DCIT, CENTRAL CIRCLE-3(1), HYDERABAD vs. SRINIVAS ALLURI, HYDERABAD

आदेश / O R D E R PER MANJUNATHA.G, AM:

This appeal filed by the Revenue is directed against the order of the

Commissioner of Income Tax (Appeals), Hyderabad-11, dated

27.09.2025, and pertains to assessment year 2022-23.

Managing Director of M/s. SRR Projects (P) Ltd., filed his return of income :: 2 :: (RoI) for AY 2021-22 on 29.12.2022 declaring total income of

Rs.55,97,790/-. The case was selected for scrutiny and during the course

of assessement proceedings, the AO noticed that the assessee has

claimed interest deduction of Rs.1,64,12,367/- against interest income

offered during the year under consideration. The AO called upon the

assessee to furnish relevant details, i.e. the interest income earned for

the year under consideration and deduction claimed towards interest

payment u/s.57(iii) of the Act. In response, the assessee submitted that,

he has borrowed loans from his friends & relatives for the purpose of

lending the same to the company M/s. SRR Projects (P) Ltd., on which,

the company has credited interest amounting to Rs.1,52,01,493/- after

deducting TDS u/s.194A of the Act and the assessee offered the same as

‘income from other sources’. The assessee also credited interest due to

loan borrowed from various friends & relatives to the tune of

Rs.1,64,12,367/- and the same has been claimed as expenditure incurred

related to income u/s.57(iii) of the Act. The assessee has been

consistently following mercantile system of accounting and as per

provisions of Section 145 of the Act, the assessee has offered interest

income on accrual basis and also claimed interest expenditure on accrual

basis.

and also taking note of the amount of interest paid by the assessee,

observed that as per the information gathered through notice issued :: 3 :: u/s.133(6) of the Act, it was found that the person/entities to whom the

assessee claimed to have paid interest was stated that they have not

received any interest from the assessee till date and the assessee also

accepted in his reply but he has not paid any interest. Further, the

assessee has not filed proof of payment of interest after deducting

applicable TDS. Therefore, rejected the explanation of the assessee and

disallowed interest claimed of Rs.1,52,01,493/- on the ground that the

assessee can’t claim interest on accrual basis.

assessee, there is an increase in loan and advances taken by the

assessee. The AO called upon the assessee to furnish details of loan. In

response, the assessee has furnished details of loan including opening

balance, loan taken during the year, loan repaid during the year and

closing balance as on 31.03.2022 along with interest paid on said loans.

The AO called upon the assessee to file relevant details including

confirmations from the parties. In response, the assessee has furnished

confirmations from the parties along with their ITR particulars and bank

statements. The AO after considering the relevant submissions of the

assessee observed that, out of total loan taken during the year to the

tune of Rs.1,60,57,209/-, the assessee has taken Rs.35,57,209/- from

ICICI Bank. Further, during the year, the assessee has repaid sum of

Rs.62,45,000/-. Therefore, by taking note at balance amount of

Rs.62,55,000/-, loan taken by the assessee observed that the assessee :: 4 :: has failed to prove the onus of identity and creditworthiness and thus,

made addition of Rs.62,55,000/- u/s.68 of the Act.

appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed

complete details of interest paid on loan borrowed from various persons

and claimed as deduction u/s.57(iii) of the Act. The assessee had also

explained the method of accounting followed by the assessee for the year

under consideration for offering income from ‘income from other source’

and claimed that he has followed mercantile system of accounting and as

per the provisions of Sec.145 of the Act and accounted interest income

and interest expenditure on accrual basis. The assessee had also

explained the additions made by the AO towards loan accepted during the

year u/s.68 of the Act and claimed that the AO has summarily made addition by taking loan taken during the year minus loan repaid during

the year without considering details submitted by the assessee including

confirmation letters from the parties. Further, the AO has accepted

repayment of loan, however, balance outstanding amount is treated as

unexplained. Therefore, he submitted that additions made by the AO

should be deleted.

assessee and also taken note of explanation with regard to interest

deduction u/s.57(iii) of the Act observed that, the assessee had credited :: 5 :: interest due on the loans given to M/s. SRR Projects (P) Ltd., on accrual

basis, even though, he has not received any interest income during the

Financial Year under consideration. Similarly, the assessee had credited

interest due on the loans borrowed from various persons and claimed

deduction u/s.57(iii) of the Act on accrual basis since the assessee is

following mercantile system of accounting and accounted income and

expenditure on accrual basis. Therefore, held that the assessee has

rightly claimed that interest due on loan u/s.57(iii) of the Act, because the

above interest income has been incurred for earning interest income.

