DY. COMMISSIONER OF INCOME TAX, MUMBAI vs. HITESH SHANTILAL MEHTA, MUMBAI

The above-captioned appeals have been preferred by the Revenue and the corresponding Cross Objections by the assessee against the respective orders passed by the learned Commissioner of Income Tax (Appeals) for Assessment Years 1996-97, 1998-99, 1999-2000, 2002-03, 2003-04, 2007-08, 2009-10, 2010-11, 2015-16, 2017-18 and 2020-21. Since all these appeals and Cross Objections pertain to the same assessee and involve a common issue relating to allowability of interest expenditure claimed under section 57 of the Income-tax Act, 1961, they were heard together and are being disposed of by this consolidated order. The principal grievance of the Revenue is against the relief granted by the learned CIT(A) in respect of such interest expenditure, whereas the assessee, in the Cross Objections, has challenged the action of the learned CIT(A) in restricting the deduction of interest expenditure only to the extent of interest income earned during the respective assessment years.

The procedural background, though extending over several assessment years, can be stated briefly. In Assessment Years 1996-97, 1998-99, 1999-2000, 2002-03, 2003-04, 2007-08, 2009-10 and 2010-11, the assessments had originally been

Before proceeding to the merits, two preliminary aspects require consideration. The first relates to maintainability of the Revenue’s appeals for Assessment Years 1998-99, 1999- 2000, 2002-03, 2015-16, 2017-18 and 2020-21 in ITA Nos. 6492 to 6497/Mum/2025. It was submitted before us that the tax effect involved in these appeals is below the monetary limit prescribed by the CBDT Circular No. 09/2024 dated

The second preliminary aspect concerns a delay of eight days in filing the Cross Objections for Assessment Years 1996-97, 1998-99, 1999-2000, 2002-03, 2003-04, 2007-08, 2010-11, 2015-16 and 2020-21. The assessee has filed applications for condonation of delay supported by affidavit, explaining that the notices of the departmental appeals were served at his residential address on 25.10.2025 when he was travelling and, in his absence, were received by the house help. On returning, the assessee came across the said notices while examining the documents received during his absence

Coming to the substantive controversy, the material facts relevant for adjudication are substantially common across the assessment years under consideration. The assessee is a notified person under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 and, consequent to such notification, his properties and assets came to be vested in the Custodian appointed under the said Act. The case of the assessee throughout has been that borrowings had originally been made from related brokerage entities, namely, M/s Ashwin S. Mehta, M/s Harshad S. Mehta and M/s J.H. Mehta, for making investments in shares and securities and that, under the arrangement between the

The nature of the controversy can conveniently be understood from Assessment Year 2009-10, the facts of which are representative of the issue arising in the other years. During this year, the assessee had earned interest of ₹15,51,80,555 on term/fixed deposits maintained by the Custodian and offered the same to tax under the head “Income from other sources”. Against such income, the assessee had debited aggregate interest expenditure of ₹18,76,05,698, comprising ₹7,97,15,047 payable to M/s Ashwin S. Mehta, ₹9,66,22,118 payable to M/s Harshad S. Mehta and ₹1,12,68,533 payable to M/s J.H. Mehta. Out of the aforesaid interest expenditure, the assessee had itself disallowed proportionate interest of ₹57,71,502 under section 14A and, consequently, claimed net interest expenditure of ₹18,18,34,196. The controversy before us, therefore, is not

The Assessing Officer disallowed the claim essentially on the ground that the assessee had failed to establish a crystallised and enforceable liability to pay interest. According to him, there was no written agreement containing the terms governing payment of interest; the liability was tentative and provisional; there was no established basis demonstrating the assessee’s obligation to pay and the corresponding right of the creditors to receive the amount; the basis of computation had not been satisfactorily established; and the provision represented a contingent liability. The Assessing Officer also observed that the concerned brokerage entities had not filed returns for the corresponding period and, therefore, presumed that they had not charged interest from the assessee. On these premises, the entire claim was disallowed. Without prejudice, he further observed that, even if the interest expenditure were otherwise allowable, the provisions of section 14A read with Rule 8D would apply.

