MEGHA FINCORP,CHANDIGARH vs. INCOME TAX OFFICER, WARD-2(1), CHANDIGARH, CHANDIGARH

आयकर अपीलीय अिधकरण,च�ीगढ़ �ायपीठ “बी” , च�ीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH HEARING THROUGH: PHYSICAL MODE �ी लिलत कुमार, �ाियक सद� एवं �ी मनोज कुमार अ�वाल, लेखा सद� BEFORE: SHRI. LALIET KUMAR, JM & SHRI. MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No. 819 /Chd/ 2025 िनधा�रण वष� / Assessment Year : 2018-19 Megha Fincorp बनाम The ITO C/o Tejmohan Singh, Advocate Ward-2(1) # 527, Sector 10-D, Chandigarh Chandigarh �ायी लेखा सं./PAN NO: ABAFM3515F अपीलाथ�/Appellant ��थ�/Respondent िनधा�रती की ओर से/Assessee by : Shri Tejmohan Singh, Advocate राज� की ओर से/ Revenue by : Dr. Ranjit Kaur, Addl. CIT, Sr. DR सुनवाई की तारीख/Date of Hearing : 30/06/2026 उदघोषणा की तारीख/Date of Pronouncement : 20/07/2026 आदेश/Order PER LALIET KUMAR, J.M: The present appeal has been preferred by the assessee against the order dated 19.12.2024 passed by the Ld. CIT (A), National Faceless Appeal Centre, Delhi, for the Assessment Year 2018-19, arising out of the assessment framed under section 147 read with section 144B of the Income-tax Act, 1961. 2. At the outset, the Registry pointed out that there is a delay of 108 days in filing the present appeal. The Ld. AR prayed for condonation of delay. 3. The Ld. DR opposed the application for condonation of delay. 4. We have heard both the parties and request for seeking condonation of delay . Upon consideration of the facts and circumstances of the case, and the reasons explained therein, we are satisfied that the assessee was prevented by sufficient and reasonable cause from filing the appeal within the prescribed period of limitation. Accordingly, the delay of 108 days in filing the appeal is condoned, and the appeal is admitted for adjudication.

Trading Company Pvt. Ltd., both partners of the assessee-firm, was not allowable as according to him the partners' capital accounts reflected debit balances at the beginning and at the close of the year. He further observed that the interest entries had been passed through journal vouchers on the last day of the accounting year without actual payment through the banking channel and, therefore, concluded that the expenditure represented diversion of income by way of fictitious entries. The Assessing Officer accordingly disallowed interest of Rs.45,42,852/-. 6.2 The Assessing Officer further noticed that interest of Rs.44,24,839/- had been credited to M/s Salico Trading Corporation, which was not a partner of the firm, and held that tax had not been deducted at source thereon. Invoking the provisions of section 40(a)(ia), he disallowed 30% of the said expenditure amounting to Rs.13,27,451/-. Consequently, the total income of the assessee was assessed at Rs.58,70,303/-. 7. Against the order of the AO the assessee went in appeal before the Ld. CIT(A). The Ld. CIT(A) affirmed both the additions. While sustaining the disallowance of interest paid to the partners, the Ld. CIT(A) observed that the assessee had failed to establish that the partners had offered the corresponding interest income to tax and also upheld the disallowance under section 40(a)(ia) by holding that the assessee had failed to substantiate deduction of tax at source. 8. Against the order of the Ld. CIT(A) the Assessee preferred an appeal before the Tribunal. 9. During the course of hearing the Ld. AR assailing the impugned orders submitted that the reassessment proceedings themselves were without jurisdiction. It was argued that after the amendments brought about by the Finance Act, 2021, the notice under section 148 could not have been issued by the Jurisdictional Assessing Officer and that the reassessment proceedings were liable to be quashed in view of the judgment of the Hon'ble Punjab & Haryana High Court in Jasjit Singh vs. Union of India & Others. It was further submitted that the reopening had been initiated on the basis of alleged escapement of interest income, whereas no addition whatsoever had ultimately been made on that issue and the additions had been made on entirely different grounds relating to allowability of interest expenditure. Hence, according to the Ld. AR, the reassessment itself deserved to be declared invalid. However, in the course of submission the Ld. AR had submitted that

