SHYAM REALTIES,AHMEDABAD vs. THE DY. CIT, CIRLCE-2(2)(1), AHMEDABAD

Particulars A.Y. 2017–18 A.Y. 2018–19 Return filing 30.10.2017 31.10.2018 date Returned Rs. 33,06,110/- Rs. 97,90,060/- Income Assessment 143(3) 143(3) r.w.s. 144B completed under section & 1388/Ahd/2024 Shyam Realties vs. Dy.CIT, Cir.2(2)(1) Asst. Years : 2017-18 & 2018-19 Date of AO’s 21.12.2019 09.09.2021 order Date of 27.06.2024 27.06.2024 (common CIT(A)’s order order) Additions 1. Rs. 83,34,774/- u/s 68 (unsecured 1. Rs. 14,69,04,326/- made by AO loans) (additional revenue based on 60% WIP) 2. Rs. 36,69,000/- interest 2. Rs. 38,94,295/- disallowance on above loans interest disallowance on earlier year loans 3. Rs. 4,70,832/- (loan balance 3. Rs. 33,90,51,606/- discrepancy) (alleged violation of section 269SS) 4. Rs. 47,16,513/- (bogus purchases) Assessed Rs. 204,97,229/- Rs. 51,04,16,994/- Income CIT(A)’s 1. Addition u/s 68 deleted 1. WIP addition of Rs. decision 14.69 Cr deleted 2. Interest disallowance Rs.

& 1388/Ahd/2024 Shyam Realties vs. Dy.CIT, Cir.2(2)(1) Asst. Years : 2017-18 & 2018-19 AY 2017-18

1. On the facts and in the circumstances of the case as well in law, the NFAC (Appeals), New Delhi has erred in upholding the disallowance of interest on Unsecured Loans to the tune of Rs. 36.69 Lacs.

2. The appellant further reserves its right to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal. for AY 2018-19 1. On the facts and in the circumstances of the case as well in law, the NFAC (Appeals), New Delhi has erred in upholding the disallowance of interest on Unsecured Loans to the tune of Rs. 38,94,295/-. 2. The appellant further reserves its right to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.

5.1. The Ld. AR also placed reliance on the following judicial precedents: • Vidya Education Investments (P.) Ltd. [2021] 129 taxmann.com 5 (Delhi - Trib.). • United Foods (P.) Ltd. [2023] 148 taxmann.com 452 (Delhi - Trib.).

• Ojas Tarmake (P.) Ltd. [2023] 156 taxmann.com 75 (Gujarat).

• Hareshbhai Sakariya [2023] 148 taxmann.com 115 (Surat-Trib.). & 1388/Ahd/2024 Shyam Realties vs. Dy.CIT, Cir.2(2)(1) Asst. Years : 2017-18 & 2018-19 These decisions were cited to support the proposition that interest cannot be disallowed in the absence of a sustainable addition of principal under section 68, and that the AO had not brought on record any contrary evidence except non-compliance with notices issued under section 133(6) of the Act.

5.2. The Ld. Departmental Representative (DR) supported the findings recorded by the Assessing Officer as well as the Ld. CIT(A) in their respective orders. It was submitted that the assessee had repeatedly failed to discharge its onus under section 68 of the Act with respect to establishing the identity, creditworthiness, and genuineness of the persons from whom unsecured loans were allegedly obtained. It was also contended that interest under section 36(1)(iii) of the Act, especially when the principal transaction itself is not proved to be genuine, cannot be allowed as expenditure. Reliance was placed on the findings of the Ld. CIT(A) who, after admitting additional evidence and calling for a remand report, recorded a categorical conclusion that the assessee failed to establish the creditworthiness of the lenders and the genuineness of the transactions, and accordingly upheld the interest disallowance in both years.

6.1. It is settled law that the deletion of an addition under section 68 of the Act on technical grounds—namely, that the credit pertains to an earlier year and is carried forward as opening balance—does not automatically confer legitimacy upon the transaction. It is important to note that the Ld. CIT(A) has specifically recorded that the loan amounts reflected in the opening balances pertain to earlier years which were not subject to scrutiny assessment, and therefore the principle of res judicata is inapplicable. The non-examination of those credits in the past does not ipso facto prove their genuineness in the present year.

6.2. The allowability of interest under section 36(1)(iii) of the Act is a fresh claim each year and is contingent upon the existence of a genuine and subsisting liability. In the present case, the assessee has not brought on record any credible documentary evidence to substantiate the identity and creditworthiness of the parties or the genuineness of the loan transactions. In fact, during the course of the hearing before us, the Bench specifically asked the Ld. Authorized Representative whether any material has been placed on record to show that the loans in question, on which interest has been claimed, have been repaid in subsequent years, or that interest thereon has actually been paid. In response, the Ld. AR fairly admitted that such details had not been brought on record and further submitted that he does & 1388/Ahd/2024 Shyam Realties vs. Dy.CIT, Cir.2(2)(1) Asst. Years : 2017-18 & 2018-19 not consider such evidence relevant to his contention that interest should be allowed solely because no addition under section 68 of the Act has been made in the year under consideration. In our considered view, this argument is misconceived and contrary to the settled legal position.

6.3. The deduction of interest expenditure is governed by section 36(1)(iii) of the Act, which allows deduction only where the capital has been genuinely borrowed and used for the purposes of business. If the assessee fails to establish the genuineness of the underlying loan, the interest payable or paid thereon cannot be allowed. Mere routing of interest through banking channels or deducting TDS is not conclusive proof of allowability.

6.4. Further, the assessee’s failure to bring on record evidence of repayment of the loans, even years after their receipt, reinforces the Revenue’s contention that the alleged loans lack commercial substance. A genuine business liability is typically reflected in either repayment schedules, confirmations, or servicing of debt—none of which have been demonstrated in the present case. The assessee has relied on various decisions to argue that non-compliance with notices under section 133(6) or 131 of the Act by third parties should not automatically lead to adverse inferences, particularly when other documentary evidence exists on record. We have perused the said decisions and find them to be factually distinguishable from the case at hand. In those cases, there existed tangible and corroborative evidence in the form of confirmations, repayment details, PANs, TDS deduction, business necessity, and historical assessments, which are conspicuously absent in the present case. Here, the assessee not only failed to discharge the initial onus but also failed to bring on record any evidence of repayment or genuine subsistence & 1388/Ahd/2024 Shyam Realties vs. Dy.CIT, Cir.2(2)(1) Asst. Years : 2017-18 & 2018-19 of the loan liability, thereby justifying the disallowance of interest by the lower authorities.

6.5. Thus, the reasoning adopted by the Ld. CIT(A) in both years—namely, that the assessee failed to discharge its burden to prove the genuineness and creditworthiness of the lenders, and that interest cannot be allowed on an unverified or fictitious liability—is sound and supported by settled judicial principles. We find no justification to interfere with the findings so recorded. In view of the foregoing discussion and on a comprehensive consideration of the facts and applicable law, we are of the view that the disallowance of interest amounting to Rs.36,69,000/- in A.Y. 2017-18 and Rs.38,94,295/- in A.Y. 2018-19 is legally sustainable. Accordingly, grounds of appeals of the assessee are dismissed.