Partial Interest Disallowance Upheld u/s 57(iii): ITAT Dismisses Revenue Appeal on Nexus of Borrowed Funds for Interest Income [Read Order]

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) upheld the partial disallowance of interest expenditure under Section 57(iii) of the Income Tax Act, 1961, emphasizing the rule of consistency with prior assessments and the verified nexus between borrowed funds and interest income.

Shri Mahesh Kumar Goyal (assessee) filed return of income for Assessment Year (AY) 2012-13. The assessment was completed under Section 143(3) on March 31, 2015, wherein the Assessing Officer (AO) made a full disallowance of interest expenditure claimed under Section 57(iii), treating it as not incurred for earning interest income.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) partially deleted the disallowance after considering the assessee’s submissions and workings from previous years.

The CIT(A) noted that in AY 2011-12, the AO had verified the nexus of borrowed funds and disallowed only Rs. 18.14 lakhs out of total interest expenditure of Rs. 190.42 lakhs. For AY 2012-13, fresh borrowings amounted to Rs. 200.82 lakhs on September 5, 2011, and Rs. 142.50 lakhs with interest on fresh loans at Rs. 14.23 lakhs.

Based on prior workings, the assessee computed a proportionate disallowance of Rs. 43.45 lakhs, of which Rs. 27.36 lakhs was already disallowed, confirming an additional Rs. 16.08 lakhs. Aggrieved by the CIT(A)’s order, the revenue appealed to the ITAT.

The revenue argued for full disallowance, contending that the interest expenditure was not wholly and exclusively for earning interest income. The assessee’s counsel countered that the majority of borrowings pertained to earlier years, already verified, and the disallowance should follow the consistent approach from past assessments.

The two-member bench comprising Laliet Kumar (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) observed that the rule of consistency favored the assessee, as no change in facts was demonstrated.

The bench noted that in AY 2011-12, the AO had partially disallowed interest after verifying the nexus, and the assessee’s workings for the current year aligned with that, considering only interest on fresh borrowings.

The bench held that full disallowance in the current year was unjustified, as major borrowings were from prior years and stood verified.

The Tribunal dismissed the revenue’s appeal and upheld the CIT(A)’s order. The appeal of the revenue was dismissed.

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