he is not pressing the legal ground and therefore the same may be dismissed as not pressed. 9.1 Without prejudice to the legal grounds, the Ld. AR submitted that the authorities below had proceeded on a complete misreading of the accounts maintained by the assessee. It was contended that both M/s Prabha Electronics Pvt. Ltd. and M/s Salico Trading Company Pvt. Ltd. were partners of the assessee-firm and the partnership deed specifically authorized payment of interest on the partners' capital accounts. The Assessing Officer had merely compared the opening balance as on 01.04.2017 and the closing balance as on 31.03.2018 and ignored the actual movement in the running capital accounts throughout the year. It was submitted that the opening balances stood modified by reversal entries passed on 01.04.2017, after which the accounts carried substantial credit balances for most of the previous year. Interest had been computed on the basis of the daily running credit balances and not on the opening or closing balances. The debit balances appearing at the end of the year had arisen only because of substantial withdrawals made towards the close of the financial year and could not retrospectively obliterate the credit balances existing during the year. The detailed day-wise interest calculations, running ledger accounts and reversal entries placed in the paper book clearly demonstrated that interest had been calculated transaction-wise, after considering the balance outstanding after each receipt and withdrawal together with the number of days for which such balance remained outstanding.

9.2 The Ld. AR further submitted that the authorities below had completely ignored the overwhelming documentary evidence produced before them. It was pointed out that the returns of income, computations, audited financial statements and ledger accounts of both partner companies had been placed on record and clearly reflected the interest income received from the assessee-firm. Form No.16A issued in favour of both the partner companies also evidenced deduction and deposit of tax at source on the interest credited by the assessee. Therefore, the allegation that the interest expenditure was fictitious or represented diversion of income was wholly contrary to the record. The Ld. AR argued that once the corresponding interest income had been duly offered to tax by the recipient partners and tax had also been deducted at source by the assessee, the same expenditure could not simultaneously be treated as fictitious in the hands of the

payer. It was further submitted that the mere fact that the entries had been passed by journal vouchers on the closing day of the accounting year did not render the expenditure inadmissible, as under the mercantile system of accounting the accrued liability is recognized by crediting the recipient's account and section 194A itself contemplates deduction of tax at the time of credit or payment, whichever is earlier.

9.3 With regard to the disallowance under section 40(a)(ia), the Ld. AR submitted that the very foundation of the addition was factually incorrect. It was contended that the Assessing Officer himself had accepted that the interest of Rs.44,24,839/- had been paid on loan obtained from M/s Salico Trading Corporation. Tax amounting to Rs.4,42,484/- had been duly deducted under section 194A at the time of credit of interest and had been deposited with the Central Government. Form No.16A generated through the TRACES system, the return of income, computation, audited financial statements, group-wise statement of interest income and ledger account of M/s Salico Trading Corporation were all placed on record, which conclusively established deduction and deposit of tax at source as well as recognition of the corresponding interest income by the recipient. It was argued that once the statutory condition regarding deduction and deposit of tax stood fulfilled, the provisions of section 40(a)(ia) had no application. The Ld. AR submitted that the reasoning adopted by the Ld. CIT(A) that the interest had not been separately transferred through banking channels was legally untenable, as neither section 194A nor section 40(a)(ia) requires actual payment through banking channels once tax has been deducted at the time of credit. It was, therefore, prayed that both the additions sustained by the Ld. CIT(A) be deleted in toto. 10. The Ld. Sr. DR, on the other hand, strongly relied upon the assessment order as well as the order of the Ld. CIT(A). It was submitted that the Assessing Officer had thoroughly examined the ledger accounts, partners' capital accounts, bank statements and other documents furnished during the reassessment proceedings. The authorities below had rightly concluded that the partners' capital accounts reflected debit balances and that the impugned interest entries were merely book entries passed on the last day of the accounting year without any actual movement of funds through banking channels. It was further submitted that the assessee had failed to satisfactorily establish the genuineness of the interest expenditure before

