ITAT Allows Interest Deduction Under Section 43B to Avoid Double Taxation

The assessee, Bhartiya Samruddhi Finance Ltd, a non Non-Banking Financial Company registered with RBI, lends small loans to poor and semi-literate borrowers, mostly in rural and semi-urban areas. During the demonetisation period, the company had accepted cash repayments from borrowers, which were deposited into 12 bank accounts. The total cash deposits amounted to Rs 2,71,38,972, which was scrutinised.

The first issue was regarding an addition of Rs 2,71,38,972 made by AO, arguing that the source of these deposits was not properly explained by the assessee. However, the assessee explained that these were recoveries from its loan debtors and showed a detailed list of 17,280 customers from whom it had collected the cash recovery. The AO also observed some discrepancies in the reporting by RBL Bank. The CIT(A) had deleted the addition, and therefore, the revenue filed an appeal before the Tribunal.

The ITAT observed that the AO had invoked Section 269T, which prohibits the repayment of a loan, deposit, or specified advance of Rs 20,000 or more in cash. However, the Tribunal highlighted that the AO had wrongly applied this section, as the assessee here is a lender.

The Tribunal found that the company’s explanation was sufficient and the cash deposits were genuine. Therefore, the Tribunal ruled in favour of the assessee, dismissing the revenue’s appeal.

The second issue was the disallowance of Rs 23,75,55,144 in interest paid under a One-Time Settlement (OTS) with financial institutions, which was challenged by the assessee before the Tribunal. For AY 2017-18, the assessee claimed an Rs 23,75,55,144 deduction under section 43B of the Income Tax Act on a payment basis towards the interest paid through One-Time Settlement (OTS). The assessee had earlier disallowed unpaid interest under Section 43B in the past returns.

ITAT allowed the deduction, holding that the interest was already taxed through disallowance in the prior years. The Tribunal said that if this deduction under section 43B were not granted to the assessee, then it would result in double taxation since the interest was already taxed in the earlier years.