NIRMAL TRADING CORPORATION,MUMBAI vs. INCOME TAX OFFICER, WARD 24(3)(1), MUMBAI

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ITA 1239/MUM/2026Status: DisposedITAT Mumbai14 May 2026AY 2020-217 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal found no justification for the disallowance, noting the assessee disclosed substantial interest income and incurred expenditure to earn it. The CIT(A) erred in upholding the addition without appreciating the facts.

What were the facts?

The assessee claimed a deduction for interest expenditure incurred on unsecured loans, arguing it was for earning interest income. The Assessing Officer (AO) disallowed the deduction, stating no nexus was proven and the loans were for business purposes, not for earning interest income. The CIT(A) upheld the AO's decision.

What were the issues?

Whether interest expenditure incurred on unsecured loans can be deducted when used to earn interest income, and if the nexus between expenditure and income is sufficiently established.

Which sections of the Income-tax Act were involved?

Section 57(iii),Section 143(3),Section 147

AI-generated summary — verify with the full judgment below

Before: SHRI SAKTIJIT DEY & SHRI PRABHASH SHANKAR

For Appellant: Shri Tejveer Singh, Adv
For Respondent: Shri Swapnil Choudhari, (Sr. DR)
Hearing: 23.04.2026Pronounced: 14.05.2026

PER PRABHASH SHANKAR [A.M.] :- The present appeal emanating from the appellate order dated 05.02.2026 is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) r.w.s. 147 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 28.03.2022 for the Assessment Year [A.Y.] 2017-18. P a g e | 2 A.Y. 2020-21 Nirmal Trading Corporation 2. The grounds of appeal are as under:

1.

That the Learned CIT(A)/NFAC has erred in upholding the disallowance of interest expenditure amounting to Rs. 55,10,926 ignoring that such expenditure was incurred for earning the interest income that is offered to tax.

2.

That the Learned CIT(A)/NFAC has failed to apply the fundamental “Matching Principle” and the concept of “Real Income,” whereby taxing the gross interest receipts while disallowing the corresponding cost of funds.

3.

That the Learned CIT(A)/NFAC has erred in disregarding the substantive documentary evidence submitted by the appellant, including loan confirmations, ITRs of the lenders, and proof of TDS compliance under Chapter XVII-B, which conclusively establish the genuineness and nexus of the transactions.

4.

That the Learned CIT(A)/NFAC has erred in not considering the alternative plea that if the interest expenditure is held non-deductible for lack of nexus, the corresponding interest income earned from those specific borrowed funds should also be excluded from the total assessed income.

3.

At the outset, it was noticed that there is a delay in filing of appeal for a period of 3 days. In this connection, it is submitted by the assessee that he was unable to file the appeal within the stipulated timeframe due to the fact that there was delay in signing and uploading of Form 36 though the challan for the appeal was paid well within the time frame. The delay was unintentional, for bona fide reasons and due to the circumstances beyond the control of the assessee. Considering the delay being quite minor, we condone the same.

4.

Facts of the case are that the assessee Firm had filed return declaring Rs.23,38,920/-. Thereafter, assessment was completed u/s 143(3) r.w.s 144B of Act, at assessed income of Rs. 78,49,846/-. The AO

