The Income Tax Appellate Tribunal, Delhi, has clarified a critical principle in direct tax litigation: once the genuineness of a loan transaction is accepted in a prior assessment year, subsequent disallowance of interest on that same loan under Section 36(1)(iii) or its reclassification as unexplained income under Section 69A is legally unsustainable. This decision reinforces the doctrine of consistency in tax assessments and curbs arbitrary re-litigation of settled facts.
Background & Facts
The Dispute
The appellant, Yashu Iron Private Limited, faced reassessment proceedings for the assessment year 2019-20, wherein the Assessing Officer disallowed interest expenses of Rs. 7,02,000 under Section 36(1)(iii) of the Income Tax Act, 1961, and further added Rs. 7,02,000 as unexplained income under Section 69A. The disallowance was based on the claim that the underlying loan from M/s Arti Securities and Services Ltd. was an "accommodation entry" used for cash laundering.
Procedural History
- Assessment Year 2018-19: The assessee took an unsecured loan of Rs. 72 lakhs from M/s Arti Securities and Services Ltd. The genuineness of this transaction was not challenged in that year.
- Assessment Year 2019-20: The assessee paid interest of Rs. 7,02,000 on the carry-forward loan. The Assessing Officer disallowed this interest under Section 36(1)(iii) and treated the principal amount as unexplained income under Section 69A.
- CIT(A) Order: Confirmed both disallowances.
- Appeal to ITAT: Filed by the assessee challenging both additions.
Relief Sought
The appellant sought deletion of the disallowance of interest under Section 36(1)(iii) and the addition of Rs. 7,02,000 under Section 69A, arguing that the underlying loan’s genuineness had already been accepted in the previous year and that the interest payment was properly documented.
The Legal Issue
The central question was whether Section 36(1)(iii) permits disallowance of interest on a carry-forward loan when the genuineness of the loan itself was not disputed in the preceding year, and whether the same amount can be reclassified as unexplained income under Section 69A merely because the lender is suspected of being an "entry provider."
Arguments Presented
For the Appellant
The appellant relied on the principle of consistency in tax assessments, citing that the loan transaction had been accepted in the previous year without objection. It submitted that the interest payment was supported by bank statements and confirmation from the lender, and that the AO’s reliance on seized documents to question the loan’s genuineness was impermissible after prior acceptance. It argued that Section 69A requires a fresh, independent finding of unexplained money, not a retrospective recharacterization of a previously accepted transaction.
For the Respondent
The Revenue contended that the transaction with M/s Arti Securities and Services Ltd. was part of a larger pattern of accommodation entries used to launder cash, citing the 3% commission and the nature of contra entries in the bank ledger. It argued that the AO was entitled to reassess the transaction under Section 147 and that prior acceptance did not bind the department in subsequent years if new material came to light.
The Court's Analysis
The Tribunal rejected the Revenue’s argument that prior acceptance of a loan could be disregarded merely because the lender was suspected of being an entry provider. It emphasized that Section 69A applies only where there is no explanation for money credited in the books, and where the source remains untraceable. Here, the Rs. 7,02,000 was not a credit entry but an interest payment, already accounted for in the books and confirmed by the lender.
"We noted that the issue of interest of Rs. 7,02,000/- has already been adjudicated in the above ground and this entry relates to that account and hence, there is no element of any unexplained entry which remains to be added under Section 69A of the Act."
The Tribunal held that once the genuineness of the loan transaction was accepted in the previous assessment year, the interest paid on it in the subsequent year could not be disallowed under Section 36(1)(iii) on the ground of unexplained source. The AO’s reliance on seized documents to reopen a settled transaction violated the principle of finality in tax assessments. The Tribunal further noted that the so-called "contra entries" cited by the AO were merely accounting records of cheque deposits and returns, not evidence of fictitious credits.
The Verdict
The appellant won. The Tribunal held that interest on a carry-forward loan cannot be disallowed under Section 36(1)(iii) if the loan’s genuineness was accepted in a prior year, and Section 69A cannot be invoked to treat such interest as unexplained income where the transaction’s nature and source are already established. Both additions were deleted.
What This Means For Similar Cases
Prior Acceptance of Loan Genuineness Bars Retrospective Disallowance
- Practitioners must argue that once a loan’s source is accepted in a prior year, subsequent reassessments cannot revisit its genuineness without new, compelling evidence of fraud or fabrication.
- The burden shifts to the Revenue to prove that the prior acceptance was obtained by misrepresentation or concealment.
Section 69A Requires Independent Unexplained Credit, Not Recharacterization
- Section 69A applies only to unexplained credits in the books, not to interest payments on previously accepted loans.
- Tax officers cannot convert interest expenses into unexplained income merely by labeling the lender as an "entry provider" without independent proof of fictitious credit.
Documentary Evidence Overrides Suspicion-Based Assumptions
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Bank statements, lender confirmations, and ledger entries carry greater weight than speculative inferences from seized documents.
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Practitioners should insist on concrete evidence of fraud before allowing additions under Section 69A.
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Always cross-check whether the disputed amount is an interest payment or a credit entry
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File objections to reassessment notices that rely on prior-year accepted transactions without new evidence
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Cite this judgment to resist arbitrary additions under Section 69A where the source is traceable
