TaxTMI 
TaxTMI 
2026 (10) TMI 539
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Briefly stated, the assessee is an individual and a director in Prince Pipes & Fittings Pvt. Ltd. During the years under consideration, the assessee derived income under various heads, including salary, income from house property, profits and gains of business or profession, capital gains and income from other sources. The returns filed by the assessee for the respective assessment years were selected for scrutiny under CASS. Pursuant to the statutory notices issued under sections 143(2) and 142(1) of the Act, the assessee furnished the details called for by the Assessing Officer. The assessments were thereafter completed under section 143(3) of the Act after making various additions and disallowances. Particulars Assessment year 2017-18 Assessment year 2018-19 Assessment year 2021-22 Appeal before the Tribunal ITA No. 8137/Mum/2026, Revenue's appeal ITA No. 8138/Mum/2026, Revenue's appeal ITA No. 6062/Mum/2026, assessee's appeal Return of income Original return filed on 01.11.2017 and revised return filed on 26.07.2018, declaring total income of Rs. 1,41,50,690/- Return filed on 27.10.2018, declaring total income of Rs. 1,56,77,510/- Return fil....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 4,58,53,641/- made under section 36(1)(iii) of the Income-tax Act, 1961, without appreciating that the assessee had substantial interest-bearing borrowings and had failed to establish with cogent evidence that the investments, advances and other applications of funds not yielding taxable income or business benefit were made entirely out of interest-free funds? 3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 30,36,230/- comprising brokerage, commission and loan processing charges incurred in connection with raising borrowed funds, without appreciating that the assessee failed to establish that the entire borrowings obtained during the year were utilized wholly and exclusively for business purposes? 4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 1,02,698/- made under section 14A read with Rule 8D of the Income-tax Rules, 1962, without appreciating that the Assessi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng that the Assessing Officer had examined the assessee's claim and computed the disallowance in accordance with the statutory provisions. 7: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 6,34,500/- being interest paid on loans from B.K. Trading, Bharat T. Chheda and Jayesh K. Haria, despite the fact that the Department has challenged the appellate orders relating to the underlying loan additions before the Hon'ble ITAT and the issue has not attained finality. 8: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 30,96,979/- comprising brokerage, commission and legal/professional expenses incurred for obtaining borrowings, without appreciating that the assessee failed to establish that the entire borrowed funds were utilized wholly and exclusively for business purposes. The appellant craves leave to add, amend, alter, modify or withdraw any of the above grounds of appeal at or before the time of hearing. ITA No. 6062/Mum/2026, Assessment Year 2021-22 - Assessee's App....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ained unsecured loans aggregating to Rs. 68,11,00,000/- from 38 creditors. For verification of the loan transactions, the Assessing Officer issued notices under section 133(6) to all the creditors. According to the Assessing Officer, the following two creditors did not comply with the notices: Name of the creditor Loan received Interest paid Shri Jayesh K. Haria Rs.50,00,000/- Rs.1,47,500/- Shri Bharat T. Chheda Rs.80,00,000/- Rs.5,89,666/- Total Rs.1,30,00,000/- 6. The Assessing Officer observed that neither of the aforesaid creditors had complied with the notices issued under section 133(6), nor had the assessee produced them for examination. He therefore concluded that the identity and creditworthiness of the creditors and the genuineness of the transactions remained unverified. Accordingly, for the reasons recorded in paragraphs 4.2 to 4.2.4 at pages 2 to 5 of the assessment order, the Assessing Officer treated the loans aggregating to Rs. 1,30,00,000/- as unexplained cash credits under section 68 of the Act. 7. The learned CIT(A), in paragraphs 7.2.3 to 7.2.11 at pages 19 to 27 of the impugned order, noted that 36 out of the 38 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mation. The learned AR submitted that Shri Bharat T. Chheda had responded to the notice issued under section 133(6). However, the response was received after the assessment order had already been passed and, therefore, could not be considered by the Assessing Officer. It was further submitted that the loan had subsequently been repaid. The learned AR also pointed out that the Assessing Officer had not disallowed the interest of Rs. 5,89,666/- paid on the loan obtained from Shri Bharat T. Chheda. There was no allegation in the assessment order that the transaction represented an accommodation entry. 