ITAT Allows Prior-Period Interest Deduction Citing No Revenue Loss [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the deduction of prior-period interest expenses for the appellant, holding that there was no loss to the revenue as the lender had already offered the interest income for tax in their returns.

Prasandi Infotech Park Pvt. Ltd., based in Greater Noida, had taken a loan from SREI Infrastructure Finance Ltd. The company entered into multiple rounds of negotiation with the lender between 2015 and 2016, seeking a waiver or reduction in the interest rate from 12% to 8% and a moratorium on interest payment. However, these negotiations did not yield a favourable outcome. It was only on 13 June 2016 that the lender finally rejected the borrower’s proposal, confirming the full interest liability.

Since the confirmation of liability came during the financial year relevant to AY 2017–18, the company claimed the entire interest as an exceptional item in its profit and loss account for that year. The Assessing Officer, however, disallowed the claim on grounds that the interest pertained to earlier assessment years (AYs 2015–16 and 2016–17) and, being a prior-period expenditure, was not allowable in the year under assessment.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, observing that under the mercantile system of accounting, the liability had accrued in the respective earlier years. The CIT(A) opined that the company had distorted the current year’s accounts by shifting prior-period expenditure into AY 2017–18.

Aggrieved by the findings, the assessee contended before the ITAT that the liability had not crystallised until the final rejection letter was issued by SREI on 13 June 2016. The assessee also pointed out that the lender had already accounted for the interest as income in its own tax filings for the earlier years and paid tax on the same, thereby confirming the legitimacy of the liability.

The assessee relied on several judicial precedents including CIT v. Dinesh Kumar Goel (2011) and CIT v. Nagri Mills Co. Ltd (1958), which held that where there is no prejudice or loss to the Revenue, tax authorities should not raise objections solely on technical grounds.

The ITAT bench comprising S. Rifaur Rahman (Accountant Member) and Sudhir Kumar (Judicial Member) agreed with the assessee. The Tribunal acknowledged that though the expenditure technically related to earlier years, the liability had practically crystallised only upon the final rejection of waiver negotiations. Since the company was already in a loss position in earlier years and even in AY 2017–18, there was no tax advantage or revenue loss involved.

Citing the Delhi High Court’s observation in Dinesh Kumar Goel (2011), the bench noted that no undue benefit had accrued to the assessee. It held that the disallowance merely amounted to a timing difference without any fiscal implication for the Revenue. Accordingly, the appeal was allowed.

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