The learned CIT(A), after considering the earlier orders of the Tribunal, did not sustain the basic premise of the Assessing Officer that the entire interest expenditure was inadmissible. He noticed that in the assessee’s own case for

The learned CIT(A), however, proceeded to restrict the deduction to the quantum of interest income earned or offered during the respective years. For doing so, he principally referred to the decision of the Tribunal in Cascade Holdings Pvt. Ltd. v. DCIT, ITA Nos. 6965, 6966 & 6968/Mum/2018 dated 16.03.2020, wherein deduction of interest expenditure had been allowed to the extent of interest income. On that basis, he concluded that the maximum amount allowable under section 57 would be the amount of interest income earned or offered by the assessee. He further directed the Assessing Officer to verify whether the corresponding interest payable to M/s Ashwin S. Mehta, M/s J.H. Mehta and M/s Harshad S. Mehta had been offered to tax by the respective recipients in accordance with the method of accounting

Before us, the learned counsel for the assessee submitted that the learned CIT(A), having accepted the allowability of interest expenditure in principle and having also noticed the consistent orders of the Tribunal in the assessee’s own case and in the cases of other family members and group entities, was not justified in restricting the deduction merely to the extent of interest income earned during the respective years. She submitted that the borrowings in question were old borrowings, substantially originating in the year 1990, which had been utilised for acquisition of shares and securities. The subsequent sale of such shares and deployment of the realisation in fixed/term deposits or utilisation thereof pursuant to directions operating under the Special Court regime did not alter the source or character of the funds. Thus, according to her, there existed a continuing nexus between the borrowed funds on which interest liability had

The learned counsel further submitted that the premise adopted in the earlier proceedings that the liability remained contingent upon adjudication by the Hon’ble Special Court was factually incorrect. Referring to the proceedings in M.P. No.41 of 1999, it was pointed out that the prayers therein related essentially to sale of specified properties and did not involve adjudication of the assessee’s obligation to pay interest. The proceedings referred to by the authorities had already culminated and, therefore, no dispute concerning the existence of the interest liability remained pending before the Hon’ble Special Court. It was also pointed out that this aspect had earlier been noticed by the Tribunal while restoring

The principal contention of the learned counsel, however, was that the restriction imposed by the learned CIT(A) has no statutory basis under section 57. It was submitted that once the requisite nexus between the expenditure and the income assessable under the head “Income from other sources” is established, there is no further requirement that the expenditure allowable under section 57(iii) must necessarily be restricted to the quantum of income actually earned in that particular year. In support, reliance was placed upon the Tribunal’s order in the assessee’s own case for Assessment Year 2012-13 in ITA No.4430/Mum/2017 dated 27.12.2017; the orders in the cases of Smt. Pratima H. Mehta; and the decisions rendered in several other family and group cases on

Per contra, the learned Special Counsel for the Revenue supported the orders of the authorities below insofar as the Revenue’s surviving appeals are concerned and opposed the Cross Objections filed by the assessee. The Revenue’s case, in substance, is that the assessee must establish the requisite nexus contemplated under section 57 between the interest

We have heard the rival submissions, perused the material placed on record and carefully considered the orders passed in the assessee’s own case as well as in the cases of other family members and group entities which have been referred to before us. The controversy which now survives for our adjudication is essentially whether, on the facts obtaining in the present cases, the interest expenditure satisfies the requirement of section 57 and, if so, whether there is any legal basis for restricting such otherwise allowable expenditure to the amount of interest income earned during the corresponding assessment year.

We have given our thoughtful consideration to the rival submissions and have examined the material placed before

Before examining this restriction, we may first deal with the foundational objections which had weighed with the Assessing Officer, namely, that the interest liability was tentative, provisional or contingent; that there was no written agreement creating an enforceable obligation; and that the basis for payment of interest had not been established. On this aspect, the record shows that these are not fresh liabilities created during the assessment years before us. The borrowings go back to the period prior to notification under the Special Court Act and the consistent case of the assessee

Equally, the premise that allowability of the liability remained dependent upon some pending adjudication before the Hon’ble Special Court does not survive on the material available before us. The assessee had specifically demonstrated that M.P. No.41 of 1999, which was referred to in the earlier proceedings, principally concerned sale of

