Interest on Past Unsecured Loans Cannot Be Disallowed unless original loans are first proved bogus: ITAT

Surym Infrastructure declared an income of Rs. 2.89 crore for AY 2018-19. During scrutiny, the AO questioned the of Rs. 1.95 crore paid on unsecured loans, even though all loans were old opening balances and TDS had been deducted. The AO relied on a third-party Section 131 statement, unrelated tally data forwarded by another company, and newspaper reports on GST fraud, none of which involved the assessee or its lenders. The assessee furnished confirmations, PAN, financials, and ITRs of all lenders.

CIT(A) Held: The CIT(A) deleted the disallowance, holding that the AO had acted on assumptions without any evidence that the lenders were entry providers or that the loans were non-genuine when taken.

Issue Raised: Whether interest on unsecured loans brought forward from earlier years can be disallowed solely on general third-party material unconnected to the assessee.

ITAT Held: The ITAT upheld the CIT(A). It held that no fresh loans were taken, so interest on opening balances cannot be disallowed unless the original loans are first proved bogus, something the AO never attempted to establish. No enquiry was made with the lenders despite complete documentation, and the third-party statements and GST reports had no link to the assessee.

With no cash trail or evidence of accommodation entries, the disallowance was based on pure presumption. Relying on decisions such as Ambe Tradecorp, Merrigold Gems and Ayachi Chandrashekhar Narsangji, the Tribunal affirmed the deletion of the entire addition and dismissed the Revenue’s appeal.

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