Consistency prevails as tax appellate order upholds deletion of interest disallowance on secured loan u/s 36(1)(iii)

ITAT Delhi dismissed the revenue's appeal challenging deletion of disallowance of interest on a secured loan. The assessee had obtained the loan in AY 2007-08, paid interest thereon, and consistently claimed it as deductible expenditure, with no disallowance in scrutiny assessments for AYs 2007-08 to 2011-12. Disallowance was first made in AY 2012-13, which had already been deleted and upheld by ITAT. Applying the rule of consistency, as endorsed by SC, and noting unchanged facts and law, ITAT upheld CIT(A)'s deletion of proportionate interest disallowance, deciding against the revenue.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether disallowance of proportionate interest on borrowed funds was justified on the ground that interest-bearing loans were allegedly diverted to non-interest-bearing advances to partners.

1.2 Whether, in light of earlier assessment years where similar interest was allowed without disallowance, the principle of consistency barred the disallowance in the relevant year.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of disallowance of proportionate interest on alleged diversion of interest-bearing funds to partners' advances

Interpretation and reasoning

2.1 The Assessing Officer noted that the assessee had debited a substantial amount of interest to the profit and loss account against secured loans, and that large advances had been given to partners without charging interest. On this basis, proportionate disallowance of interest was made on the ground of diversion of interest-bearing funds to non-interest-bearing advances.

2.2 Before the appellate authority, the assessee demonstrated that the loans were taken for business purposes and that in spite of a specific clause in the partnership deed permitting payment of interest on partners' capital, no interest was actually paid on partners' credit balances, which were substantial. This indicated that, in substance, the assessee was not conferring an interest benefit on partners; rather, partners had large interest-free funds lying with the firm.

2.3 The appellate authority found that, considering the totality of facts and circumstances, there was no real basis for disallowance of the interest and there was no benefit to the revenue from such disallowance. It further observed that on identical facts in earlier years, the same issue had been decided in favour of the assessee by the appellate authorities.

2.4 The Tribunal noted that the loan in question had been taken in an earlier year and that interest thereon had been consistently allowed as a deductible expenditure. It agreed with the appellate authority that there was no infirmity in allowing the interest claim in the present year as well.

Conclusions

2.5 The disallowance of interest on the allegation of diversion of borrowed funds to interest-free advances to partners was held to be unjustified and was correctly deleted.

Issue 2: Applicability of the rule of consistency to disallowance of interest expenditure

Legal framework

2.6 The Tribunal relied on the principle laid down by the Supreme Court that where the fundamental facts remain the same and there is no change in law, a consistent view taken in earlier assessment years should be followed in subsequent years.

Interpretation and reasoning

2.7 It was recorded that the loan had been taken in an earlier assessment year and interest thereon had been paid and claimed since then. The returns for several preceding years were subjected to scrutiny and no disallowance of interest had been made for those years.

2.8 The first disallowance on this account was made only from a later assessment year, which was deleted by the first appellate authority, and that deletion was subsequently upheld by the Tribunal. Further, for immediately preceding assessment years, the appellate authorities had allowed the assessee's appeals on the issues of consistency, commercial expediency, and interest of revenue, on identical facts.

2.9 The Tribunal held that, in the facts of the case, the rule of consistency squarely applied because the facts and nature of the borrowing and use of funds had not changed and there was no change in the applicable law. Therefore, the view consistently taken in favour of allowing the interest in prior years had to be followed in the year under appeal.

Conclusions

2.10 The Tribunal concluded that, applying the rule of consistency, there was no error in the appellate authority's order deleting the interest disallowance, and the revenue's appeal was dismissed.

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