11. On these facts, the learned AR submitted that the identity and creditworthiness of both creditors and the genuineness of the transactions stood established. Mere non-compliance or delayed compliance by the creditors with the notices issued under section 133(6), according to him, could not justify the addition when the assessee had furnished the relevant documentary evidence. 12. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer. 13. We have considered the rival submissions and perused the material available on record. Under se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the creditors and the genuineness of the transactions. The Revenue has not brought before us any contrary material or pointed out any specific infirmity in the documents examined by the learned CIT(A). The general reliance placed by the learned Departmental Representative upon the assessment order does not dislodge these factual findings. 18. In view of the foregoing, we find no infirmity in the order of the learned CIT(A) deleting the addition of Rs. 1,30,00,000/- made under section 68 of the Act. Ground No. 1 raised by the Revenue is accordingly dismissed. Ground No. 2: Disallowance of interest under section 36(1)(iii) of Rs. 4,58,53,641/- 19. On examination of the financial statements, the Assessing Officer noticed that the assessee had interest-bearing borrowings aggregating to Rs. 128,42,07,342/-. According to him, the assessee had utilised Rs. 90,20,93,640/- for advancing interest-bearing loans, while substantial funds were deployed in interest-free loans and advances, investments in partnership firms and other personal or non-business assets. During the assessment proceedings, the assessee submitted that the loans and advances appearing in the balance sheet amounted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eeded the total interest-bearing funds available with the assessee. Since the interest-free funds of Rs. 17,81,73,835/- exceeded the amount of Rs. 17,03,36,594/- deployed in interest-free loans, investments and other non-business assets, the learned CIT(A) held that the impugned deployment was covered by the interest-free funds available with the assessee. Relying upon the decision of the Hon'ble Supreme Court in CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC), the learned CIT(A) directed the Assessing Officer to delete the disallowance of Rs. 4,58,53,641/-. 24. Before us, the learned AR referred to the balance sheet placed at page 5 of the paper book and the tabulated details of the sources and application of funds appearing at pages 15 to 17 of the impugned order. It was submitted that the interest-free funds available with the assessee were greater than the amounts utilised for personal, interest-free or non-business purposes. The learned AR submitted that the Assessing Officer had not established any direct nexus between the interest-bearing borrowings and the interest-free advances or investments. The disallowance was made merely by reducing the interest-bearing loa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing which was directly utilised for making a specific interest free advance or investment. Nor did he examine the availability and utilisation of the assessee's interest-free funds before drawing an inference of diversion. 29. The learned CIT(A), on the other hand, examined the balance sheet and the accompanying schedules. In paragraph 7.3.5 of the impugned order, he recorded the following position regarding the availability and deployment of funds: Particulars Amount Capital of the assessee Rs.16,71,73,835/- Interest-free unsecured loans Rs.1,10,00,000/- Total interest-free funds available Rs.17,81,73,835/- Funds deployed in interest-free loans, equity investments, personal purposes and other non-business assets Rs.17,03,36,594/- Excess of interest-free funds over the disputed deployment Rs.78,37,241/- 30. The learned CIT(A) further recorded that the funds deployed for business purposes and for advancing interest-bearing loans amounted to Rs. 1,29,93,36,730/-. This amount was greater than the total interest-bearing funds of Rs. 128,42,07,342/- considered by the Assessing Officer. Thus, the factual position recorded by the learned CIT(A) sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... between the aggregate interest-bearing borrowings and the interest-bearing loans advanced. Such a broad arithmetical comparison cannot displace the presumption arising from the availability of sufficient interest-free funds. 35. The learned DR has not controverted the figures recorded by the learned CIT(A) or pointed out any error in the fund position reproduced above. No material has been brought before us to establish that any specific interest-bearing borrowing was diverted for a non-business purpose. 