the lower authorities. The Ld. DR further contended that in so far as the payment to M/s Salico Trading Corporation was concerned, the Assessing Officer had rightly invoked section 40(a)(ia) and the Ld. CIT(A), after due consideration of the material on record, had correctly sustained the disallowance. Accordingly, the Ld. DR prayed that the order of the Ld. CIT(A) be upheld and the appeal of the assessee be dismissed. 11. We have heard the rival submissions and have carefully perused the material available on record, including the assessment order, the impugned order of the Ld. CIT(A), the written submissions filed before us, and the paper book placed on record. 12. At the outset, the Ld. AR did not press Ground Nos. 1 to 3 relating to the validity of the reassessment proceedings. The said grounds are, therefore, dismissed as not pressed. 13. The controversy surviving for our adjudication relates to the disallowance of interest of Rs.45,42,852/- paid to the partners and the disallowance of Rs.13,27,451/- made under section 40(a)(ia) of the Act. Ground No. 4 14. The issue for our consideration relates to the disallowance of interest amounting to Rs.45,42,852/-, comprising interest of Rs.36,77,088/- credited to M/s Prabha Electronics Pvt. Ltd. and Rs.8,65,764/- credited to M/s Salico Trading Company Pvt. Ltd. It is an undisputed fact that both these companies are partners of the assessee-firm. The Assessing Officer himself has categorically recorded at page 5 of the assessment order that: "Assessee firm has paid interest to Prabha Electronics Private Limited of Rs.36,77,088/- and Salico Trading Co. Private Limited of Rs.8,65,764/-, both being partners." Thus, the status of the aforesaid two companies as partners of the assessee-firm has never been disputed by the Revenue. 14.1 The Assessing Officer disallowed the aforesaid interest expenditure primarily on two grounds. Firstly, according to him, the opening as well as the closing balances in the partners' capital accounts reflected debit balances and, therefore, no interest was payable thereon. Secondly, the interest had been credited through journal entries on the last day of the accounting year without any corresponding transfer through banking channels. The Ld. CIT(A) has merely affirmed the aforesaid

reasoning without independently appreciating the evidence brought on record by the assessee. 14.2 Having carefully considered the rival submissions and examined the material available before us, we are unable to subscribe to the view taken by the authorities below. 14.3 Undisputedly, the assessee is a partnership firm. The partnership deed, placed at pages 39 to 44 of the paper book, specifically authorises the payment of interest to the partners on their capital accounts. Acting in terms of the said partnership deed, the assessee credited interest to the respective running capital accounts of M/s Prabha Electronics Pvt. Ltd. and M/s Salico Trading Company Pvt. Ltd. Therefore, the payment of interest itself is duly authorised by the partnership deed, and its genuineness has not been doubted by the Revenue.

14.4 The entire edifice of the disallowance rests upon the premise that since the opening and closing balances reflected debit balances, no interest could have been payable during the year. In our considered opinion, such an approach is fundamentally misconceived. None of the provisions of the Income-tax Act and the partnership deed obliges an assessee to compute interest merely with reference to the opening and closing balances of the account. The manner of maintaining running accounts and the methodology for computing interest are essentially commercial decisions of the assessee. It is well settled that the Assessing Officer cannot substitute his own method of accounting or commercial expediency for that adopted by the assessee unless the method followed is shown to be contrary to law or demonstrably incorrect. 14.5 In the present case, the assessee has consistently maintained that interest was computed on the basis of the actual daily running credit balances available in the partners' accounts and was credited only for the period during which such credit balances existed. Significantly, this explanation itself which is available at page 8 of the assessment order to the following effect:

Sir, In reference to your show cause notice ITBA/AST/F/147(SCN)/2023-24/1055342624(1) dated 23-08-2023 for the assessment proceedings in above case we submit the following documents and information :-

Name of Person PAN No. Interest Paid Remarks Prabha Electronics 36,77,088 Interest paid on credit Private Limited balance in Partners Capital Salico Trading Co. 8,65,764 Interest paid on credit Private Limited balance in partners capital Salico Trading 44,24,839 Interest paid on Loan Corportion taken Total 89,67,691

Out of the above Interest had paid to Partners i.e. M/s Prabha Electronics Private Limited and M/s Salico Trading Co Private Limited. The ledgers account for the above loans were also submitted earlier and again enclosed for your reference. Partners capital account ledgers clearly shows that there was credit balance through out the year and it was converted into debit only on the last day of the year i.e. 31.03.2018. Since there was running credit balance in the account and the interest had been paid on by calculating the interest daily balances basis. Where ever there was credit balance the interest was paid and where ever there was debit balance interest was charged and only net interest had been paid. So it will not be justified in assuming that there was debit balance at the end of year and interest can not be paid in the said account. Interest has been paid on the credit balance in account. The firm had raised a loan from M/s Salico Trading Corporation and had paid the interest on the same. Ledger account enclosed. Running balance clearly shows the credit balance in the account. Interest had been calculated on the running balance on daily basis. In the previous reply this loan was wrongly stated as Partner Capital account. We hereby submit this was not partners capital account but a loan from M/s Salico Trading Corporation. Once the Assessing Officer has taken note of the assessee's explanation, it was incumbent upon him to examine the correctness of the detailed working furnished by the assessee instead of rejecting the same merely by referring to the opening and closing balances.

