Assessee Fails to Prove Genuineness and Creditworthiness: ITAT upholds ₹75.6 Income Tax Disallowance Lakh against Interest on Unsecured Loans [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the disallowance of interest expenditure of ₹75,63,295 for Assessment Years (AY) 2017–18 and 2018–19 as the assessee failed to establish the genuineness and creditworthiness of the unsecured loans on which the interest was claimed.

The assessee-appellant, Shyam Realities, a partnership firm engaged in construction and development, filed its income tax returns for AY 2017–18 and AY 2018–19, declaring incomes of ₹33,06,110 and ₹97,90,060 respectively.

During scrutiny proceedings, the Assessing Officer (AO) disallowed interest of ₹36,69,000 in AY 2017–18 on the ground that the unsecured loans were unexplained under Section 68 of the Income Tax Act, 1961. In AY 2018–19, although no fresh loans were received, ₹ 38,94,295 of interest on opening loan balances was similarly disallowed as there was a continued failure to establish their genuineness.

The Commissioner of Income Tax (Appeals) ( CIT(A) deleted the Section 68 addition of principal loans for AY 2017–18 and did not make any addition under Section 68 for AY 2018–19. The CIT (A) held that the assessee had not proved the identity, creditworthiness, and genuineness of the parties from whom the loans were allegedly received.

The assessee contended before the ITAT that since no addition under Section 68 of the Income Tax Act was made in AY 2018–19, the interest paid on such loans could not be disallowed. It argued that Tax Deducted at Source (TDS) was deducted, and interest was credited to the lender's accounts. The assessee reiterated that unless the principal amount was proved to be non-genuine in the AY, the interest should be allowable.

However, the Tribunal rejected this argument.

The Bench comprising T.R. Senthil Kumar (Judicial Member) and Makarand V. Mahaodekar (Accountant Member) emphasized that the allowability of interest under Section 36(1)(iii) of the Income Tax Act as a fresh claim every year.

The Tribunal noted the assessee could not furnish any evidence of loan repayment, confirmations, bank transactions, or other corroborative documentation to prove the genuineness of the lenders. It held that mere TDS deduction or book entries were not sufficient to allow interest deduction.

The assessee was represented by Bandish Soparkar, while Atul Pandey represented the revenue.

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