We now come to the more fundamental requirement of nexus under section 57. The material placed on record shows a continuing financial trail. The borrowings were made for acquisition of shares and securities; the investments so acquired were subsequently realised; and the sale proceeds were thereafter either placed in fixed/term deposits or utilised for payments pursuant to the directions operating in relation to the notified entities. In the case of Pratima H. Mehta, while examining substantially the same factual pattern, the Tribunal had specifically noticed that the borrowings were made in the year 1990 and invested in shares, which were subsequently sold, and the realisations were either retained in fixed deposits or utilised for payments to notified entities. The mere transformation of the asset from shares into their sale proceeds and thereafter into fixed deposits cannot, by itself, snap the nexus with the original source of funds. What

Section 57, insofar as relevant to the controversy before us, predicates allowability upon the relationship between the expenditure incurred and the earning of income chargeable under the head “Income from other sources”. The requirement is of a real nexus with the earning of such income; it does not postulate that the amount of expenditure must bear an arithmetical equivalence to the income actually realised in the same year. The earlier orders referred to in the impugned proceedings have themselves noticed the principle emanating from Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC), read with CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.), that the connection between expenditure and earning of income need not necessarily be direct and that an indirect connection may also establish the requisite nexus. Likewise, in CIT v. Smt. Sushila Devi Khadaria [2009] 319 ITR 413 (Bom.), the jurisdictional High Court upheld the deduction of finance expenditure against income falling under the head “Income from other sources” in the factual circumstances considered therein. These principles were specifically applied by the Tribunal in the group proceedings while accepting the claim under section 57.

This brings us to the decision in Cascade Holdings Pvt. Ltd., which constitutes the principal foundation for the restriction imposed by the learned CIT(A). A closer examination of that decision shows that the factual position therein was materially different. In that case, against interest

This distinction assumes greater significance because the very same issue has subsequently been examined in the assessee’s own case. In the consolidated order dated 09.02.2026 for Assessment Years 2000-01, 2004-05 and 2018-19, the Tribunal specifically considered the reliance placed upon Cascade Holdings Pvt. Ltd. and held that the restriction therein was founded upon its peculiar facts and could not be understood as laying down a general proposition that interest expenditure allowable under section 57 must invariably be capped at the interest income earned. The Tribunal consequently directed allowance of the entire interest expenditure for those assessment years. The factual

This is also consistent with the manner in which the issue has been dealt with in the assessee’s own case for Assessment Year 2012-13 and in the cases of other family members. In the assessee’s case for Assessment Year 2012-13 in ITA No.4430/Mum/2017, the Tribunal directed allowance of deduction under section 57 in respect of interest accrued at 12%, subject to verification of quantification. Similar claims have thereafter been considered in the cases of Pratima H. Mehta and other members of the group. Of particular relevance is the decision in the case of Pratima H. Mehta for Assessment Year 1992-93, wherein, after examining the governing principles, the Tribunal held that the assessee was entitled to deduction of interest expenditure under section 57 because the expenditure had the requisite nexus with income falling under the head “Income from other sources”, even though such nexus was not necessarily direct.

Thus, the conclusion follows both from the statutory requirement and from the consistent adjudication on the same factual foundation. The decisive test is the existence of the requisite nexus between the expenditure and the income sought to be earned under the relevant head, and not whether the expenditure happens to be lower than, equal to or higher

We, therefore, hold that the learned CIT(A) was justified in rejecting the Assessing Officer’s action of disallowing the interest expenditure in its entirety, but was not justified in thereafter restricting the allowable deduction merely to the quantum of interest income earned or offered during the respective assessment years. Such restriction neither follows from section 57 nor from the decision in Cascade Holdings Pvt. Ltd. on which reliance has been placed. Accordingly, subject to the year-specific quantification of the interest expenditure and such other statutory disallowance as may independently be applicable, the assessee is entitled to deduction of the entire interest expenditure having the requisite nexus with income assessable under the head “Income from other sources”. The corresponding grounds raised by the Revenue are, therefore, dismissed and the