P a g e | 3 A.Y. 2020-21 Nirmal Trading Corporation disallowed the claim for deduction of interest paid against the interest income u/s 57(iii) of the Act of Rs 55,10,926/-. The disallowance was made on the ground that the assessee could not prove the nexus between the income and the expenditure holding that the expenditure claimed by the assessee under section 57(iii) was not laid out or expended wholly and exclusively for the purpose of making or earning income declared under the head “Income from Other sources”. From the records, it was observed that during the relevant year the assessee was dealing in wholesale and retail trading in metals and metal ores and not in any money lending business, extending loan facility.Total interest paid/credited other than Bank FD in ICICI Bank was Rs. 44,91,339/-. However, in the Trading and Profit & Loss account, interest receipt on loan was shown at Rs. 68,88,658/- and interest paid on Other Income at Rs. 55,10,926/-. The assessee could not give any satisfactory reason or reasonable cause for obtaining the loan necessitating payment of interest to the extent of Rs. 55,10,926/-. The expenditure claimed was purely related to payment of interest towards unsecured loans which was presumably obtained for assessee’s business purposes and not for earning the interest income. Accordingly, the said claim of deduction u/s. 57(iii) for Rs. 55,10,926/- was disallowed and added to the total income. The ld.CIT(A) in a rather cryptic order upheld the addition with P a g e | 4 A.Y. 2020-21 Nirmal Trading Corporation the observations that in view of the findings given by the AO in the assessment order, there was no merit in the contentions raised by the assessee that income earned through interest would not be possible if it would not have paid interest to other parties. The claim of the assessee that funds were borrowed from certain parties which were used to lend money and earn interest income and TDS was also made on interest payment made to the lenders as also confirmations from parties of unsecured loan to whom interest was paid as well as copy of Income Tax Returns of parties of unsecured loan were not taken note of.

5.

Before us, the ld.AR has contested the appellate order claiming that the assessee was earning substantial interest income and the expenditure was directly linked to earing the same. A copy of the computation of income has also been placed on record showing Interest income from loan of Rs 68,88,658/- against which deduction u/s 57(iii) has been claimed to the extent of Rs 55,10,926/-and the net income from such interest of Rs. 13,77,732/- was duly disclosed .It is contended that the ld.CIT(A) has passed a non speaking order without appreciating the facts of the case and the submissions made in this regard and went on to uphold the addition.

P a g e | 5 A.Y. 2020-21 Nirmal Trading Corporation 5.1 It is claimed that there is direct nexus between the interest income and the corresponding interest paid.Regarding the Section 57(iii) deduction, the assessee provided detailed bifurcation of interest. It was explained that the firm had borrowed funds (unsecured loans) amounting to Rs. 6,55,92,556/- as of 31st March 2020. These funds were utilized for two purposes: a) Partially for the primary business of trading in metals and metal ores. b) Partially for advancing loans to third parties to earn interest income. The assessee earned Rs. 68,88,658/- as gross interest income from these advances. To earn this, it paid Rs. 55,10,926/- as interest to the original lenders. Consequently, it claimed this expense as a deduction under Section 57(iii), offering a net interest income of Rs. 13,77,732/- to tax. While the AO accepted the explanation regarding high creditors as satisfactory, the claim for interest deduction was rejected based on the observation of the AO that the assessee is a trader in metals and not a money-lending concern; therefore, the unsecured loans were “presumably” obtained for business purposes and also lack of nexus. The assessee specifically submitted that if the interest paid was disallowed, then the interest income which had been offered to tax under 'Income from Other Sources' should also not be taxed to avoid double taxation on the same transaction.

P a g e | 6 A.Y. 2020-21 Nirmal Trading Corporation 6. The ld.DR on the other hand, has claimed that no nexus was established. He relied on the orders of the authorities below.

7.

Having gone through the facts of the case and the orders of the lower authorities, we find that there was no justification for the disallowance in view of the fact that the assessee was disclosing substantial amount of interest on loans and advances which were borrowed, incurring expenditure to earn such income. The ld.CIT(A) has grossly erred in not appreciating the facts of the case upheld the addition in a preconceived manner which could not be sustained.Accordingly,the appellate order is set aside and the AO is directed to delete the addition made which lacks any substance. The grounds of appeal are therefore, allowed.

8.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 14/05/2026. SAKTIJIT DEY PRABHASH SHANKAR (उपाध्यक्ष/ VICE PRESIDENT) (लेखाकार सदस्य/ACCOUNTANT MEMBER)

Place: म ुंबई/Mumbai ददनाुंक /Date 14.05.2026 Lubhna Shaikh / Steno

P a g e | 7 A.Y. 2020-21 Nirmal Trading Corporation

आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,

उि/सहायक िंजीकार (Dy./Asstt.

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