36. In these circumstances, the ratio of Reliance Industries Ltd. (supra) is squarely applicable. We therefore find no infirmity in the conclusion of the learned CIT(A), recorded in paragraph 7.3.8 at page 30 of the impugned order, directing deletion of the disallowance of Rs. 4,58,53,641/- made under section 36(1)(iii). 37. Ground No. 2 raised by the Revenue is accordingly dismissed. Ground No. 3: Disallowance of brokerage, commission and loan processing charges of Rs. 30,36,230/- 38. During the relevant previous year, the assessee claimed the following expenditure incurred in connection with the raising of borrowed funds: Nature of expenditure Amount claimed....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or any particular item of brokerage, commission or loan-processing expenditure as relating to a non-business purpose. The disallowance of Rs. 30,36,230/- was accordingly deleted. 45. Before us, the learned AR submitted that the present ground was consequential to Ground No. 2 concerning the disallowance of interest under section 36(1)(iii). It was submitted that the Assessing Officer had presumed that 37 per cent of the incremental unsecured loans was utilised for non-business purposes merely because the incremental loans and advances made during the year represented approximately 63 per cent of the incremental unsecured loans obtained during the year. According to the learned AR, the aforesaid comparison did not establish the actual utilisation of the borrowed funds. The Assessing Officer had not traced any particular borrowing to any personal or non-business investment or advance. 46. The learned AR further submitted that the assessee had sufficient interest-free funds to cover the interest-free advances, investments and other non-business assets. Therefore, once the allegation of diversion of borrowed funds had been rejected while deciding the disallowance under section 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....28,42,07,342/- The Revenue did not establish any direct nexus between the interest-bearing borrowings and the interest-free or non-business deployment. 50. The impugned disallowance is founded upon the same allegation of diversion of borrowed funds which formed the basis of the disallowance under section 36(1)(iii). Once it is found that the assessee had sufficient interest-free funds to cover the nonbusiness deployment and no nexus between the borrowed funds and such deployment has been established, the basic premise underlying the present proportionate disallowance ceases to survive. 51. We further notice that the Assessing Officer has not disputed that the brokerage, commission and loan-processing charges were actually incurred. There is no finding that the expenditure was bogus, excessive or unsupported by documentary evidence. The expenditure has been disallowed only by applying an estimated percentage of 37 per cent. In the absence of any identified nexus between the expenditure and a specific non-business borrowing or utilisation, such an ad hoc proportionate disallowance cannot be sustained. 52. In these circumstances, we find no infirmity in the conclusion of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Investment Ltd. v. CIT [2018] 402 ITR 640 (SC), wherein it was held: "Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO." 56. The learned CIT(A) also relied upon PCIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bom.), wherein the Hon'ble jurisdictional High Court observed: "Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance cla....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Share of profit/(loss) M/s Prince Marketing Rs.14,10,380/- M/s Kingdom Commodities LLP Rs.1,146/- Arena Enterprises Rs.8,71,304/- Parshvanath Corporation (Rs.1,08,28,018/-) Ellora Chem (Firm) (Rs.3,95,789/-) Net share of loss (Rs.89,40,978/-) 61. The learned AR submitted that the net share of loss of Rs. 89,40,978/- was not claimed in the computation in view of section 10(2A). Apart from the partnership-firm items, the computation disclosed the following exempt receipts: Nature of receipt Amount Provision under which exemption was claimed Interest on Public Provident Fund Rs.1,45,145/- Section 10(11) Dividend received on shares Rs.4,000/- Section 10(34) Dividend received from mutual funds Rs.45,379/- Section 10(35) 62. It was pointed out that the computation itself reflected the suo motu disallowance of Rs. 1,66,741/- under section 14A. However, neither the assessment order nor the impugned order examined the basis on which this amount had been calculated or correlated it with the investments which had actually yielded the respective exempt receipts. 63. The learned AR submitted that the Assessing Off....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... noticing the aforesaid deficiency, proceeded to delete the entire further disallowance without examining the basis on which the assessee had computed the suo motu disallowance of Rs. 1,66,741/-. The impugned order does not record any finding regarding the nature of expenditure included in the assessee's computation, the investment base adopted by the assessee or whether such computation was supported by the accounts. 