ITAT Bangalore Restores Interest Disallowance Issue to AO, Imposes ₹10,000 Cost for Fresh Adjudication

Dispute Over Excess Interest Paid

The assessee, an individual engaged in business, had claimed deduction of interest paid on loans obtained from individuals at 7 percent, after setting off interest received from debtors. The Assessing Officer disallowed the excess interest, holding that the assessee failed to establish a nexus between the expenditure and earning of income. On appeal, the NFAC Commissioner (Appeals) dismissed the matter ex parte after multiple hearing notices, noting non-compliance by the assessee.

Tribunal Grants One More Opportunity, With Conditions

Before the Tribunal, the assessee contended that relevant documents had been furnished at the assessment stage and that failure to pursue the appellate proceedings was inadvertent. Seeking a fresh opportunity, the assessee undertook to substantiate the business purpose of the borrowings. Accepting that the issue required factual re-examination, the Bench held that the correlation between interest expenditure and income generation needed proper verification. The Tribunal therefore remitted the matter to the Assessing Officer for de novo adjudication.

However, the relief was made conditional. The assessee was directed to deposit ₹10,000 towards the Prime Minister’s National Relief Fund and produce proof before the Assessing Officer. The Bench clarified that failure to comply would automatically revive the original assessment order.

Outcome

With these directions, the Tribunal set aside the orders of both lower authorities and allowed the appeal for statistical purposes, reinforcing that substantive tax claims should be decided on merits rather than procedural lapses.