Assessee wins appeal; deletion of duplicate disallowance under section 36(1)(iii) for interest on borrowed capital

ITAT held in favour of the assessee and allowed the appeal, directing deletion of additions made by AO/CPC under section 36(1)(iii) relating to interest on borrowed capital. The tribunal found the interest had been disallowed already under ICDS-IX and reported under clause 13(e) of Form 3CD, while the AO/CPC had duplicated the disallowance by also relying on clause 21(i). As the assessee produced evidence and the AO had already deleted the additions under section 154, the AO/CPC and CIT(A)'s sustained additions were set aside.

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ISSUES PRESENTED AND CONSIDERED

1. Whether interest expenditure debited to profit & loss account and disallowed under ICDS-IX (reported at clause 13(e) of Form 3CD) can be again disallowed and added back to income under section 36(1)(iii) of the Income Tax Act on the basis of the same tax audit report (clause 21(i)), resulting in a double addition.

2. Whether rectification orders passed by the jurisdictional Assessing Officer under section 154 deleting the additions made in the CPC/assessment intimation operate to negate the subsequent re-addition sustained by the Commissioner (Appeals), i.e., whether the Commissioner (Appeals) ought to have allowed the appeal when the AO had already deleted the disallowance by orders under section 154.

3. Whether an apparent inconsistency between entries in different clauses of Form 3CD (clause 13(e) vs clause 21(i)) justifies sustaining an addition when the assessee produces financial statements, tax audit disclosures and the AO's rectification orders showing that the expenditure was already disallowed under ICDS-IX.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Double addition of interest: legal framework

Legal framework: ICDS-IX as notified under section 145(2) governs treatment of borrowing costs for construction; clause 13(e) of Form 3CD records ICDS adjustments including capitalisation/disallowance; section 36(1)(iii) concerns deduction for interest on borrowed capital (and proviso/exceptions); clause 21(i) of Form 3CD requires reporting of amounts inadmissible under the proviso to section 36(1)(iii).

Precedent treatment: No prior judicial precedent was cited by the lower authorities or the Tribunal in the judgment. The Court proceeded on statutory scheme and audit disclosures.

Interpretation and reasoning: The Tribunal accepted the undisputed factual matrix - interest of Rs.137.81,63,643 was debited to P&L, and that same amount was reported as disallowed under ICDS-IX in clause 13(e) of the tax audit report. The CPC/AO had made an addition under section 36(1)(iii) on the basis of clause 21(i) of Form 3CD. The Tribunal held that where the same interest expenditure has already been disallowed by the assessee under ICDS-IX (and reported in clause 13(e)), a subsequent addition of the same expenditure under section 36(1)(iii) constitutes a double addition for one expenditure and is impermissible on the facts. The Tribunal further noted that the tax audit report itself reflected the same interest amount in two places (13(e) and 21(i)), demonstrating the source of the duplication.

Ratio vs. Obiter: Ratio - on the facts, the same interest amount that has been disallowed under ICDS-IX cannot be validly disallowed again under section 36(1)(iii) to produce a double addition; where the audit report and financial statements show the disallowance already effected, a re-addition is not tenable. Obiter - general observations on reporting requirements of Form 3CD and how auditors may duplicate entries (not necessary for decision but explanatory).

Conclusions: The addition under section 36(1)(iii) based on clause 21(i) cannot be sustained where the interest has already been disallowed under ICDS-IX and reported at clause 13(e), thereby resulting in double taxation of the same expenditure.

Issue 2 - Effect of section 154 rectification orders deleting the additions

Legal framework: Section 154 permits rectification of mistakes apparent from record; rectification deleting an addition effectively corrects the assessment record; appellate consideration must take into account rectification orders if brought to appellate forum's notice.

Precedent treatment: None cited; Tribunal relied on statutory import of rectification orders and factual chronology.

Interpretation and reasoning: The Tribunal found on record that the jurisdictional Assessing Officer passed two section 154 orders (dated 18.05.2022 and 21.08.2023) deleting the additions made by CPC under section 36(1)(iii) - first deleting Rs.100,16,00,589 and later deleting Rs.37,65,63,103, cumulatively removing the entire disallowance. The Tribunal held that once the AO, upon verifying facts, had rectified and deleted the additions, the Commissioner (Appeals) ought to have allowed the appeal in view of those rectifications. The Tribunal emphasized that the rectification orders, having removed the disallowance from the assessment record, rendered the sustained addition by the lower appellate authority incorrect on the existing record and evidence furnished by the assessee.

Ratio vs. Obiter: Ratio - rectification under section 154 deleting an addition is operative and must be taken into account by appellate authorities; where such deletions have occurred and are shown on record, sustaining the addition on appeal is not warranted. Obiter - none significant beyond application to facts.

Conclusions: The rectification orders deleting the additions negate the basis for sustaining the addition at the appellate stage; the Tribunal directed deletion of the disallowance accordingly.

Issue 3 - Reliance on Form 3CD inconsistency as a basis to uphold disallowance

Legal framework: Tax audit report (Form 3CD) is a relevant source of information; entries in different clauses must be read in context with financial statements and other evidences; AO/CPC cannot treat duplication in audit disclosures as mandating double disallowance when other material shows prior disallowance.

Precedent treatment: Not addressed by lower authorities in terms of binding precedent; Tribunal applied facts to statutory disclosure regime.

Interpretation and reasoning: The Commissioner (Appeals) sustained the disallowance on the ground that the assessee could not explain inconsistency between amounts reported under clause 21(i) and clause 13(e) of Form 3CD. The Tribunal reviewed the paper book, financial statements and the tax audit report and found that the duplicate reporting in Form 3CD explained the origin of the second entry; the assessee had shown and the AO later accepted (by rectifications) that the interest was already disallowed under ICDS-IX. The Tribunal concluded that mere inconsistency in Form 3CD entries, absent a positive showing that the amount remained available for deduction, does not justify upholding a double addition when the factual matrix and rectification orders demonstrate otherwise.

Ratio vs. Obiter: Ratio - Form 3CD inconsistent entries cannot be used to sustain duplicate disallowance where evidence and rectification orders establish that the amount was already disallowed; appellate authority must consider rectification and substantive records. Obiter - cautionary note on auditors' reporting duplications (explanatory).

Conclusions: The Commissioner (Appeals)'s reliance on an alleged inconsistency in Form 3CD was misplaced in the face of documentary evidence and AO's rectifications; the duplicate addition cannot stand.

Final Disposition (operative conclusion from reasons above)

The Tribunal set aside the Commissioner (Appeals)'s order sustaining the addition, directed deletion of the disallowance of interest under section 36(1)(iii) in view of ICDS-IX disallowance reported at clause 13(e) and the jurisdictional AO's section 154 rectification orders, and allowed the appeal.

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