14.6 We find that the assessee has placed on record before us as well as before the lower authority as mentioned by the Assessing Officer in his order(supra) the complete running ledger accounts of both partner companies, the reversal entries passed on 01.04.2017, detailed day-wise computation of interest, copies of the partnership deed, bank transactions during the year, acknowledgements of returns of income, audited financial statements and ledger accounts of the recipient companies. The running ledger accounts clearly demonstrate that, after giving effect to the reversal entries passed on 01.04.2017, the partners' accounts carried substantial credit balances at various points during the previous year. The detailed interest computation records each transaction, the balance outstanding after every receipt and withdrawal, the number of days for which such balance remained

outstanding and the corresponding amount of interest relatable thereto. Thus, the computation of interest has been based on actual running balances rather than on the opening or closing figures. 14.7 The Ld. DR, despite relying upon the assessment order, could not point out any factual error or computational defect in the running accounts or in the detailed interest working produced before us. No material has been brought on record by the Revenue to demonstrate that the calculations furnished by the assessee are either erroneous or manipulated. In the absence of any such rebuttal, the documentary evidence produced by the assessee deserves due evidentiary value.

14.8 We also find that undue emphasis has been laid by the authorities below on the fact that the interest was credited through journal entries on 31.03.2018. Such reasoning overlooks the settled principles governing mercantile accounting. Under the mercantile system, an accrued liability is recognised by crediting the payee's account. In fact, section 194A itself recognises deduction of tax at the time of credit or payment, whichever is earlier. Section 194A (1) provides as under:

194A. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force Therefore, merely because the interest liability has been recognised through journal entries at the close of the accounting year cannot lead to the conclusion that the expenditure is fictitious or non-genuine. This is not so provided by the statute itself.

14.9 Another significant aspect, which has escaped the attention of both the lower authorities, is that the recipient companies have duly recognised the corresponding interest income in their respective books of account and have offered the same to tax in their returns of income. The assessee has placed on record the acknowledgements of the returns of income, computations of income, audited financial statements, ledger accounts, as well as Form No.16A evidencing deduction and deposit of tax at source in respect of the impugned interest payments.

14.10 In so far as M/s Prabha Electronics Pvt. Ltd. is concerned, the return of income for Assessment Year 2018-19, together with the computation of income, audited Profit & Loss Account and ledger account reflecting the interest income received

from the assessee, was duly filed before the learned Assessing Officer. These documents are available at pages 57 to 64 of the paper book. Likewise, in the case of M/s Salico Trading Company Pvt. Ltd., the return of income for Assessment Year 2018-19, along with the computation of income, audited Profit & Loss Account and ledger account evidencing the interest income earned from the assessee, was also furnished before the learned Assessing Officer and forms part of the paper book at pages 65 to 73. 14.11 It is also pertinent to note that the learned CIT(A) himself has referred to Form No.16A in the impugned appellate order, thereby acknowledging that tax had been duly deducted at source on the interest payments. Once the corresponding interest income has been accepted and assessed in the hands of the recipient companies, and the assessee has duly discharged its obligation of deducting and depositing tax at source, the allegation that the impugned interest expenditure represents a diversion of income or a sham transaction becomes wholly untenable.

14.12 It is difficult to comprehend how the very same amount, which the Revenue has accepted as taxable income in the hands of the recipients, can simultaneously be treated as fictitious or non-genuine expenditure in the hands of the payer. The Revenue has neither alleged nor demonstrated that the recipient companies were subjected to tax at any concessional rate, had brought-forward losses, or that the arrangement resulted in any loss of revenue to the exchequer. Therefore, even from the standpoint of revenue neutrality, the allegation of diversion of income is entirely devoid of merit and unsupported by any cogent material on record.

14.13 We also find merit in the grievance of the assessee that the Ld. CIT(A.) has recorded a finding that the returns of income and computations of the recipient companies were not furnished before him. Such observation is factually incorrect. The paper book contains the acknowledgements of returns, computations of income, audited financial statements and ledger accounts of both recipient companies. The assessee has also filed the requisite certificate certifying the documents placed in the paper book stating that the same were filed before AO. During the course of the hearing, the Ld. Departmental Representative could not dispute either the existence or the authenticity of these documents. The appellate authority has, therefore, sustained the addition without examining the complete evidentiary record available before it.