There remains the direction of the learned CIT(A) regarding corresponding taxation of interest in the hands of the recipient entities. The learned CIT(A) noticed that the interest expenditure had been claimed in respect of amounts payable to M/s Ashwin S. Mehta, M/s J.H. Mehta and M/s Harshad S. Mehta and, following the earlier directions of the Tribunal, directed the Assessing Officer to verify whether the corresponding interest income had been offered to tax by the respective recipients in accordance with the method of accounting followed by them and, if not, to take appropriate action in their cases. The assessee’s specific case before the authorities has been that M/s Ashwin S. Mehta and M/s J.H. Mehta follow the mercantile system of accounting, whereas Shri Harshad S. Mehta follows the cash system and, consequently, the point of time at which corresponding interest becomes taxable in their respective hands may not necessarily be identical. In our view, the allowability of expenditure in the hands of the assessee and the taxability of the corresponding receipt in the hands of the creditor have to be determined in accordance with the provisions applicable to each assessee and the method of accounting lawfully followed by the respective recipient. Therefore, if any corresponding interest income is liable to tax in the hands of a recipient but

We may also clarify the position regarding section 14A, since the Assessing Officer had made an alternative observation in this regard. As noticed hereinabove, for Assessment Year 2009-10, against the gross interest expenditure of ₹18,76,05,698, the assessee had itself made a proportionate disallowance of ₹57,71,502 under section 14A and had claimed only the net amount of ₹18,18,34,196 as deduction. The Assessing Officer, having disallowed the entire interest claim itself, did not make any further separate disallowance under section 14A, though he observed that the provisions of section 14A read with Rule 8D would otherwise apply. Our finding in the preceding paragraphs is confined to the proposition that interest expenditure satisfying the conditions of section 57 cannot be restricted merely to the amount of interest income earned in the relevant year. It does not disturb any year-specific disallowance already made by the assessee under section 14A or any other independent statutory adjustment which has attained finality. The

The assessee had also raised, without prejudice, an alternative contention that to the extent any portion of the interest expenditure was ultimately held not allowable as a revenue deduction, the same should be permitted to be capitalised, relying upon earlier orders rendered in the cases of the family members. Since we have held that the interest expenditure having the requisite nexus with income assessable under the head “Income from other sources” is allowable under section 57 and cannot be restricted merely to the quantum of interest income, the aforesaid alternative plea does not survive for separate adjudication and is, therefore, rendered academic.

Thus, the position which emerges is that the existence and character of the interest liability cannot be rejected on the grounds on which the Assessing Officer proceeded; the requisite nexus between the historical borrowings and the income-producing investments stands established on the factual matrix already examined in successive proceedings; and, once such nexus satisfies the requirement of section 57,

In view of our findings hereinabove, the Revenue’s appeals for Assessment Years 1998-99, 1999-2000, 2002-03, 2015- 16, 2017-18 and 2020-21 in ITA Nos. 6492 to 6497/Mum/2025 stand dismissed on account of low tax effect in terms of CBDT Circular No. 09/2024 dated 17.09.2024. As already observed, such dismissal is on account of the prescribed monetary limit and does not amount to adjudication of the issues raised therein on merits.

Insofar as the surviving appeals of the Revenue are concerned, for the reasons discussed in the foregoing paragraphs, we find no infirmity in the conclusion of the learned CIT(A) insofar as he has accepted the allowability of interest expenditure under section 57. However, his further restriction of such deduction only to the extent of interest income earned or offered during the respective assessment years cannot be sustained. The decision in Cascade Holdings

The delay of eight days in filing the respective Cross Objections, as specified in paragraph 4 above, having already been condoned, all the Cross Objections have been adjudicated on merits. In view of our findings, the Assessing Officer is directed to allow the interest expenditure claimed by the assessee under section 57 having the requisite nexus with income assessable under the head “Income from other sources”, without restricting such deduction merely to the quantum of interest income earned or offered during the relevant assessment year. The allowance shall, however, remain subject to verification of the year-wise quantification wherever such verification is required in terms of the earlier directions of the Tribunal and after giving effect to any independent year-specific statutory disallowance which otherwise subsists in accordance with law. The direction of

Accordingly, all the appeals filed by the Revenue are dismissed and all the Cross Objections filed by the assessee are allowed in terms indicated hereinabove.