MR. ABHAY NAVINCHANDRA ZAVERI,MUMBAI vs. DCIT, 19(1), MUMBAI

This appeal by the assessee is directed against the order dated 15.12.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi ["learned CIT(A)"], under section 250 of the Income-tax Act, 1961 ("the Act"), arising from the assessment order dated 10.03.2025 passed under section 143(3) read with section 144B of the Act for the assessment year 2023-24.

The effective grounds raised by the assessee relate to the disallowance of interest of Rs.52,01,262/- under section 36(1)(iii) of the Act in respect of the amount standing in the capital/current account of the assessee with M/s Abhay Navinchandra, a partnership firm in which he is a partner, and the disallowance of House Rent Allowance of Rs.9,66,686/- paid to his son under section 40A(2)(b) of the Act.

Briefly stated, the assessee, an individual engaged in the business of manufacturing and sale of studded gold jewellery, filed his return of income declaring total income of Rs.99,84,200/-. The Assessing Officer noticed that the assessee had unsecured loans and had incurred interest expenditure of Rs.62,86,251/-, whereas an amount of Rs.4,33,53,851/- stood in the name of the partnership firm without any interest being charged. The Assessing Officer treated the said amount as an interest-free advance out of borrowed funds and disallowed interest of Rs.52,01,262/- by applying the rate of 12%. The Assessing Officer further observed that HRA of Rs.11,60,000/- paid to the assessee's son, Shri Pranav Zaveri, was substantially higher than the HRA paid to other employees and disallowed Rs.9,66,686/- under section 40A(2)(b) of the Act. The learned CIT(A) confirmed both disallowances.

Before us, the learned Authorised Representative submitted that the amount of Rs.4,33,53,851/- represented the assessee's capital/current account in the partnership firm and not a loan. It was submitted that the capital had been introduced over several years out of the assessee's own funds and that the balance fluctuated during the year. Pursuant to the direction of the Bench at the time of hearing, the assessee filed a year-wise reconciliation of the balances standing in the name of the partnership firm from assessment years 2017-18 to 2023- 24, together with copies of the relevant ledger accounts. It was 2 contended that these documents establish the nature and source of the amounts and require consideration. In respect of the HRA disallowance, it was submitted that Shri Pranav Zaveri was handling the manufacturing unit and marketing of jewellery and that the payment was commensurate with his role and responsibilities.

The learned Departmental Representative relied upon the orders of the lower authorities. He submitted that the assessee had interest- bearing unsecured loans and had failed to establish the nexus of the alleged own funds with the amount advanced to the partnership firm. He also supported the finding that the HRA paid to the related party was excessive when compared with the HRA paid to the other employees.

We have heard the rival submissions and perused the material available on record. The principal controversy relating to the disallowance under section 36(1)(iii) turns upon the true nature of the amount standing in the name of the partnership firm, the movement of the capital/current account over the relevant years, the availability of interest-free funds and the nexus, if any, between the borrowed funds and the amounts introduced in the firm. The year-wise reconciliation and the supporting ledger accounts now filed by the assessee have a direct bearing on these factual aspects. These documents were filed pursuant to the direction of the Bench and require proper verification with the books of account, bank statements and the accounts of the partnership firm. Such verification is appropriately undertaken at the first appellate stage after affording the Assessing Officer an opportunity to examine the material.

In these circumstances, and having regard to the principles of natural justice, we consider it appropriate to set aside the impugned 3 order of the learned CIT(A) and restore all the grounds raised by the assessee to his file for fresh adjudication. The learned CIT(A) shall admit and examine the year-wise reconciliation, ledger accounts and such further evidence as may be produced by the assessee; may obtain a remand report from the Assessing Officer, if considered necessary; and shall decide the issues by a speaking order in accordance with law after granting adequate opportunity of hearing to the assessee. In relation to the HRA disallowance, the learned CIT(A) shall examine the nature of services, role and responsibilities of the concerned employee, the terms of employment, comparable remuneration/allowances and the statutory parameters contained in section 40A(2)(a) of the Act. The assessee shall furnish the requisite documentary evidence and shall cooperate in the proceedings. We make it clear that we have not expressed any opinion on the merits of the issues.

Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

In the result, the appeal of the assessee is allowed for statistical purposes.