Shyam Realities Vs DCIT (ITAT Ahmedabad)
These two appeals were filed by the assessee against the orders passed by CIT (A) who confirmed the disallowance of interest on unsecured loans to the extent of Rs.36,69,000/- for AY 2017–18 and Rs.38,94,295/- for AY 2018–19. The assessee is a partnership-firm engaged in the business of construction and development. During the respective assessment years, AO disallowed interest expenditure on unsecured loans on the ground that the loans were either unexplained or not genuine. For AY 2017-18, AO treated certain unsecured loans as unexplained u/s 68 and disallowed proportionate interest thereon. For AY 2018-19, although no fresh loans were received, interest on opening balances of such unsecured loans—treated as bogus in the earlier year—was again disallowed by the AO, citing lack of genuineness and creditworthiness. The CIT(A) upheld the disallowance in both years, primarily on the basis that the genuineness of the loans had not been established, and therefore, the interest paid on such loans could not be allowed.
It was argued by the assessee that the interest paid on the loans cannot be disallowed unless the principal is held to be non-genuine in the relevant year. In absence of any fresh addition u/s 68 of the Act in AY 2018-19, interest disallowance lacks legal foundation. Assessee had deducted TDS on the interest paid and the same was credited to the accounts of lenders. It was argued that unless the principal amount is treated as non-genuine, interest cannot be disallowed separately.
