Facts of the Case

  • The Revenue challenged ITAT orders dated 02 March 2021 for AY 2013-14 and 2014-15.
  • The Assessing Officer disallowed interest expenditure amounting to ₹5.64 crore under Section 36(1)(iii).
  • It was alleged that the assessee used borrowed funds for non-business purposes and maintained fixed deposits instead of repaying loans.
  • ITAT deleted the disallowance relying on earlier years’ decisions in the assessee’s own case.

Issues Involved

  1. Whether interest expenditure can be disallowed under Section 36(1)(iii) when borrowed funds are allegedly used for non-business purposes.
  2. Whether ITAT was justified in following earlier years’ decisions in the assessee’s own case.
  3. Whether the principle of consistency applies in income tax proceedings despite the absence of res judicata.

Petitioner’s Arguments (Revenue)

  • The assessee diverted borrowed funds for non-business purposes.
  • Interest was paid at a higher rate (12.1%) compared to interest earned (7.6%), causing avoidable loss.
  • Funds kept in FDRs could have been used to repay loans and reduce liability.
  • ITAT wrongly relied on past decisions; res judicata does not apply to tax matters.

Respondent’s Arguments (Assessee)

  • The issue was already decided in its favor in earlier assessment years.
  • Due to contractual restrictions and prepayment charges, early repayment of loans was not prudent.
  • No diversion of funds for non-business purposes occurred.

Court’s Findings / Order

  • The Court noted that identical issues had been decided in earlier years in favor of the assessee.
  • No appeal had been filed against those earlier ITAT decisions.
  • While res judicata does not strictly apply, consistency must be maintained in tax matters.
  • Relied on precedents emphasizing consistency and certainty in taxation.
  • Held that no substantial question of law arose.
  • Appeals dismissed.

Important Clarifications

  • Principle of res judicata is not applicable in tax matters, but
  • Principle of consistency and certainty must be followed when facts remain identical.
  • Courts should avoid contradictory findings across assessment years unless facts differ.

Sections Involved

  • Section 36(1)(iii) of the Income Tax Act, 1961
  • Section 260A of the Income Tax Act, 1961

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1395-DB/MMH18042022ITA872022_214818.pdf

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