Facts of the case

During previous year relevant to A.Y. 2005-06, the assessee had taken loan from the bank. During the period spanning between A.Y. 2005-06 to A.Y. 2011-12, interest on loan paid by the assessee to the bank was allowed as deductible expenditure under section 36(1)(iii) of the Income-tax Act, 1961. It is only during A.Y.s 2012-13, 2013-14, 2014-15 and 2015-16, expenditure by way of interest on loan from bank was disallowed. The disallowance was made on account of the fact that the funds/loans received from bank had been diverted as interest-free advances to the partners. The Assessing Officer was of the opinion that the assessee had not been able to demonstrate commercial expediency during the A.Y.s when the disallowance was made. The revenue is in appeal before Hon’ble High Court for A.Y. 2015-16.

Issue under consideration

The issue under consideration is that whether the assessee is required to demonstrate commercial expediency during each year concerning a loan which was availed during previous year relevant to A.Y. 2005-06.

Decision

The Hon’ble High Court held that if the loan was availed on account of stated commercial expediency and interest in respect of the said loan was allowed as deduction under section 36(1)(iii) by the Revenue during the previous year relevant to the assessment year when the loan was first availed then several years thereafter, the assessee once again is not required to demonstrate commercial expediency during each year.