INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Applicability of generic provisions under section 37(1) - Interest expense on loan taken in earlier years - Whether assessee is required to prove genuineness of outstanding balance of the loans coming up from the earlier years

Assessee company claimed interest expenses as deduction. AO alleged that assessee was engaged in construction business and it had claimed expenses on outstanding unsecured loans taken from two private limited companies. In order to verify genuineness and creditworthiness of the unsecured loan, AO issued notice under section 133(6) but no reply was received. AO further noted that in assessment year under appeal no unsecured loan was received from these two parties to whom the interest was paid. Assessee explained that loan amount received was utilized for investment in shares but no documentary evidences were filed. AO made addition by disallowing the interest expense under section 37(1). Held: It was found that assessee received loan in earlier years on which interest was also paid which was not been disputed by revenue. Therefore revenue could not from the fact that assessee received loan in earlier years and as such, on outstanding loan amount, no disallowance of interest could be made. Revenue shall have to follow rule of consistency and definiteness of approach in dealing with the matter. When loans were not 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 instant 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) were satisfied in instant case. Revenue however, applied general provisions of section 37(1) for the purpose of making disallowance as against specific provision provided for deduction of interest under section 36(1)(iii), therefore, the entire approach of revenue authorities was wholly unjustified for purpose of disallowing the interest on irrelevant consideration. Assessee was not required to prove genuineness of the outstanding balance of the loans coming up from the earlier years. Therefore, there was no justification for revenue to disallow the interest.

REFERRED : CIT v. Sridev Enterprises (1991) 192 ITR 165 (Karn) : 1991 TaxPub(DT) 1071 (Karn-HC) and Asstt. CIT v. Mukesh Sharma IT(SS)A No. 88/Indore/2013 dated 4-6-2019 : 2019 TaxPub(DT) 4201 (Ind-Trib)

FAVOUR : In assessee's favour

A.Y. :

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