THOTA PANDURANGA JAGADISH,BHIMAVARAM vs. DCIT, CIRCLE-1, RAJAHMUNDRY

आयकर अपीऱीय अधिकरण, विशाखापत्तनम पीठ, विशाखापत्तनम INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM श्री उदयन दास गुप्ता, माननीय न्याययक सदस्य एिं श्री ओम्कारेश्िर धिदारा, माननीय ऱेखा सदस्य SHRI UDAYAN DAS GUPTA, HON’BLE JUDICIAL MEMBER AND SHRI OMKARESHWAR CHIDARA, HON’BLE ACCOUNTANT MEMBER ITA No.553/VIZ/2025 निर्धारण वर्ा/AssessmentYear:2020-21) THOTA PANDURANGA DCIT, CIRCLE-1 JAGADISH ITO, AAYAKAR BHAVAN, D.NO.26-9-65, BALUSUMUDI, VEERABHADRAPURAM Vs. BHIMAVARAM, WEST RAJAHMUNDRY-533105, GODAVARI DIST.-534202, ANDHRA PRADESH ANDHRA PRADESH अपीलधर्थीAppellant प्रत्यथी Respondent

Permanent Account Number of ANRPP1873G Assessee:

अपीलधर्थीद्वारा/Appellant represented by: Shri GVN Hari, Advocate प्रत्यथीद्वारा/Respondentrepresented by: Dr. Aparna Villuri, Sr AR सुनवाईकीतारीख/Date of conclusion of hearing: 08-Jun-2026 घोषणाकीतारीख/Date of pronouncement: 10-Jul-2026 आदेश / ORDER PER SHRI OMKARESHWAR CHIDARA, HON’BLE AM : This appeal is filed by the Assessee against the order of learned Commissioner of Income Tax (Appeals) [“Ld.CIT(A)”], National Faceless Appeal Centre (NFAC), Delhi vide DIN: ITB/NFAC/S/250/2025- 26/1078365648(1) dated 10-Jul-2025 arising out of the order passed by the

ITA No.553/Viz/2025 Thota panduranga jagadish Ld.AO u/s 143(3) of the Income Tax Act, 1961 (“the Act”) dated 26.08.2022 for the Assessment Year 2020-21.

ITA No.553/Viz/2025 Thota panduranga jagadish loans varied between 9% to 15% as compared to the interest received from unsecured loans given to the company @6%. During the year under consideration, the total amount of loans given to the company by the Director exceeded Rs.16 crores and he received interest from the company @6%, whereas he was paying interest @ 9% to 15%. There is a clear and direct nexus between the borrowings taken by the assessee and giving the same as loan to the company, in which he is a Director. The assessee as a Director claimed interest payment of Rs.83.44 lakhs as deduction u/s 57 of the Act. The Ld.AO has restricted the interest payment to Rs.46.09 lakhs, which comes to 6% as the rate of interest. In other words, the Ld.AO held that the interest expenditure claimed should be restricted to the rate of interest received from the company. As mentioned above, the assessee was claiming that the interest was paid @9% to 15% from whom he borrowed, whereas on the loans given to the company, he claims that the interest is charged @6% only. Hence, the Ld.AO has restricted the interest payment claimed to 6% and made addition of Rs.37.35 lakhs.

ITA No.553/Viz/2025 Thota panduranga jagadish

ITA No.553/Viz/2025 Thota panduranga jagadish 4. Aggrieved by the orders of the Ld.AO and Ld.CIT(A), an appeal was filed before the ITAT and the main ground of appeal before the ITAT is that the Ld.CIT(A) is not justified in confirming the order of the Ld.AO in restricting the claim of interest, because all the borrowed funds are utilized for giving loans to company only. Hence deduction u/s 57 of the Act was claimed and the same has to be allowed in full. During the proceedings before the ITAT, the Ld.AR of the appellant has filed a paper book containing copy of notice issued u/s 143(2) by the Ld.AO, copy of reply filed with regard to claim of interest before the Ld.AO and also copy of reply filed on the same issue before the Ld.CIT(A) etc. The Ld.AR of the appellant has argued that all the loans taken from various lenders are genuine and whatever interest that was paid to various lenders also should be allowed in full. For this proposition, the Ld.AR has relied on the following case laws :

