2021 (1) TMI 535 - AT - Income Tax

Addition u/s 37(1) - disallowing interest provided on loan - outstanding loan was coming up from the earlier year - unsecured loan was used to purchase shares - CIT(A) did not accept the contention of the assessee because assessee failed to establish the identity, creditworthiness and genuineness of the transaction with regard to these loans and, accordingly, dismissed the appeal of the assessee - CIT(A) also directed the AO u/s 150 of the Act to take necessary remedial action for obtaining the loans from the above two parties - Whether CIT(A) has exceeded his jurisdiction even in giving directions u/s 150 - HELD THAT - AO did not accept explanation of the assessee because in earlier years no scrutiny assessments have been made u/s 143(3) of the IT Act. But it is a fact that impugned loan amounts were taken in earlier years on which interest is also paid in earlier years. The assessee is following mercantile system of accounting. Therefore, whether assessee actually paid interest to the loaner company or not is not relevant. Such a treatment is permissible under mercantile system of accounting regularly followed by assessee. Therefore, there is no question to consider genuineness of the loan outstanding in assessment year under appeal coming up from the earlier years in assessment year under appeal. Assessee received loan in earlier years on which interest is also paid which have not been disputed by the Income tax authorities, therefore, Income tax authorities cannot depart from the fact that assessee received loan in earlier years and as such, on outstanding loan amount, no disallowance of interest could be made. The Income tax authorities shall have to follow rule of consistency and definiteness of approach in dealing with the matter. When loans have not been disputed as loan genuine in earlier year, same could not be considered as bad loan in assessment year under appeal in which the loan was merely coming up as outstanding from the previous years. In the present case, assessee company borrowed funds from these two companies in earlier years and invested in shares of other company for business purposes, therefore, provisions of section 36(1)(iii) are satisfied in the present case. The authorities below have however, applied general provisions of section 37(1) of the IT Act for the purpose of making disallowance as against specific provision provided for deduction of interest u/s 36(1)(iii) of the IT Act, therefore, the entire approach of the authorities below is wholly unjustified for the purpose of disallowing the interest on irrelevant consideration. The assessee is not required to prove genuineness of the outstanding balance of the loans coming up from the earlier years. Therefore, there was no justification for the authorities below to disallow the interest. When outstanding loan was coming up from the earlier year, there was no justification for the authorities below to disallow interest in assessment year under appeal considering loans as non-genuine .- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 37(1) of the IT Act.
2. Jurisdiction of CIT(A) in giving directions under Section 150 of the IT Act.

Detailed Analysis:

1. Disallowance of Interest Expenses under Section 37(1):

The assessee company filed a return declaring zero income, which was selected for scrutiny to verify the admissibility of interest expenses claimed. The company was engaged in real estate and investment businesses and had shown interest expenses paid to two entities: ?1,75,267/- to M/s Rajnigandha Management Pvt. Ltd. and ?22,02,566/- to M/s Ranisati Management Pvt. Ltd. The AO requested documentary evidence for the loans but received only ledger accounts and addresses. The AO noticed that no actual bank payments were made for the interest, and the companies did not respond to notices under Section 133(6). Consequently, the AO disallowed the interest expenses under Section 37(1) due to the lack of evidence proving the genuineness of the loans.

The assessee argued that the loans were taken in earlier years, and interest was paid in those years without disallowance. The company followed the mercantile system of accounting, making the actual payment of interest irrelevant. The AO, however, maintained that the assessee failed to prove the genuineness of the loans and disallowed the interest expenses.

Upon appeal, the CIT(A) upheld the AO's decision, stating the assessee failed to establish the identity, creditworthiness, and genuineness of the transactions. The CIT(A) also directed the AO to take remedial action under Section 150.

The Tribunal found that the loans were taken in earlier years and interest was paid in those years without dispute. The assessee followed the mercantile system of accounting, making the actual payment of interest irrelevant. The Tribunal referenced the Karnataka High Court's decision in CIT vs. Sri Dev Enterprises, which emphasized consistency in recognizing the nature of accounts across years. The Tribunal concluded that the authorities should not have disallowed the interest on loans taken in earlier years and used for business purposes, as Section 36(1)(iii) should apply rather than the general Section 37(1).

2. Jurisdiction of CIT(A) in Giving Directions under Section 150:

The assessee contended that the CIT(A) exceeded its jurisdiction by directing the AO to take remedial action under Section 150 for earlier years. The Tribunal supported this view, citing the ITAT Indore Bench's decision in ACIT Vs. Mukesh Sharma, which held that the CIT(A) cannot issue directions to reopen assessments for years not under appeal.

Conclusion:

The Tribunal set aside the orders of the AO and CIT(A), deleting the addition of ?23,77,833/- and nullifying the CIT(A)'s directions under Section 150. The appeal of the assessee was allowed, emphasizing the need for consistency and proper application of specific provisions like Section 36(1)(iii) over general ones like Section 37(1).