70. The statutory satisfaction contemplated under section 14A(2) is required to be recorded by the Assessing Officer. Nevertheless, while adjudicating the correctness of the additional disallowance, the learned CIT(A) was required to examine whether the suo motu disallowance was founded upon a discernible and reasonable basis. The decisions in Maxopp Investment Ltd. and Bombay Stock Exchange Ltd. do not lay down that a suo motu disallowance must be accepted irrespective of its basis. They require the correctness of the assessee's claim to be examined with reference to the accounts before Rule 8D is invoked. 71. Thus, the deletion of the further disallowance merely because the Assessing Officer did not adequately articulate his dissatisfaction leaves the substant....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the said amount shall remain undisturbed. If the disallowance recomputed in accordance with the above directions does not exceed Rs. 1,66,741/-, no further addition shall be made. The Assessing Officer shall afford the assessee a reasonable opportunity of furnishing the relevant computation and supporting details before deciding the issue. Ground No. 4 raised by the Revenue is accordingly allowed for statistical purposes. ITA No. 8138/Mum/2026 - Assessment Year 2018-19 - Revenue's Appeal Ground No. 1: Addition under section 68 of Rs. 5,00,00,000/- 76. During the relevant previous year, the assessee obtained a further loan of Rs. 5,00,00,000/- from Blacksoil Capital Private Limited. According to the assessment order, an opening loan balance of Rs. 20,00,00,000/- was already outstanding in the name of the said lender. On the basis of information appearing on the Insight/ITBA portal, the Assessing Officer formed a view that Blacksoil Capital Private Limited had been struck off by the Ministry of Corporate Affairs. The assessee was therefore called upon to explain why the loan of Rs. 5,00,00,000/- should not be treated as unexplained. In response, the assessee submitted that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s.67,94,689/- 80. On the basis of the MCA master data, financial statements, confirmation, ledger account and banking records, the learned CIT(A) held that the identity and creditworthiness of the lender and the genuineness of the transaction stood established. The learned CIT(A) further noticed that Blacksoil Capital Private Limited was an established Non-Banking Financial Company engaged in financing activities. The additional loan of Rs. 5,00,00,000/- was received and the aggregate outstanding loan was repaid through banking channels during the year. It was also noticed that the loan outstanding at the beginning of the year had been received from the same lender in assessment year 2017-18. The assessment for that year was completed under section 143(3) on 30.12.2019 without making any addition in respect of the loan of Rs. 20,00,00,000/- received from Blacksoil Capital Private Limited. The learned CIT(A) accordingly held that the assessee had satisfactorily explained the nature and source of the credit and directed the Assessing Officer to delete the addition of Rs. 5,00,00,000/-. 81. Before us, the learned AR relied on the the impugned order. The learned AR referred to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ately preceding year, the further loan obtained from the same lender could not be treated as unexplained solely on the basis of factually incorrect information regarding its corporate status. 84. The learned AR also submitted that there was no allegation or material indicating that the transaction represented an accommodation entry. The Assessing Officer had not identified any cash deposit or other suspicious source in the lender's bank account preceding the advancement of the loan. It was further submitted that the observations regarding sections 269SS and 269T were misconceived because the loan had been accepted and repaid through banking channels and not in cash. On these facts, the learned AR submitted that the learned CIT(A) had correctly deleted the addition of Rs. 5,00,00,000/- made under section 68. 85. We have considered the rival submissions and perused the material available on record. The Assessing Officer made the addition of Rs. 5,00,00,000/- principally on the basis of information appearing on the departmental portal that Blacksoil Capital Private Limited had been struck off by the Ministry of Corporate Affairs. 86. The assessee had furnished the MCA master ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the learned CIT(A) deleting the addition of Rs. 5,00,00,000/- made under section 68. The sole foundation for treating the corresponding interest payment of Rs. 1,47,20,547/- as unexplained expenditure under section 69C therefore no longer survives. 