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2021 (1) TMI 535 - AT - Income TaxAddition u/s 37(1) - disallowing interest provided on loan - outstanding loan was coming up from the earlier year - unsecured loan was used to purchase shares - CIT(A) did not accept the contention of the assessee because assessee failed to establish the identity, creditworthiness and genuineness of the transaction with regard to these loans and, accordingly, dismissed the appeal of the assessee - CIT(A) also directed the AO u/s 150 of the Act to take necessary remedial action for obtaining the loans from the above two parties - Whether CIT(A) has exceeded his jurisdiction even in giving directions u/s 150 - HELD THAT:- AO did not accept explanation of the assessee because in earlier years no scrutiny assessments have been made u/s 143(3) of the IT Act. But it is a fact that impugned loan amounts were taken in earlier years on which interest is also paid in earlier years. The assessee is following mercantile system of accounting. Therefore, whether assessee actually paid interest to the loaner company or not is not relevant. Such a treatment is permissible under mercantile system of accounting regularly followed by assessee. Therefore, there is no question to consider genuineness of the loan outstanding in assessment year under appeal coming up from the earlier years in assessment year under appeal. Assessee received loan in earlier years on which interest is also paid which have not been disputed by the Income tax authorities, therefore, Income tax authorities cannot depart from the fact that assessee received loan in earlier years and as such, on outstanding loan amount, no disallowance of interest could be made. The Income tax authorities shall have to follow rule of consistency and definiteness of approach in dealing with the matter. When loans have not been disputed as loan genuine in earlier year, same could not be considered as bad loan in assessment year under appeal in which the loan was merely coming up as outstanding from the previous years. In the present case, assessee company borrowed funds from these two companies in earlier years and invested in shares of other company for business purposes, therefore, provisions of section 36(1)(iii) are satisfied in the present case. The authorities below have however, applied general provisions of section 37(1) of the IT Act for the purpose of making disallowance as against specific provision provided for deduction of interest u/s 36(1)(iii) of the IT Act, therefore, the entire approach of the authorities below is wholly unjustified for the purpose of disallowing the interest on irrelevant consideration. The assessee is not required to prove genuineness of the outstanding balance of the loans coming up from the earlier years. Therefore, there was no justification for the authorities below to disallow the interest. When outstanding loan was coming up from the earlier year, there was no justification for the authorities below to disallow interest in assessment year under appeal considering loans as non-genuine.- Decided in favour of assessee.
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