Interest Expenses Cannot Be Disallowed in Current Year If Genuineness Is Accepted in Previous Years: ITAT

The Income Tax Appellate Tribunal (ITAT), Delhi, has ruled that if the assessing officer has accepted the genuineness of the interest expense transaction in the previous year, the same cannot be disallowed for the current year.

The assessee filed an appeal before the ITAT Delhi challenging three issues, including the disallowance of interest expenses, an addition under section 69A of the Income Tax Act, and a commission of 3% on the accommodation entry.

The first issue related to the disallowance of interest expenses of Rs 7,02,000 under Section 36(1)(iii) of the Income Tax Act. The assessee had taken a loan from M/s Arti Securities and Services Ltd in FY 2017-18 and has provided interest of 7,02,000. The AO disallowed the interest expense, claiming that the unsecured loan taken by the assesse from M/s Arti Securities and Services Ltd. remained unexplained. This decision was upheld by the CIT(A). The assessee’s contention was that this loan was carried forward from the previous financial year, and the interest paid is confirmed by the other party. The Tribunal ruled in favour of the assessee company, holding that once the genuineness of the transaction had been accepted in earlier years, the interest expenses cannot be disallowed in the current year. Therefore, the addition was deleted.

The second issue relates to the addition of Rs 7.02 lakh under section 69 of the Income Tax Act. Based on the seized documents, the AO alleged that the assessee has entry transactions with an accommodation-providing company. Therefore, the AO treated the transaction of Rs 7,02,000 as an unexplained entry under section 69A of the Income Tax Act.

The Tribunal, however, noted that these entries were linked to the interest and not unexplained credits. Since the Tribunal had already addressed the issue of the interest of Rs 7,02,000, the addition under section 69A was deleted.

In the third issue, the AO had added a 3% commission on the alleged accommodation entry, which amounted to Rs 21,060. Since the Tribunal had already deleted the addition under section 69A, the commission was also removed.