93. Accordingly, we uphold the order of the learned CIT(A) deleting the disallowance of Rs. 1,47,20,547/-. Ground No. 2 raised by the Revenue is dismissed. Ground No. 3: Disallowance of legal and professional charges of Rs. 5,90,000/- under section 69C 94. The Assessing Officer noticed that the assessee had incurred legal and professional charges of Rs. 5,90,000/- for obtaining the loan from Blacksoil Capital Private Limited. Since the underlying loan was treated as unexplained cash credit under section 68, the Assessing Officer treated the related expenditure of Rs. 5,90,000/- as unexplained expenditure under section 69C. 95. The learned CIT(A), in paragraphs 7.3.1 and 7.3.2 of the impugned order, observed that the disallowance was consequential to the addition made in respect of the underlying loan. Having held that the loan received from Blacksoil Capital Private Limited was genuine, the learned CIT(A) deleted the disallo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... books and offered in the return of income. Therefore, the addition resulted in taxing the same receipts for a second time. 103. The learned AR accordingly submitted that the learned CIT(A) had correctly deleted the addition of Rs. 3,00,000/-. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer. 104. We have considered the rival submissions and perused the material available on record. The Assessing Officer made the addition of Rs. 3,00,000/- on the premise that the related receipts appearing in Form No. 26AS had not been recorded in the books of account or offered to tax. The learned AR referred to Form No. 26AS placed at pages 44 to 49 of the paper book and Annexure II to Schedule D, containing the party-wise details of interest received, placed at page 22 of the paper book. The said schedule records business-related interest of Rs. 1,44,000/- in the name of Nipa Enterprises and Rs. 1,56,000/- in the name of Ambica Traders. Thus, the apparent difference arose because Form No. 26AS reflected the receipts in the names of the respective proprietors, whereas the books and the interest schedule recorded them in the names of their pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r section 36(1)(iii) Rs.1,62,86,836/- 108. The Assessing Officer further observed that, if the assessee were granted relief in respect of the loan from Blacksoil Capital Private Limited, the corresponding interest of Rs. 1,47,20,547/- would stand restored to the computation under section 36(1)(iii), resulting in a total possible disallowance of Rs. 3,10,07,383/-. 109. On examination of the balance sheet and its schedules, the learned CIT(A) recorded the following fund position: Particulars Amount Capital of the assessee Rs.21,44,11,573/- Interest-free unsecured loans Rs.1,10,00,000/- Total interest-free funds available Rs.22,54,11,573/- Interest-bearing funds Rs.175,47,29,334/- Funds deployed for business purposes and interest-bearing loans Rs.179,37,78,172/- Funds deployed in interest-free loans, equity investments, personal purposes and other nonbusiness assets Rs.18,03,67,114/- 110. The learned CIT(A) found that the funds deployed for business purposes and interest-bearing loans, amounting to Rs. 179,37,78,172/-, exceeded the interest-bearing funds of Rs. 175,47,29,334/-. He further found that the interest-free funds of Rs. 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITR 466 (SC). 114. The learned AR accordingly submitted that, since the interest free funds were more than sufficient to cover the non-business or interest-free deployment, the learned CIT(A) had correctly deleted the disallowance of Rs. 1,62,86,836/-. 115. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer. 116. We have considered the rival submissions and perused the material available on record. The Assessing Officer treated the investments of Rs. 25,83,94,862/- as having been made from interest-bearing funds and computed a disallowance of Rs. 3,10,07,383/- by applying an interest rate of 12 per cent. After reducing the interest of Rs. 1,47,20,547/- paid to Blacksoil Capital Private Limited, which had been separately disallowed under section 69C, he made the net disallowance of Rs. 1,62,86,836/- under section 36(1)(iii). 117. The Assessing Officer proceeded on the premise that the assessee had not established the source of the investments made in equity shares, partnership firms and other assets. He did not, however, identify any specific borrowing which was directly utilised for making a particular investment or intere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as under: "7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question." 121. The ratio of the aforesaid decision is that where the interest free funds available with the assessee are sufficient to meet the investments, a presumption arises that the investments were made from such interest-free funds. The issue is essentially factual and requires comparison of the interest-free funds available with the investments or advances alleged to have been made for nonbusiness purposes. 