No disallowance of interest u/s 36(1)(iii) where interest-free advances covered by sufficient own surplus funds; presumption arises from mixed funds that own funds used first; prior year acceptance on identical facts binding.

आदेश/ORDER 

PER PRABHASH SHANKAR [A.M.] :-

The above captioned appeals have been preferred by the Revenue against the orders of even date passed by the Learned Commissioner of Income-tax, Appeal, CIT(A) 52, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to the order passed u/s. 143(3) r.w.s. 254 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Years [A.Y.] 2013-14 and 2014-15. Since the issue involved is common, these appeals are being taken up together for adjudication vide this composite order for the sake of brevity. ITA No.3494/Mum/2025 for AY 2013-14 is taken up as the ‘Lead case’. Decision herein would apply mutatis mutandis to the other appeal.

2. The grounds of appeal are as under:-

ITA No.3494/MUM/2025(AY 2013-14)

1. “On the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in directing the AO to delete the addition made u/s 36(1) (iii) of Rs.2,23,93,835/-without properly appreciating the facts that assessee company failed to prove that interest expenses claimed have been utilized wholly and exclusively for its business purpose?

2. “On the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in relying the order of AO for the A.Y.2012-13, without appreciating the facts that every assessment year is different assessment year and Principle of res-judicata is not applicable in income tax proceedings?”

3. It may be stated here at the outset that the instant appeal is the second round of litigation before ITAT. The assessee filed its return of incomedeclaring total income at Rs. 14,99,63,000/- for the relevant year. The assessment was completed u/s. 143(3) of the Act and the income was determined at Rs. 18,33,68,530/- wherein a disallowance of interest of Rs. 2,23,93,835/- u/s. 36(1)(iii) of the Act was made on account of interest-free loans advanced to various parties. In the appellate proceeding during 1st round of litigation, the assessee had preferred an appeal before the CIT(A) who held that during the year consideration, the assessee was having sufficient own funds in order to advance friendly loans to various parties. After relying on the decision of the Hon’ble Bombay High Court in the case of CIT Vs Reliance Utilities and Power Ltd. (313 ITR 340), the said disallowance was deleted. Aggrieved by the order of the ld.CIT(A), the Revenue preferred an appeal before the Tribunal which set aside the appellate order and remitted the matter back to the file of the AO to verify the facts and pass the assessment order in accordance with the directions given by the Hon’ble Tribunal in assessee’s own case for A.Y. 2012-13 in ITA No. 6686/Mum/2016 dated 31.10.2018 wherein identical issue of disallowance u/s. 36(1)(iii) of the Act was involved.In the said set aside proceedings, the AO held that all the interest-free loans were advanced in the earlier years and since no disallowance was made in the earlier years, no disallowance could be made in the year under consideration.However,in the instantyear the AO proceeded to disallow the interest again on the ground that addition of Rs. 2,23,93,835/- was sustainable as one-to-one nexus of interest-free friendly fund advanced and availability of own funds was not provided by the assessee.

4. Aggrieved by the order, an appeal was preferred by the assessee before the ld.CIT(A) who after analysing the facts of the case for the year underconsideration and that of the earlier year (i.e. A.Y. 2012-13) found that there was no reason to deviate from the view adopted by the AO in the case of