14.14 On an overall consideration of the material available on record, we are satisfied that the authorities below have proceeded on an incomplete appreciation of facts by selectively relying only upon the opening and closing balances while completely overlooking the running nature of the accounts, the reversal entries passed on 01.04.2017, the intervening credit balances, the detailed day-wise computation of interest, the movement of funds through the running accounts, deduction of tax at source and the recognition of corresponding income by the recipient partners. Such an approach, in our considered opinion, is neither factually sustainable nor legally tenable. 14.15 Accordingly, we hold that the authorities below were not justified in disallowing the interest expenditure of Rs.45,42,852/-. The addition sustained by the Ld. CIT(A.) is, therefore, directed to be deleted. Consequently, Ground No.4 of the assessee stands allowed. Ground No. 5 15. The next issue relates to the disallowance of Rs.13,27,451/- under section 40(a)(ia), being 30% of the interest of Rs.44,24,839/- credited to M/s Salico Trading Corporation. 15.1 The sole basis for invoking section 40(a)(ia) is the finding of the Assessing Officer that tax had not been deducted at source from the aforesaid interest payment. However, from the material placed before us, we find that the assessee has produced Form No.16A generated from the TRACES portal showing deduction of tax of Rs.4,42,484/- under section 194A on the interest credited to M/s Salico Trading Corporation. The assessee has further produced the return of income, computation, audited financial statements, group-wise statement of interest income and ledger account of the recipient, all of which disclose recognition of the corresponding interest income.

15.2 Neither the Assessing Officer nor the Ld. CIT(A.) has disputed the genuineness of Form No.16A or recorded any finding that the tax reflected therein had not actually been deposited with the Central Government. The only additional reasoning assigned by the Ld. CIT(A) is that the interest amount had not been separately transferred through banking channels. Such reasoning, in our opinion, travels beyond the scope of section 40(a)(ia). The statutory provision merely requires

deduction and deposit of tax at source. Once tax has been deducted at the time of credit of interest, as expressly contemplated under section 194A, there is no further statutory requirement that the accrued interest must simultaneously be paid through banking channels before deduction can be allowed.

15.3 The documentary evidence placed on record conclusively establishes that tax had been deducted at source and the corresponding income had been recognised by the recipient. The very foundation for invoking section 40(a)(ia), therefore, ceases to exist. 15.4 Accordingly, we hold that the disallowance of Rs.13,27,451/- made under section 40(a)(ia) is unsustainable and the same is directed to be deleted. It is pertinent to note that the statute itself recognizes this principle. The proviso to section 40(a)(ia) provides that where the recipient of the income has duly furnished its return of income, taken the amount into account while computing its taxable income, and paid the taxes due thereon, no disallowance under section 40(a)(ia) can be made in the hands of the payer merely on account of non-deduction or short deduction of tax at source.

15.5 This statutory principle has been authoritatively recognized by the Hon'ble Delhi High Court in the case of CIT v. Ansal Landmark Township (P.) Ltd., wherein it was held that once the payee has discharged its tax liability on the amount received, the payer cannot be subjected to disallowance under section 40(a)(ia).

15.6 In the present case, the assessee has not only produced the copy of the return of income filed by the recipient but has also furnished Form No. 16A evidencing deduction of tax at source and other relevant documents demonstrating that the corresponding income has been duly offered to tax by the recipient. In these circumstances, the disallowance made by the Assessing Officer under section 40(a)(ia) is contrary to the statutory provisions as well as the binding judicial precedent and, therefore, is unsustainable in law. Accordingly, the addition made by the Assessing Officer deserves to be deleted.

Order pronounced on 20/07/2026

Sd/- Sd/- मनोज कुमार अ�वाल लिलत कुमार (MANOJ KUMAR AGGARWAL) (LALIET KUMAR) लेखा सद�/ ACCOUNTANT MEMBER �ाियक सद� /JUDICIAL MEMBER AG आदेश की �ितिलिप अ�ेिषत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��थ�/ The Respondent 3. आयकर आयु�/ CIT 4. आयकर आयु� (अपील)/ The CIT(A) 5. िवभागीय �ितिनिध, आयकर अपीलीय आिधकरण, च�ीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

BY ORDER, ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL KENDRIYA SADAN, SECTOR-9A CHANDIGARH