122. In the present case, the interest-free funds of Rs. 22,54,11,573/- were sufficient to cover the disputed deployment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owance at Rs. 3,85,949/-, comprising demat charges of Rs. 16,449/- under rule 8D(2)(i) and Rs. 3,69,500/- under rule 8D(2)(ii). After taking into account the suo motu disallowance of Rs. 1,90,432/-, the resultant addition was Rs. 1,95,517/-. 128. In appeal, the learned CIT(A) held that the Assessing Officer had not recorded the satisfaction contemplated under section 14A(2), having regard to the accounts of the assessee, before rejecting the suo motu disallowance and invoking rule 8D. Relying upon the decisions in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) and PCIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bom.), the learned CIT(A) deleted the additional disallowance of Rs. 1,95,517/-. 129. Before us, the learned Departmental Representative relied upon the assessment order and submitted that the assessee's computation was not in accordance with the amended rule 8D. It was submitted that the Assessing Officer had considered the assessee's working before computing the disallowance in accordance with the prescribed statutory method. 130. Per contra, the learned AR submitted that the Assessing Officer had mechanically rejected the suo motu disallowan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Assessing Officer thereafter referred to the different categories of exempt income and computed the disallowance with reference to the investment in Vikas Ecotech Ltd., he did not examine the constituent elements of the suo motu disallowance of Rs. 1,90,432/- or demonstrate, having regard to the accounts, why such disallowance was incorrect. Thus, the mandatory exercise contemplated under section 14A(2) was not carried out in the manner required by law. 136. At the same time, we find that the learned CIT(A) deleted the additional disallowance solely on the ground that the Assessing Officer had failed to record the requisite satisfaction. The learned CIT(A) did not examine the basis on which the assessee had computed the suo motu disallowance of Rs. 1,90,432/-. In the absence of such examination, the correctness of the assessee's claim cannot be accepted merely because the satisfaction recorded by the Assessing Officer was found deficient. 137. There is, however, one material distinction from the facts considered by us for A.Y. 2017-18. For the year under consideration, the Assessing Officer has stated at paragraphs 8.9 and 8.10 of the assessment order that the investment c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d as business expenditure. The Assessing Officer accordingly disallowed the entire amount of Rs. 6,34,500/-. 141. In appeal, the learned CIT(A) observed that the sole basis of the disallowance was the addition made under section 68 in the earlier assessment years. The addition relating to B.K. Trading for A.Y. 2016-17 had been deleted by the learned CIT(A) by order dated 23.01.2026. Similarly, the additions relating to Bharat T. Chheda and Jayesh K. Haria for A.Y. 2017-18 had been deleted by the learned CIT(A) by order dated 08.05.2026. The learned CIT(A), therefore, held that the foundation of the consequential disallowance no longer survived and directed its deletion. 142. Before us, the learned Departmental Representative relied upon the assessment order. Per contra, the learned AR submitted that the addition made under section 68 in respect of the loan obtained from B.K. Trading for A.Y. 2016-17 had already been deleted in the assessee's own case in DCIT v. Jayant Shamji Chheda, ITA No.3548/Mum/2026, vide order dated 19.08.2026. As regards the interest of Rs. 4,05,333/- paid to Bharat T. Chheda and Rs. 1,68,750/- paid to Jayesh K. Haria, the learned AR referred to the fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e loan was non-genuine, cannot be sustained. 147. As regards Bharat T. Chheda and Jayesh K. Haria, the corresponding loans of Rs. 80,00,000/- and Rs. 50,00,000/-, respectively, were added under section 68 in A.Y. 2017-18. While disposing of the Revenue's appeal for A.Y. 2017-18 hereinabove, we have upheld the decision of the learned CIT(A) deleting those additions. Consequently, the foundation for disallowing the corresponding interest of Rs. 4,05,333/- and Rs. 1,68,750/-, respectively, also ceases to exist. 148. The interest disallowance is entirely consequential to the additions made under section 68 in the preceding assessment years. No independent material has been brought on record by the Assessing Officer to demonstrate that the interest was not paid, that it was not incurred for the purposes of the assessee's business, or that it was otherwise inadmissible under any provision of the Act. In the absence of any such independent basis, the interest expenditure cannot be disallowed merely by relying upon additions under section 68 which have subsequently been deleted. 