Although, few persons in response to notice u/s.133(6) of the Act denied

receipt of any interest income but clearly stated that they have paid loan

to the assessee company and also interest has been charged on loan.

Further, they offered interest income to cash on cash basis. Therefore,

observed that, the AO was erred in making addition towards interest

expenditure and thus, directed the AO to delete the addition to the extent

of Rs.1,52,01,493/- made towards disallowance of interest expenditure.

Rs.62,55,000/-. The Ld.CIT(A) observed that the AO, on adhoc basis

made addition of Rs.62,55,000/-, even though, he was accepted the fact

that the assessee has filed relevant evidences to prove creditworthiness

of the parties. The Ld.CIT(A) further noted that the assessee has taken

loan of Rs.70 lakhs from Mr. Anil Chandrasekkar Kodali and also paid

Rs.47,45,000/- to the above party. However, the AO has made addition :: 6 :: towards balance amount of Rs.62,55,000/- to say that he was accepted

the fact that the assessee has filed all the details. Similarly, in respect of

loan taken from Smt. Kalyani Chava for Rs.15 lakhs, the assessee has

repaid a sum of Rs.25 lakhs to the above party towards opening balance.

However, the AO accepted the repayment but made addition towards

borrowings. Therefore, observed that there is no consistency in the

approach of the AO. Since the assessee has furnished all the details and

proved identity of the creditworthiness, genuineness of the transaction

and also creditworthiness of the parties, the AO was erred in making

addition u/s.68 of the Act and thus, directed the AO to delete the addition

of Rs.62,55,000/- made u/s.68 of the Act.

appeal before this Tribunal.

deleting the addition made by the AO towards interest expenditure

without appreciating the fact that all the parties denied receipt of any

interest when the AO has conducted enquiries u/s.133(6) of the Act. The

Ld.Sr.AR further submitted that the onus is on the assessee to prove

expenditure has been incurred to earn income before claiming deduction

u/s.57(iii) of the Act. Since, the assessee has not proved the onus and

also the parties have denied receipt of interest, the AO has rightly made

additions towards disallowance of interest u/s.57(iii) of the Act. The :: 7 :: Ld.CIT(A) without appreciating the relevant facts simply deleted the

additions made by the AO. Therefore, he submitted that the additions

made by the AO should be upheld.

erred in deleting the addition made u/s.68 of the Act for Rs. 62,55,000/-

even though, the assessee has failed to prove the genuineness of

transaction and creditworthiness of the parties. Mere fact of accepting

repayment doesn’t absolve, the assessee from his onus to prove the

transaction to the satisfaction of the AO. Since the assessee has not

discharged the onus, the AO has made additions towards unexplained

loan u/s.68 of the Act. The Ld.CIT(A) without appreciating relevant facts

simply deleted the additions made by the AO. Therefore, he submitted

that the order of the Ld.CIT(A) should be set aside and the additions

made by the AO should be upheld.

the order of the Ld.CIT(A) submitted that the assessee has followed

mercantile system of accounting for reporting ‘income from other

sources’. The assessee has offered interest accrued but not received on

loan given to M/s. SRR Projects (P) Ltd. Similarly, the assessee has

credited interest due but not paid to loan borrowed from various parties

and claimed deduction u/s.57(iii) of the Act. Since there is a nexus

between interest expenditure and interest income, the assessee has :: 8 :: rightly claimed deduction towards interest payment on loan against

interest income. The Ld.CIT(A) after considering relevant facts has rightly

appreciated the facts and deleted the additions made by the AO.

Therefore, he submitted that the order of the Ld.CIT(A) should be upheld

and additions made by the AO should be deleted.

adhoc basis made addition of Rs.62,55,000/- without even considering

individuals loan taken from various parties. The assessee has explained

the loan accepted during the year by filing relevant details including

confirmations from the parties and their bank account statements along

with ITR filed for the year under consideration. The parties also

confirmed in response to enquiry conducted during the course of

assessement proceedings. In fact, the AO accepted repayment of loan to

the parties, however, loan borrowed from the same party has been

treated as unexplained. The Ld.CIT(A) after considering relevant facts

has rightly deleted the additions made by the AO. Therefore, he

submitted that the order of the Ld.CIT(A) should be upheld and additions

made by the AO should be deleted.

