 2025, for the assessment year 2018-19.

The assessee filed his return of income on October 4, 2018. Later, the case was selected for scrutiny by AO, and notices under sections 143(2) and 142(1) were also issued to the assessee.

In reply, the assessee explained that loans were taken from individuals at 7% interest for business purposes. After adjusting the interest received from debtors, there was a net loss. Therefore, the assessee claimed that the excess interest paid should be allowed as a business expense and should not be added to income. However, the AO did not accept this explanation.

The assessee then filed an appeal before the CIT(A). The CIT(A) issued six hearing notices. The assessee sought adjournment three times and did not respond to the other notices. Therefore, the CIT(A) decided the case based on available records and dismissed the appeal.

The assessee then approached the Tribunal against this ex parte order of CIT(A). During the hearing, the assessee’s representative argued that the assessment order was incorrect because documents had already been submitted to prove that the interest expenses were related to the earning income. It was also stated that due to oversight, the assessee could not properly follow up on the appeal before the CIT(A) and requested another opportunity to present documents before the AO.

However, the DR argued that the assessee failed to provide sufficient details both before the AO and the CIT(A), and therefore, the appeal should be disallowed.

After hearing both sides, the Tribunal observed that the AO had disallowed the excess interest mainly because the connection between the expense and income was not clearly established.

The Tribunal set aside the orders of both the AO and CIT(A) and sent the matter back to the AO for a fresh decision. The appeal was allowed only for statistical purposes.

However, the Tribunal imposed a condition. The assessee must pay Rs. 10,000 as cost to the Prime Minister’s National Relief Fund and submit the payment receipt to the AO before the reassessment. If the assessee does not pay this amount, then the original assessment order dated March 26, 2021, will automatically become valid again without any further notice.