149. In view of the above, we find no infirmity in the decision of the learned CIT(A) deleting the disa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ofessional expenditure to nonbusiness purposes was factually incorrect. 154. The learned CIT(A) accepted the assessee's contention. Referring to his findings concerning the disallowance under section 36(1)(iii), he held that the assessee possessed sufficient interest-free funds to cover the investments in personal or non-business assets. He consequently held that no part of the borrowed funds could be regarded as having been diverted for non-business purposes. Treating the allocation made by the Assessing Officer as an ad hoc disallowance, the learned CIT(A) directed deletion of Rs. 30,96,979/- 155. Before us, the learned Departmental Representative relied upon the assessment order. Per contra, the learned AR submitted that the disallowance was entirely founded upon the same assumption of diversion of borrowed funds which formed the basis of the disallowance under section 36(1)(iii). Referring to the balance sheet and the fund position already considered while adjudicating Ground No. 5, he submitted that the assessee's interest-free funds were sufficient to cover the interest-free advances, investments and alleged non-business applications. 156. The learned AR further subm....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Fund Rs.1,77,372/- Total Rs.77,62,496/- 163. In response to the notice issued under section 142(1), the assessee submitted that the investments in the partnership firms had been made out of his own funds and, therefore, no disallowance under section 14A was warranted. Without prejudice to this contention, the assessee furnished a computation under rule 8D in compliance with the direction of the Assessing Officer. 164. The Assessing Officer rejected the contention that the investments had been made exclusively out of interest-free funds. He observed that the assessee had failed to establish, by supporting documentary evidence, that his own funds had been specifically deployed in making the investments which yielded or were capable of yielding exempt income. At paragraph 5.7, the Assessing Officer stated that he was not satisfied with the correctness of the assessee's claim and proceeded to apply rule 8D. 165. The Assessing Officer considered the annual average of the monthly averages of the investments in all the partnership firms at Rs. 49,02,91,249/- and the corresponding average investment in the Public Provident Fund at Rs. 25,06,622/-. The disallowance was co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for the current and earlier years. Such credited profits could not be regarded as fresh investments made out of borrowed funds. According to him, only the amount actually introduced by the assessee as capital could be considered as an "investment" for the purpose of applying rule 8D. 172. It was further submitted that the assessee's own capital exceeded the capital invested in Arena Enterprises and Ellora Chemical Works. Therefore, a presumption arose that the relevant investments had been made out of the assessee's own interest-free funds. Consequently, no interest expenditure could be attributed to the earning of the exempt share of profit. 173. The learned AR also submitted, without prejudice, that the net exempt income for the year was Rs. 4,96,832/-, comprising the net share of profit from the partnership firms of Rs. 3,19,460/- and PPF interest of Rs. 1,77,372/-. He contended that the share of loss from Prince Marketing could not be ignored while determining the real income exempt under section 10(2A). Accordingly, the disallowance under section 14A could not, in any event, exceed Rs. 4,96,832/-. In support of the principle that section 14A operates with reference to e....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., section 14A(3) makes the procedure prescribed in section 14A(2) applicable. The Assessing Officer is therefore required to examine the accounts and record his dissatisfaction with the correctness of the assessee's claim before determining the disallowance under rule 8D. The Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC), at paragraph 41, held: "Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct." 179. In the present case, however, the facts are materially different from those obtaining in A.Ys. 2017-18 and 2018-19. The Assessing Officer noticed from the accounts that the assessee had claimed interest expenditure of Rs. 87,40,221/- and had investments in partnership firms and in the PPF. He issued a specific show-cause notice, considered the assessee's explanation that the investments had been made from his own funds and recorded at paragraphs 5.4 and 5.7 why he was not satisfied with the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the year." 184. Although the Special Bench considered the corresponding clause of rule 8D as it then stood, the principle remains applicable because the computation continues to operate upon the value of investments having a relation to income which does not form part of the total income. 