ITAT Grants Fresh Opportunity in Section 57(iii) Interest Disallowance Case, Remands Matter for Verification

The ITAT Delhi held that the interest expense disallowance under Section 57(iii) needs proper verification. Since the assessee had relevant documents not submitted earlier, the tribunal remanded the case to the AO, allowing a fresh opportunity. Appeals allowed for statistical purposes.

The assessee, Pramod Kumar Aggarwal, had filed two separate appeals for the Assessment Years 2016-17 and 2015-16. However, the tribunal has disposed of both the appeals through a single order. The assessee, a proprietor of a firm, M/s P.K. Optical, also operating a franchise of Arena Multimedia, had faced two additions of Rs 31.13 lakh and Rs 36.52 lakh made by the tax authorities for the Assessment Years 2015-16 and 2016-17, respectively. These additions were made by disallowing a payment of interest to the bank under Section 57(iii) of the Income Tax Act. The key reason given by the tax authorities is that the assessee failed to furnish relevant documents proving these interest expenses had a direct connection with his business activities, which is a requirement to claim such deductions under the Income Tax Act.

During the hearing before the ITAT Delhi, the assessee claimed that the credit in question was taken from HDF Financial Services Limited and it did not carry any condition regarding how it should be used by the borrower (assessee). Further, the assessee claimed that he had used this credit amount for various purposes, including purchasing assets that generated rental income, supporting business operations, and lending money at higher interest rates, which were duly reported in the income tax returns. He also flagged that the tax authorities have allowed similar interest expenses for earlier and later years.

When the tribunal analysed the case, it noted that sufficient documents establishing a direct connection between the interest expenses and business activities were present with the assessee; however, they could not be presented before the concerned authorities earlier. Considering the same, the tribunal decided to grant the assessee a second opportunity to present all the relevant documents before the tax authorities in the interest of justice.

Consequently, the case has been remanded back to the tax authorities for fresh consideration and directed the Assessing Officer (AO) to re-evaluate the matter, granting the assessee a fair chance to present all supporting documents. The appeal has been allowed for statistical purposes.