Excess interest payment allowed when opening capital exceeds interest-free loans under Section 36(1)(iii)

ITAT Pune allowed the assessee's appeal on two grounds. First, regarding disallowance of interest under Section 36(1)(iii) on interest-free loans, the tribunal held that since the assessee's opening capital of Rs. 4,36,06,730.78 was substantially higher than interest-free loans of Rs. 94,70,000, no proportionate disallowance was warranted, following SC precedent in South Indian Bank Ltd. Second, concerning disallowance of proportionate interest where AO restricted interest rates from 17-23% to 15%, the tribunal applied the consistency principle, noting no such disallowances were made in previous assessment years 2014-15, 2016-17, and 2017-18, thereby allowing the excess interest payment of Rs. 4,55,190.

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Issues:
1. Disallowance of interest under section 36(1)(iii) on interest-free loans given by the assessee.
2. Disallowance of excess interest paid on unsecured loans.

Analysis:

*Issue 1: Disallowance of interest under section 36(1)(iii) on interest-free loans given by the assessee*

The Assessing Officer disallowed an amount of Rs. 6,25,496/- as interest on unsecured loans given without charging any interest to four individuals. The CIT(A) upheld this disallowance. However, the Tribunal allowed the appeal, citing that the assessee's own capital exceeded the amount of interest-free loans given, following the principle established in case laws such as CIT vs. Reliance Utilities Ltd. and South Indian Bank Ltd. The Tribunal held that no disallowance under section 36(1)(iii) was justified in this case.

*Issue 2: Disallowance of excess interest paid on unsecured loans*

The Assessing Officer made an addition of Rs. 4,55,190/- as excess interest paid on unsecured loans by the assessee. The CIT(A) confirmed this disallowance. However, the Tribunal allowed the appeal on this issue as well. The Tribunal noted that the Assessing Officer had restricted the interest rate on unsecured loans to 15%, despite the assessee paying interest ranging from 17% to 23%. The Tribunal observed that no such disallowance was made in previous assessment years and emphasized the consistency principle. Therefore, the Tribunal held that no disallowance of interest was warranted in this case.

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside both the disallowance of interest under section 36(1)(iii) and the disallowance of excess interest paid on unsecured loans. The Tribunal's decision was based on the adequacy of the assessee's own capital compared to the interest-free loans given and the lack of justification for restricting the interest rate on unsecured loans.

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