185. In the present case, the record shows that the assessee earned a positive share of profit of Rs. 34,72,196/- from Arena Enterprises and Rs. 41,12,928/- from Ellora Chemical Works. The investment in the PPF also yielded exempt interest of Rs. 1,77,372/-. The Assessing Officer was therefore justified in considering the investment in the PPF. However, the capital balances in partnership firms which did not yield any positive exempt income during the year could not have been included indiscriminately in the rule 8D computation. 186. We are unable to accept the further contention that the disallowance should be restricted to Rs. 4,96,832/-. The figure of Rs. 4,96,832/- was arrived at by setting off the share of loss of Rs. 72,65,664/- from Prince Marketing against the positive shares of profit from Arena Enterprises and Ellora Chemical Works. A share of loss from one partnership firm doe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterest expenditure of Rs. 87,40,221/- against the interest income earned from the business of advancing loans. 191. In response to the notice issued under section 142(1), the assessee submitted that he had been regularly engaged in the business of advancing loans on interest and had earned interest income of Rs. 7,35,69,625/- during the year. The interest expenditure of Rs. 87,40,221/- had been incurred in the course of that business and was, therefore, allowable under section 36(1)(iii). 192. The assessee further submitted before the Assessing Officer that he possessed interest-free funds comprising his own capital of Rs. 146.49 crore and interest-free loans from family members of Rs. 230.41 crore, aggregating to Rs. 376.90 crore. The only interest-bearing borrowing outstanding as on 31.03.2021 was the borrowing of Rs. 12.38 crore from Kotak Mahindra Bank. 193. The Assessing Officer observed that a sum of Rs. 4,40,00,000/- borrowed from Kotak Mahindra Bank had been utilised for a non-business purpose. He consequently disallowed the corresponding interest component of Rs. 2,89,380/- under section 36(1)(iii). 194. In appeal, the assessee explained that the loan of Rs. 4....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t nexus between the earlier borrowing and a particular business advance was not demonstrated, the presumption recognised in Reliance Industries Ltd. (supra) operated in favour of the assessee. 199. The learned AR also contended that the Assessing Officer had separately made a disallowance of Rs. 49,27,979/- under section 14A by applying rule 8D. According to him, the interest expenditure of Rs. 2,89,380/- could not again be disallowed under section 36(1)(iii) if the same expenditure had already entered the computation under section 14A. He accordingly sought deletion of the disallowance. 200. The learned Departmental Representative relied upon the assessment order and the impugned order. 201. We have considered the rival submissions and perused the material available on record. The assessee is engaged in the business of advancing loans on interest and earned interest income of Rs. 7,35,69,625/- during the relevant previous year. Against such income, the assessee claimed interest expenditure of Rs. 87,40,221/-. Out of this amount, the Assessing Officer disallowed interest of Rs. 2,89,380/- attributable to the loan of Rs. 4,40,00,000/- obtained from Kotak Mahindra Bank. 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed funds are available and the assessee's own and other interest-free funds are sufficient to cover the interest-free advances or alleged nonbusiness deployment, a presumption arises that such deployment was made out of the interest-free funds. In the present case, the Revenue has neither rebutted this presumption nor established a direct nexus between the interest-bearing borrowing and any identified personal expenditure or non-business asset. 208. The fact that the Kotak Mahindra Bank loan was applied towards repayment of an earlier liability does not establish diversion of borrowed funds. The Revenue was required to demonstrate either that the original borrowing from Smt. Tarla Chheda had been utilised for a personal purpose or that the refinancing transaction was unrelated to the assessee's financing business. No such finding is discernible from the assessment order or the impugned order. 209. We are, however, unable to accept the alternative contention that the interest has been disallowed twice, once under section 14A and again under section 36(1)(iii). For the year under consideration, the disallowance under rule 8D was computed at one per cent of the annual average of....