AO to Re-Examine Interest Disallowance u/s 36(1)(iii) on Commercial Expediency | ITAT

Case Details: Kausalya Agro Farms and Developers (P.) Ltd. vs. Income-tax Officer - [2025] 179 taxmann.com 564 (Hyderabad-Trib.)

Judiciary and Counsel Details

• Vijay Pal Rao, Vice President & Madhusudan Sawdia, Accountant Member
• S. Rama Rao, Adv. for the Appellant.
• Dr Sachin Kumar, Sr. DR for the Respondent.

Facts of the Case

The assessee, a private limited company, filed its income tax return for the relevant assessment year. The case was reopened under Section 147, and a notice under Section 148 was issued. During the reassessment proceedings, the assessee furnished a reply to the notice issued by the Assessing Officer (AO) and enclosed the necessary documents.

The AO was not satisfied with the explanation and issued a show-cause notice along with a draft assessment order, proposing a disallowance under section 36(1)(iii). Since the assessee did not furnish any response to the said show-cause notice, the AO completed the assessment under section 147.

The aggrieved assessee preferred an appeal to the CIT(A). CIT(A) set aside the entire assessment to the file of the AO with a direction to complete the assessment de novo. Aggrieved by the order, the assessee preferred an appeal to the Hyderabad Tribunal.

ITAT Held

The Tribunal held that the undisputed fact was that the assessment was completed under section 147 with a single disallowance made under section 36(1)(iii). The assessee filed a reply dated 12/01/2022, enclosing books of account, computation of income, and other relevant details. After considering the assessee’s submission, the AO issued a show-cause notice to the assessee. The assessee failed to comply with the said show cause notice.

It was held that the proceedings were substantially participated in by the assessee, except for the final stage relating to the proposed disallowance under section 36(1)(iii). The assessee was partially ex parte, i.e., confined to the issue of disallowance under section 36(1)(iii). The proviso to section 251(1)(a) indeed empowers the CIT(A) to set aside an assessment made under section 144, but such power must be exercised in a judicious and proportionate manner.

Where the default is limited to a single issue, as in the present case, directing a full de novo assessment goes beyond what is necessary for proper adjudication, accordingly, CIT(A) should have restricted the remand to the specific issue of disallowance under section 36(1)(iii) instead of directing the AO to redo the entire assessment de novo.

List of Cases Reviewed

• Kapil Foods and Structures (P.) Ltd. v. Dy. CIT [IT Appeal Nos. 205 & 206 (Hyd.) of 2025, dated 26-9-2025] (para 10.5) followed

List of Cases Referred to

• Kausalya Agro Farms & Developers (P.) Ltd. v. Dy. CIT [IT Appeal No. 676 (Hyd.) of 2020, dated 4-9-2024] (para 8.1)
• Kapil Foods and Structures (P.) Ltd. v. Dy. CIT [IT Appeal Nos. 205 & 206 (Hyd.) of 2025, dated 26-9-2025] (para 8.2)
• Radhasoami Satsang v. CIT [1992] 60 Taxman 248/193 ITR 321 (SC) (para 10.3).