RAJESH JUGRAJ MADHANI,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-10(2)(2), MUMBAI

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ITA 1195/MUM/2024Status: DisposedITAT Mumbai19 May 2026AY 2014-157 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal noted that a similar issue for the preceding assessment year was remanded back to the CIT(A) for de novo adjudication. Therefore, the present appeal was also set aside and remanded back to the CIT(A) for fresh adjudication.

What were the facts?

The assessee claimed interest expenses exceeding interest income, leading to a disallowance. Additionally, interest paid on unsecured loans, previously held as non-genuine, was also disallowed. The assessee argued that interest was paid for earning interest income and challenged the disallowance on grounds of double taxation.

What were the issues?

Whether interest expenditure is allowable when it exceeds interest income, and whether interest on loans treated as non-genuine in a prior year can be disallowed again.

Which sections of the Income-tax Act were involved?

Section 57(iii),Section 68

AI-generated summary — verify with the full judgment below

IN THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI “D” BENCH, MUMBAI BEFORE SHRI SANDEEP GOSIAN, JUDICIAL MEMBER AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER ITA No.1195/MUM/2024 (AY: 2014-15) Rajesh Jugraj Madhani vs. DCIT, Circle-10(2)(2) 301, Saloni Apartment, 56th Road, Aayakar Bhawan, M.K. Road, Mumbai- T.P.S III, Borivali (West)-400092. 400020. PAN/GIR No: AAHPM3871E (Appellant) (Respondent) Assessee by Shri Punit J. Shah Revenue by Shri Umashankar Prasad (CIT DR) & Shri Annavaram Kosuri (SR AR) Date of Hearing 19.05.2026 Date of Pronouncement 13.08.2026 O R D E R PER BIJYANANDA PRUSETH, AM:

This appeal filed by the assessee emanates from the order passed under

section 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the National Faceless

Appeal Centre [in short, ‘CIT(A)’], dated 17.01.2024 for the assessment year (AY)

2014-15.

2.

The grounds of appeal raised by the assessee are as under:

“1.0 On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the disallowance of interest u/s.57(iii) of Rs.1,90,09,960/-, on restricting the interest expense to the extent of interest income earned during the year,

2.0 The Ld. CIT(A), before making the disallowance of interest of Rs.1,90,09,960/-, ought to have considered the understated vital facts, being,

a) The interest had been paid for the purpose of making/earning the interest income;

b) The mere non-realization of interest income from defaulted borrowers (lendee) would not disentitle the appellant to claim the interest expense;

3.0 Without prejudice to Ground No. 3, Ld. CIT(A) ought to have made the disallowance of interest on interest bearing loans (liabilities) utilised for providing non-interest bearing loans (assets);

4.0 On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the addition u/s 68 of interest paid of Rs.46,58,605/- on unsecured loans held as non-genuine in earlier assessment year,

5.0 Without prejudice to Ground no-4, Ld. CIT(A) erred in confirming the separate disallowance of interest paid on non-genuine loans of Rs.49,58,605/- though such interest is already included in the disallowance of interest sustained of Rs. 1,90,09,960/-, thereby leading to double taxation.”

3.

Facts of the case, in brief, are that the assessee filed return of income for

the AY 2013-14 on 31.07.2013 declaring total income at Rs.Nil. The case was

selected for scrutiny and assessment was completed u/s 143(3) of the Act on

29.12.2016. During the year, the assessee, a director of M/s. Mighty

Constructions Pvt. Ltd., had earned salary income and interest income on

loans/advances given by him. The AO noted that the assessee had earned interest

income of Rs.2,73,94,759/- and claimed interest and other expenses of

Rs.4,63,94,719/-, resulting in a loss of Rs.1,90,09,960/- under the head “Income

from other sources”. The AO held that the assessee failed to establish the nexus

between the interest expenditure and interest income, particularly as interest-

bearing funds were also utilised for making interest-free advances to group

concerns at lower rates. Accordingly, the loss claimed u/s 57(iii) of the Act was disallowed. The AO further noted that interest expenditure of Rs.49,58,605/- was

claimed in respect of unsecured loans which had been treated as unexplained

cash credits u/s 68 of the Act in A.Y. 2013-14. Since the said addition was under

challenge in appeal, the AO disallowed the corresponding interest expenditure of

Rs.49,58,605/-. Consequently, the total income was assessed at Rs.1,68,49,540/-

u/s 143(3) of the Act. 4. Aggrieved by the order of AO, the assessee filed appeal before the CIT(A).

The CIT(A) noted that the assessee had challenged the disallowance of

Rs.1,90,09,960/- u/s 57(iii) of the Act and the disallowance of Rs.49,58,605/-

relating to interest paid on unsecured loans treated as unexplained credits u/s 68

in AY 2013-14. With regard to the first issue, the CIT(A) held that the assessee had

failed to establish the requisite nexus between the interest expenditure and

interest income, particularly as interest-bearing funds were utilised for interest-

free advances to group concerns at lower rates of interest. The CIT(A) also held

that the additional submissions regarding non-recovery of interest did not

warrant interference and, accordingly, confirmed the disallowance of

Rs.1,90,09,960/-. As regards the disallowance of Rs.49,58,605/-, the CIT(A)

rejected the assessee’s contention of double disallowance, observing that the

said interest expenditure was claimed separately in respect of loans held to be non-genuine in A.Y. 2013-14. Accordingly, the CIT(A) confirmed both the

disallowances and dismissed the appeal.