(a) Smt.Virmati Ramkrishna Vs. CIT (1981) 131 ITR 659 (GUJ) (b) Sarabhai Sons (P) Ltd. Vs. CIT (1993) ITR 464 (GUJ) (c) CIT Vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) (d) Sri Girishbhai Vadilal Shah ITA No.429/Ahd/2018 (e) Subhakaran Sampatlall (HUF) ITA No.344/Kol/2020

ITA No.553/Viz/2025 Thota panduranga jagadish 6. The Bench has taken into consideration the arguments of both sides, perused the orders of Ld.AO and Ld.CIT(A). To start with, there is no dispute that the assessee borrowed amounts from various persons and lent the same to the company in which he is a Director. In the earlier year, the assessee was receiving interest @12% from the company on the amount given as loans, whereas in this year, the assessee has suddenly reduced charging of interest to 6% from the company, in which he is a Director. The assessee could not explain the reason for charging lesser rate of interest in this year. From the assessment order, it is observed that the assessee has lent an additional amount of approximately Rs.8 crore to the company and charged half of the rate of interest. In other words, the loans given by the assessee Director to the company has been increased from Rs.8 crores to Rs.16 crores in the current year and the rate of interest charged was reduced from 12% to 6%. But the assessee is paying the same rate of interest to his lenders @9% to 15% as in the earlier year. Since there was no explanation for charging lesser rate of interest compared to last year, it is held that the assessee has reduced charging the rate of interest only to avoid payment of due taxes. The Bench has gone through several cases law filed by the Ld.AR of appellant and in none of the cases, similar facts exist. The cases law relied on by the Ld.AR of the appellant are distinguishable, because the facts are completely different, i.e., in none of the cases, the assessee has charged higher rate of interest in earlier years and in the subsequent year lesser rate of interest was charged. Consequently, interest was charged by the assessee on the loans given to the company at his whims and fancies, i.e, when almost double the loan was given to the company and only half of the

ITA No.553/Viz/2025 Thota panduranga jagadish interest rate was charged. The assessee is the person who controls the affairs of the company for all practical purposes reduced the rate of interest only to reduce tax liability. The assessee is charging lesser rate of interest from the company and paying more interest to various lenders. Section 57(iii) of the Act permits deduction on the expenditure laid out or expended wholly and exclusively for the purposes of making or earning such income. Two conditions are therefore mandatory :

(a) The expenditure must be “wholly and exclusively” for the purpose of earning interest income and

(b) There must be a direct nexus or purpose link between the expenditure and the income. The deduction is not unlimited – it is tethered to, and circumscribed by, the income earning purpose. Thus, the Director borrowed at 9% to 15% and lent to his own company at 6% and this excess interest was not incurred “wholly and exclusively for the purpose of making or earning the 6% interest income. The excess was incurred for personal purposes of the Director maintaining a relationship with the company in which he holds substantial interest and not for income earning purposes. In this regard reliance is placed on the decision of Hon’ble Supreme Court in the case of CIT Vs. Vijaya Laxmi Sugar Mills LTD. (1991) 191 ITR 641 (SC). Hon’ble Supreme Court held that the requirement u/s 57(iii) that expenditure claimed should have been incurred “for the purpose of making or earning such income” means that the object of spending must be earning the income. Expenditure exceeding what can be attributed to the income

ITA No.553/Viz/2025 Thota panduranga jagadish earning purpose fails this test. Even though the facts slightly vary, this is the ratio laid down by the Hon’ble Supreme Court. To sustain the interest deduction u/s 57, taxpayers must evidence that low yield or interest free loans were funded from own / interest free resources, otherwise, proportionate disallowance on borrowings is inevitable.

6.1. Recently, in the case of Raj Kumar Goenka Vs. DCIT in ITA No.815/Kol/2025 dated 26.08.2025, the coordinate Bench of ITAT Kolkata upheld the disallowance made by the Ld.AO, when the assessee borrowed at higher rate of interest and lent the same at lower rate of interest to the related parties. The ITAT in the above decision held that the disallowance is correctly made as the same is commercially unjustified.

