2014 (2) TMI 841 - AT - Income Tax

Appeal granted: Interest disallowance overturned for unsecured loans and work-in-progress

The Appellate Tribunal ITAT Mumbai allowed the assessee's appeal, overturning the disallowance of interest on unsecured loans and in the work-in-progress ... Disallowance of interest Expenditure - Loan confirmatory letters not furnished - Interest debited in the work–in–progress - Revenue was of the view that the assessee could not prove the genuineness of the loan and, accordingly, the interest has been disallowed and had been deducted from work–in–progress – Held that:- Once the loan has been received in the earlier assessment year which are duly reflected in the Balance Sheet filed along with the return of income and the same has not been disturbed by the Department, then such a loan taken in the earlier years cannot be held to be non–genuine in this year - If the interest has been paid / payable in the earlier years, as well as in the present assessment year, then there cannot be a question of doubting the genuineness of the loan in this year, only for the purpose of disallowing the interest in this year. Since, no addition has been made on account of unexplained credit of loan in the earlier year under section 68, then no disallowance can be made out of interest in the present year - the assessee has duly deducted TDS on such payment of interest and has been deposited with the Government account, the details of which are already there in the record – thus, disallowance of interest by way of reducing the work–in–progress as on 31st March 2007, cannot be sustained – Decided in favour of Assessee. Issues:1. Disallowance of interest on unsecured loans.2. Treatment of interest paid on loans in work-in-progress account.3. Failure to furnish loan confirmations and establish business purpose of loans.Issue 1: Disallowance of interest on unsecured loansThe assessee challenged the order passed by the Commissioner (Appeals) confirming the disallowance of interest amounting to Rs. 94,12,603 on the grounds that loan confirmatory letters were not provided. The Assessing Officer observed that the interest payment could not be allowed as the assessee failed to furnish details of the loans and confirmations from the parties. The disallowed interest was reduced from the work-in-progress account, leading to a reduction in the closing WIP amount. The assessee contended that loans were taken in the previous assessment year for business purposes and provided bank passbook details to support the claim. However, the Commissioner (Appeals) upheld the disallowance citing the lack of evidence establishing a nexus between the loans and the business purpose.Issue 2: Treatment of interest paid on loans in work-in-progress accountThe main contention revolved around the interest debited in the work-in-progress account as of 31st March 2007. The Revenue argued that the genuineness of the loans was not proven, leading to the disallowance of interest. The assessee maintained that the loans, on which interest was capitalized, were predominantly taken in earlier years and reflected in the Balance Sheet without any objection from the Department. The Tribunal agreed with the assessee, emphasizing that if no addition was made under section 68 for unexplained credits in earlier years, disallowing interest in the current year was unwarranted. Additionally, the assessee had deducted TDS on interest payments, further supporting the genuineness of the loans.Issue 3: Failure to furnish loan confirmations and establish business purpose of loansThe failure to provide loan confirmations and clarify the purpose of the loans led to the disallowance of interest by the authorities. The assessee argued that the loans were taken for business purposes, as evidenced by the bank passbook and ledger details submitted. The Department contended that the burden of proof lay with the assessee to demonstrate the business purpose of the expenditures. Ultimately, the Tribunal ruled in favor of the assessee, emphasizing that the loans, being reflected in the Balance Sheet from previous years, were genuine, and the interest disallowance for the current year was unjustified.In conclusion, the Appellate Tribunal ITAT Mumbai allowed the assessee's appeal, overturning the disallowance of interest on unsecured loans and in the work-in-progress account. The judgment highlighted the importance of establishing the genuineness and business purpose of loans, especially when interest payments are capitalized. The Tribunal's decision was based on the lack of adverse findings in previous years regarding the loans and the assessee's compliance with TDS requirements, reinforcing the legitimacy of the transactions.