record and had gone through orders of the authorities below. We also

carefully considered the relevant reasons given by the AO to make

addition towards interest expenditure of Rs.1,52,01,493/-. The assessee :: 9 :: is a Managing Direction of M/s. SRR Projects (P) Ltd., has borrowed loans

and advances from various parties and in turn, he has advanced loans to

M/s. SRR Projects (P) Ltd. The assessee is following mercantile system of

accounting for the purpose of reporting income from business and income

from other sources. Accordingly, interest due but not received on loan

given to M/s. SRR Projects (P) Ltd., has been offered as income for the

year. Similarly, the assessee has also credited interest to loan accounts

on accrual basis, even though, the assessee has not paid any interest to

lenders. Since the assessee has followed mercantile system of

accounting, both interest income and expenditure has been accounted on

accrual basis and in respect of interest payment on loan, deduction

u/s.57(iii) of the Act has been claimed. The AO made addition towards

disallowance of interest of Rs.1,52,01,493/- u/s.57(iii) of the Act, on the

ground that the assessee only credited interest to the loan account but

not actually paid interest to the lenders and therefore observed that the

amount claimed as deduction towards unpaid interest u/s.57(iii) of the

Act, is not allowable. In our considered view, the AO is completely

misunderstood the concept of accounting principles and made additions

towards disallowance of interest paid on loan which is evident from

relevant facts where the assessee has accounted interest income on loan

given to the company on accrual basis, even though, the company has

not paid any interest to the assessee for the year under consideration.

Since the assessee has followed mercantile system of accounting, in our :: 10 :: considered view, when interest income has been offered on accrual basis,

corresponding interest expenditure incurred by the assessee on loan

borrowed from various persons also needs to be allowed as deduction

u/s.57(iii) of the Act on accrual basis. Therefore, in our considered view,

the AO is erred in making disallowance of interest of Rs.1,52,01,493/-.

The Ld.CIT(A) after considering relevant facts has rightly deleted the

additions made by the AO towards disallowance of interest of

Rs.1,52,01,493/-. Thus, we are inclined to uphold the findings of the

Ld.CIT(A) and reject the ground taken by the Revenue.

Act. The AO made addition on adhoc basis by taking into account loans taken during the year minus loan repaid during the year. The AO has

considered loan taken during the year at Rs.1.25 Crs. from six persons.

The AO had also taken repayment of loan of Rs.62,45,000/- made during

the year to Mr. Anil Chandrasekkar Kodali and Smt. Kalyani Chava. The

difference amount of Rs.62,55,000/- has been treated as unexplained. In

our considered view, the AO is completely erred in making addition of

Rs.62,55,000/- u/s.68 of the Act by taking summary of loan taken during

the year (minus) loan repaid during the year, even though, the AO has

accepted identity of Mr. Anil Chandrasekkar Kodali and Smt. Kalyani

Chava which is evident from the acceptance of loan repayment to above

two parties. Further, the assessee had also furnished relevant details

including confirmation from the parties along with their bank statements,

:: 11 :: ITR to prove identity, genuineness of transaction and creditworthiness of

the parties. Since the loan amount has been taken through banking

channel and also assessee has credited interest on loan borrowed form

various parties and further, the parties have also confirmed the loan

transactions, in our considered view, the additions made by the AO u/s.68

of the Act can’t be upheld. The Ld.CIT(A) after considering relevant facts

has rightly deleted the additions made by the AO. Thus, we are inclined

to uphold the findings of the Ld.CIT(A) and reject the ground taken by the

Revenue.

Sd/- Sd/- (िवजय पाल राव) (मंजूनाथा. जी) (VIJAY PAL RAO) (MANJUNATHA.G) उपा�� /VICE-PRESIDENT लेखा सद�/ACCOUNTANT MEMBER

Hyderabad, dated 17.06.2026. TLN आदेशकी �ितिलिप अ�ेिषत/ Copy of the order forwarded to: िनधा�रती/The 1 : Shri Srinivas Alluri, Plot No.8/2/269/S 24 25, Flat No.101, Hari Nilayam, Sagar Society, Assessee Banjara Hills, Hyderabad-500 034. राज�/ The Revenue 2 : The DCIT, Central Circle-3(1), Hyderabad. 3 The Principal Commissioner of Income Tax, Hyderabad. िवभागीय�ितिनिध, आयकर अपीलीय अिधकरण, हैदराबाद / DR, ITAT Hyderabad. 4 गाड�फ़ाईल / Guard file 5

आदेशानुसार / BY ORDER

Digitally signed by TUMMALACHARLA TUMMALACHARLA LAKSHMI NARAYANA DN: cn=TUMMALACHARLA LAKSHMI LAKSHMI NARAYANA, c=IN, o=INCOME TAX APPELLATE TRIBUNAL, ou=INCOME TAX NARAYANA APPELLATE TRIBUNAL, CHENNAI BENCH Date: 2026.06.17 14:16:13 +05'30'

Sr. Private Secretary ITAT, Hyderabad