6.2. The important point to be noted is that the Director has charged 12% from the company in the earlier year and suddenly reduced the rate of interest to 6% and no explanation was offered for reduction. Here, the Company requires huge funds and that’s why the assessee Director has lent an additional amount of Rs.8 cr. during this year by taking loans from others. This is a telling circumstance that the reduction of rate of interest was not driven by the market forces or commercial bargaining between independent parties, the same was driven by the Director’s personal interest in the company and hence it lacks the “wholly and exclusively” character required by section 57(iii). Hon’ble Gujarat High Court in the case of Sarabhai Sons (P) Ltd. V. CIT (1993) 201 ITR 464 held that if the dominant purpose for which expenditure was incurred was not to earn income, the expenditure falls outside Section 57(iii). Here, the dominant purpose of

ITA No.553/Viz/2025 Thota panduranga jagadish borrowing at 9% to 15% and then lending at 6% cannot be earning interest income and it is plainly to benefit the company and take loss in the hands of the assessee.

6.3. It is a settled principle that the related party dealings should be at arms length and giving the funds at below cost loans to entities in which they have interest is nothing but diversion of funds not attributable to income earning. Hon’ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. (supra) also held that where borrowed funds are advanced at below cost rates to entities, in which the assessee holds interest, such arrangement amounts to diversion of funds and the interest attributable to the diverted fund had to be disallowed. ITAT Bangalore in the case of M/s West Palm Development Pvt.Ltd vs.JCIT in ITA No.1668/Bang/2013 also held the same by relying on the decision of Vijaya Laxmi Sugar Mills Ltd.(supra). Similarly in the case of Sh. Anil Kumar (HUF) Vs. ITO in ITA No.9683/Del/2019, coordinate Bench of ITAT Delhi confirmed the addition made by the Ld.AO, where the assessee fails to establish that interest paid was expended to earn interest income and the nexus is not established, the claim u/s 57(iii) was rejected. Similarly, the co-ordinate Bench of Mumbai in the case of Jackie Mahesh Vora Vs. ACIT, 176 taxman.com 279 (Mum) upheld the restriction of interest paid to the rate of interest received u/s 57(iii) of Income Tax Act. In the case of Rajkumar Goenka Vs. DCIT, ITA 815/Kol/2025, the co-ordinate Bench Kolkata Tribunal upheld the proportionate disallowance of interest claimed by appellant in similar circumstances.

ITA No.553/Viz/2025 Thota panduranga jagadish 6.4. To sum up, the AO’s restriction of interest deduction to 6% - the rate at which the Director actually lent funds to the company is legally correct and well supported in view of the above discussion and cases law. Allowing deduction of interest paid at 9% to 15% when only 6% was earned would mean that a loss artificially engineered by the Director through below cost lending to his own company is being subsidized through a tax deduction, contrary to the “wholly and exclusively” mandate of section 57(iii). Moreover, the reduction in rate of interest from 12% to 6% in the current year without explanation further reinforces that the arrangement was not commercially driven and was motivated by personal considerations rather than income earning purpose. Hence, disallowance made by the Ld.AO is upheld.

Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962 by placing the details on the notice board on 10th July, 2026.

Sd/- Sd/- (उदयन दास गुप्ता) (ओम्कारेश्िर धिदारा) (UDAYAN DAS GUPTA) (OMKARESHWAR CHIDARA) न्याययक सदस्य/JUDICIAL MEMBER ऱेखा सदस्य/ACCOUNTANT MEMBER Visakhapatnam dated 10.07.2026. L.Rama/Sr.PS

ITA No.553/Viz/2025 Thota panduranga jagadish

Copy to: SHRI THOTA PANDURANGA JAGADISH, D.NO.26-9-65, BALUSUMUDI, 1 BHIMAVARAM, WEST GODAVARI DIST.-534202, ANDHRA PRADESH THE DCIT, CIRCLE-1, ITO, AAYAKAR BHAVAN, 2 VEERABHADRAPURAM, RAJAHMUNDRY-533105, ANDHRA PRADESH 3 THE PCIT, RAJAHMUNDRY 4 THE D.R., ITAT, VISAKHAPATNAMBENCH 5 GUARD FILE