5.

Aggrieved by the order of CIT(A), the assessee filed appeal before the

Tribunal. The Ld. AR submitted that the disallowance of Rs.1,90,09,960/- u/s

57(iii) was unjustified, as the interest expenditure was incurred for earning

interest income and the assessee had furnished details of utilisation of borrowed

funds. It was contended that, at most, the disallowance could be restricted to the

proportionate interest attributable to interest-free advances. With regard to the

disallowance of Rs.49,58,605/-, the Ld. AR submitted that the interest could not

be disallowed merely because the corresponding loans were treated as

unexplained in A.Y. 2013-14, particularly when the assessee had challenged the

said addition and furnished confirmations. It was further contended that the

disallowance resulted in double disallowance. Accordingly, deletion of both

disallowances was prayed for.

5.1 The Ld. AR also submitted that addition of interest paid on loans held as

non-genuine in the preceding AY 2013-14 was subject matter of the appeal before

the ITAT for AY 2013-14. The Tribunal, in its order in case of Rajesh Jugraj Madhani

v. DCIT in ITA No. 314/Mum/2024, dated 21.06.2024, remanded the issue back to

the CIT(A) on account of the appellant being unable to place submissions.

Pursuant to the remand, the appellant is in the process of filing detailed written submissions along with balance confirmations before the CIT(A). In these

circumstances, the Ld. AR submitted that the present disallowance can be

adjudicated only once the dispute with respect to the said loans in respect of

assessment year 2013-14 is adjudicated by the CIT(A) pursuant to the remand by

the ITAT. Thus, the Ld. AR submitted that the matter may be restored to the file

of the CIT(A) to adjudicate based on the outcome of the appeal of AY 2013-14.

6.

On the other hand, the Ld. CIT DR supported the order of lower authorities.

He would, however, have no objection if the matter is restored to the file of CIT(A)

for fresh decision.

7.

We have heard both sides and perused the materials on record. The primary issue is disallowance of interest u/s 57(iii) of the Act being the excess of interest expenditure over the interest income. The Ld. AR submitted that as per provisions of section 57(iii) of the Act, the dominant and proximate purpose of expenditure must be the earning of income chargeable under the head “Income from other sources.” The statute does not mandate the actual earning or receipt of income as a condition precedent for allowability of such expenditure. The test is the purpose of expenditure and not the result thereof. The Ld. AR relied on the decision in case of CIT vs. Rajendra Prasad Mooby, 115 ITR 519 (SC) and the decision in case of Amarsingh N. Thakur vs. ACIT (2026)183 taxmann.com 211 (Mum. Trib.). We find that similar issue had come up for consideration in assessee’s own case for the immediately preceding AY 2013-14 before the ITAT in ITA No.314/Mum/2014 dated 21.06.2024. In the said case, the CIT(A) had dismissed the appeal of the assessee. The Tribunal decided the matter by observing as under: “8. We have heard the rival contentions and perused the material on record. From the assessment order, we note that assessee had made his submissions on the explanations called for in respect of loan transactions undertaken by the assessee. We also take note of the fact that appellate proceedings were initiated after almost 4 years of the institution of appeal and thereafter much of the time had gone during the period of pandemic.

9.

Considering the facts on record and the circumstances of the case we are inclined to accept to prayer made by the Ld. counsel of the assessee to submit the matter back to the file of Ld. CIT(A) for de novo meritorious adjudication. We direct the Id. CIT(A) to provide reasonable opportunities to the assessee for making his submissions and also call for remand report from the Assessing Officer, if so required. We direct the assessee also, to be diligent in attending the hearings fixed for the appeal and assist in its expeditious and effective disposal. Assessee should not seek adjournments unless warranted by compelling reasons.”

7.1 We find that similar issues of unsecured loans and interest disallowance

was involved in the above case. The matter has been remanded back to the file of

CIT(A) for de novo adjudication on merit. The decision of the above order would

have bearing on the decision in the present appeal of assessee for AY 2014-15.

Hence, the order of CIT(A) is set aside and remanded back to his file for fresh

adjudication along with the appeal for AY 2013-14. The appellant is at liberty to

file further submission and case laws, if he so desires. The CIT(A) shall grant

adequate and reasonable opportunity of being heard to the assessee.

Accordingly, the grounds are allowed for statistical purpose.

8.

We make it clear that we have not expressed any opinion on the merit of

the case. The CIT(A) shall independently decide the case as per law after

considering the facts of the case and the submission of the appellant.

9.

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

Order is pronounced on 13.08.2026.

Sd/- Sd/- (SANDEEP GOSAIN) (BIJYANANDA PRUSETH) JUDICIAL MEMBER ACCOUNTANT MEMBER

*Aniket Chand; Sr. PS MUMBAI Date: 13.08.2026 Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, MUMBAI 6. Guard File

By Order

Assistant Registrar ITAT, MUMBAI

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