2025 (7) TMI 310 - AT - Income Tax

Disallowance of interest expenses u/s 40(a)(ia) - As pointed out that the AO had disallowed an expense which had not been claimed by the assessee for computing its income from business by invoking provisions of law applicable to computation of income from business and profession - HELD THAT - The said provision of law is applicable for the purposes of computing income under the head business profession . There is no dispute with regard to the same the impugned Section being included in chapter IV-D of the Act which deals with the computation of income under the head Income from Business Profession . It is also a fact on record that the expense disallowed by the AO was not claimed by the assessee against his business income which the assessee had returned on presumptive basis u/s 44AD of the Act. The order of the AO reveals that the impugned expense had been claimed by the assessee against rental income returned to tax separate from the business income of the assessee. Therefore it is crystal clear that the disallowance made by the AO in the present case is grossly unjustified and is not sustainable in the eyes of law. Accordingly we direct deletion of the disallowance of interest expenses. Penalty u/s 271(1)(c) also deleted made in relation to the disallowance made by the AO u/s. 40(a)(ia).

Summary

The core legal questions considered by the Tribunal in these appeals pertain to (i) the validity of the disallowance of interest expenses under Section 40(a)(ia) read with Section 194A(1)(b) of the Income Tax Act, 1961 (the "Act") in the assessment year 2015-16, (ii) the applicability and justification of penalty under Section 271(1)(c) of the Act consequent to the disallowance, and (iii) the issue of condonation of delay in filing the appeals before the Tribunal due to non-receipt of hearing notices at the correct email address.

Regarding the condonation of delay, the Tribunal considered whether sufficient cause existed for the delayed filing of appeals, given that notices of hearing and orders of the Commissioner of Income Tax (Appeals) ("CIT(A)") were sent to an incorrect email address, preventing the assessee from timely knowledge of the proceedings.

The principal substantive issue concerned the disallowance of interest expenses under Section 40(a)(ia) of the Act. The question was whether the disallowance was legally sustainable when the interest expense was claimed against income from house property (rental income) and not against income from business or profession, especially when business income was declared on a presumptive basis under Section 44AD.

Consequentially, the Tribunal also examined the validity of penalty imposed under Section 271(1)(c) for concealment or furnishing inaccurate particulars of income, which was predicated on the disallowance upheld by the Assessing Officer (AO).

Analysis of Delay Condonation Issue:

The Tribunal applied the principle that delay in filing an appeal may be condoned if sufficient cause is shown. The assessee demonstrated that notices of hearing and orders from the CIT(A) were sent to a different email address than the one specified in the appeal form (Form No. 35). This fact was supported by a notarized affidavit and remained uncontroverted by the Department's representative.

The Tribunal held that the failure to serve notices at the correct email address constituted sufficient cause for the delay. The Department's inability to rebut this fact further strengthened the assessee's plea. Consequently, the Tribunal condoned the delays of 102 and 72 days respectively in filing the two appeals.

Analysis of Disallowance under Section 40(a)(ia):

Section 40(a)(ia) of the Act mandates disallowance of certain expenses, including interest, where tax is deductible at source but not deducted or paid, and applies specifically to computation of income under the head "Profits and gains of business or profession." The provision is situated in Chapter IV-D of the Act, which exclusively deals with income from business and profession.

The AO disallowed interest expenses amounting to Rs. 15,91,452/- under Section 40(a)(ia), invoking the provision read with Section 194A(1)(b), which relates to deduction of tax at source on interest other than interest on securities.

The assessee's contention, accepted by the Tribunal, was that the disallowed interest expense was claimed against rental income (income from house property), and not against business income. The business income was declared on a presumptive basis under Section 44AD, which does not allow detailed expenses to be claimed. The AO's disallowance was therefore misplaced, as Section 40(a)(ia) applies only to business income computations and not to income from other heads such as house property.

The Tribunal noted that the AO himself acknowledged that the rental income was separate from business income, yet proceeded to disallow the interest expense claimed against the rental income under Section 40(a)(ia). This was held to be legally untenable.

Since the disallowance was not sustainable in law, the Tribunal directed deletion of the addition made by the AO on this ground.

Analysis of Penalty under Section 271(1)(c):

The penalty under Section 271(1)(c) is leviable for concealment of income or furnishing inaccurate particulars of income. The penalty in this case was imposed in relation to the disallowance under Section 40(a)(ia) upheld by the AO.

Given that the Tribunal deleted the disallowance of interest expenses in the quantum appeal, the foundation for the penalty ceased to exist. The Tribunal accordingly held that the penalty had no legs to stand upon and directed its deletion.

Significant Holdings:

On the issue of delay, the Tribunal stated: "The assessee had adduced sufficient cause for the delay, the same being attributed to uncontroverted fact of the notices of hearing before the Ld. CIT(A) as also the order passed being served on the wrong email ID of the assessee."

On the substantive issue of disallowance, the Tribunal held: "It is crystal clear that the disallowance made by the AO in the present case is grossly unjustified and is not sustainable in the eyes of law."

Regarding penalty, the Tribunal concluded: "Since, we have directed the deletion of the disallowance made by the AO in our order above, the penalty has no legs to stand upon and is, accordingly, deleted."

The core principles established include:

• Section 40(a)(ia) disallowance applies only to income computed under the head "Profits and gains of business or profession" and cannot be invoked against expenses claimed against income from other heads such as house property.
• Non-receipt of notices at the correct email address constitutes sufficient cause for condonation of delay in filing appeals.
• Penalty under Section 271(1)(c) cannot be sustained if the underlying addition or disallowance is deleted by the appellate authority.

In final determinations, the Tribunal allowed both appeals: it condoned the delay in filing, deleted the disallowance of interest expenses under Section 40(a)(ia), and consequently deleted the penalty imposed under Section 271(1)(c).