RAJESH SUBHASH SHARMA ,MUMBAI vs. ITO WARD 16(3)(1), MUMBAI

This appeal by the assessee is directed against the order dated 18.03.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [‘learned CIT(A)’], for the assessment year 2018-19, arising from the assessment order dated 27.09.2021 passed under section 143(3) read with section 144B of the Income-tax Act, 1961 (‘the Act’).

There is a delay of 258 days in filing the present appeal. The assessee has filed an affidavit explaining the circumstances which occasioned the delay. We have considered the averments made in the affidavit and the explanation offered. We are satisfied that the assessee was prevented by sufficient cause from filing the appeal within the prescribed period. The delay is, accordingly, condoned and the appeal is admitted for adjudication on merits.

The assessee has raised the following grounds of appeal:

Brief facts are that the assessee is an advocate and solicitor carrying on the profession under the name and style of Rajesh Sharma & Associates. The assessee filed his return of income on 04.10.2018 declaring total income at nil. During the scrutiny assessment, the Assessing Officer noticed a claim of interest expenditure of Rs.10,12,500, comprising interest of Rs.9,15,000 paid to Rajesh Sharma (HUF) and Rs.97,500 paid to Krishnaraj Diamonds Pvt. Ltd. The assessee explained that the loans had been obtained in the financial year 2011-12 and utilised for acquisition of the office premises at 2 Sangita Eclipse, from which he carried on his profession. The assessee also furnished the loan ledgers, the ledger of the office premises, details of payments and the assessment order for assessment year 2015-16 in which interest on the very same loans had been allowed in scrutiny assessment. The Assessing Officer, however, held that there was no nexus between the borrowings and the professional income and disallowed the entire amount of Rs.10,12,500.

In appeal, the learned CIT(A) accepted that the borrowed funds had been utilised for acquiring the office premises and that the interest expenditure had been incurred for the purpose of the profession. The learned CIT(A) also recorded that the interest had been allowed in the preceding years. Nevertheless, observing that the assessee had substantial own funds and had earned interest at a maximum rate of 6.25% on certain advances, the learned CIT(A) directed the Assessing Officer to allow interest on the impugned borrowings only at 6.25% and disallow the balance. Pursuant thereto, the disallowance surviving against the assessee is stated to be Rs.4,85,160. The assessee is in further appeal before us.

The learned Authorised Representative submitted that the learned CIT(A), having accepted the direct nexus between the borrowings and the acquisition of the office used for the assessee’s profession, was not justified in restricting the deduction by comparing the rate of interest paid on such borrowings with the rate earned on independent advances. He submitted that the loans were old loans taken in financial year 2011- 12, the office had been continuously used for professional purposes, tax had been deducted from the interest payments and the interest on the same loans had been allowed in the earlier scrutiny assessment. It was further submitted that there was no finding that any part of the borrowed funds had been diverted for a non-professional purpose. The 3 learned Departmental Representative, on the other hand, relied upon the orders of the lower authorities and supported the restriction made by the learned CIT(A).

We have heard the rival submissions and perused the material available on record. The short issue is whether, after accepting that the loans were utilised for acquiring the office premises used for the assessee’s profession, the deduction under section 36(1)(iii) could be restricted merely because the assessee possessed other funds and earned interest at a lower rate on certain advances.

The material recorded by the learned CIT(A) shows that the assessee acquired the office premises in financial year 2011-12 for an aggregate cost of Rs.1,56,17,652. A loan of Rs.1,17,00,000 was obtained from Rajesh Sharma (HUF) during the same financial year and the dates and amounts of the borrowings were correlated with the payments made towards the office premises. A further loan was obtained from Krishnaraj Diamonds Pvt. Ltd., of which Rs.8,12,565 remained outstanding at the beginning of the relevant previous year. The office was put to use for the assessee’s profession and continued to be so used during the year under consideration. Significantly, the learned CIT(A) has expressly held that the interest paid to the two parties was incurred for the business purpose and was allowable, and that the Assessing Officer was not correct in holding that there was no nexus between the borrowed funds and the business purpose.

Once the direct nexus of the borrowings with the acquisition of the professional asset is accepted and the asset continues to be used for the profession, the statutory condition under section 36(1)(iii) stands fulfilled. The provision permits deduction of interest paid in respect of capital borrowed for the purposes of business or profession. It does not 4 empower the Assessing Officer to substitute the rate at which, in his opinion, the assessee ought to have borrowed, nor does it make the deduction dependent upon the rate of return earned by the assessee on some other deployment of his own funds. The commercial expediency of an expenditure has to be examined from the viewpoint of the assessee and the Revenue cannot sit in the armchair of the businessman or professional and determine how his financial affairs should have been arranged. This principle stands recognised by the Hon’ble Supreme Court in S.A. Builders Ltd. v. CIT(A) (2007) 288 ITR 1 (SC) and Hero Cycles (P.) Ltd. v. CIT (2015) 379 ITR 347 (SC).

The observation of the learned CIT(A) that the assessee could have utilised his own funds to repay the loans does not establish diversion of the borrowed funds for any non-professional purpose. The relevant borrowings continued to remain linked to the office premises acquired in financial year 2011-12. No material has been brought on record to show that the loan funds were withdrawn from the professional asset or applied elsewhere. The advances on which the assessee earned interest at 6.25% constitute separate transactions. In the absence of a finding, supported by material, that interest-bearing borrowed funds were diverted to such advances, a comparison of the two interest rates cannot furnish a legal basis for restricting the deduction.

We also find that interest on the same continuing loans had been allowed in the earlier years, including in the scrutiny assessment for assessment year 2015-16. There is no finding of any change in the underlying facts during the year under consideration. Though the rule of res judicata does not strictly apply to income-tax proceedings, a fundamental aspect accepted in the earlier years should not ordinarily be departed from in a later year without a material change in facts. The principle was explained by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC).

In view of the above facts, we hold that the learned CIT(A) was not justified in restricting the allowable interest by applying the rate of 6.25%. We, accordingly, direct the Assessing Officer to delete the surviving disallowance of Rs.4,85,160 and allow the assessee’s claim. The ground on merits is allowed. The other grounds, being general or consequential, do not require separate adjudication.

In the result, the appeal filed by the assessee is allowed.