KAPIL TANEJA,JAIPUR vs. ACIT CIRCLE 3, JAIPUR

4. On the facts and in the circumstances of the case and in law, ld.CIT(A) has erred in confirming the addition of Rs.82,00,000/- made by ld.AO u/s 68 of the Income Tax Act, arbitrarily. 4.1 That, ld.CIT(A) has further erred in confirming the addition of Rs. 82,00,000/- made by ld.AO by alleging the loans received by assessee from various parties as undisclosed income of the assessee. Appellant prays that all the loans taken by assessee are absolutely genuine and addition so confirmed deserves to be deleted.

5. On the facts and in the circumstances of the case and in law, ld.CIT(A) has erred in confirming the disallowance of Maintenance expenses of Rs.20,000/- made by ld.AO, arbitrarily.

6. On the facts and in the circumstances of the case and in law, ld.CIT(A) has erred in confirming disallowance of Interest on TDS of Rs.1,44,519/- made by ld.AO arbitrarily. Appellant prays that interest on late payment of TDS being compensatory in nature and therefore deserves to be allowed.

7. On the facts and in the circumstances of the case and in law, ld.CIT(A) has erred in confirming disallowance of trading loss of Rs.1,50,529/- arbitrarily.

8. The appellant craves leave to add alter amend substitute one or more grounds of appeal as and when necessary.”

Sh. Kapil Taneja vs. ACIT 3. The fact as culled out from the record is that the assessee – appellant has efiled his return of income declaring total income of Rs.54,30,550/- on 17.10.2016. After filling of ITR the case of the assessee was selected under CASS for complete scrutiny. Notice u/s 143(2) of the IT Act was issued through ITBA on 03.07.2017. On 06.08.2018 notice u/s 142(1) of the IT Act was issued through ITBA along with the query letter, the assessee submitted reply online through ITBA. As the assessee-appellant has not submitted complete details even though passing of a long time, therefore, ld. AO on 20.12.2018 issued a show cause notice to the assessee requiring to show cause on some issues and furnishing clarification on some other issues. The assessee was asked to furnish a reply on 21.12.2018 but on 21.12.2018 no reply was furnished. On 24.12.2018 and 25.12.2018 various confirmations of unsecured loans and a reply to the show cause was uploaded on ITВА.

3.1 During the year under consideration the assessee has shown income under the head income from Salary, Business and Profession, Capital gain and other sources. As per the submission of the assessee, he is engaged in the business of trading and investment in shares and also earned income from interest, cargo handling charges, clearing and forwarding agent service, Sh. Kapil Taneja vs. ACIT transportation service etc. Along with the details, the assessee submitted profit & loss account by the heading 'Kapil Taneja' and other P&L account of "Pinc Freight Movers".

3.2 On perusal of the audit report ld. AO observed that assessee has taken huge unsecured loans during the year under consideration. As per the details available in col. 31(a) of the audit report and as it is evident that he has taken loan from 259 persons. The closing balance of these unsecured loans as per balance sheet filed was Rs.28,60,02,040/-, he also observed that in the details given in the audit report regarding unsecured loans, PAN No. of lenders were not given. In the query letter issued on 06.08.2018, the assessee was required to furnish confirmation of all unsecured loans, whether squared up or not. As is evident from the order of the assessment that the assessee was given an opportunity in the matter vide notice dated 12.09.2018, 25.10.2018, 01.11.2018, 12.11.2018, 06.12.2018 and on 20.12.2018. Thus ld. AO noted that despite various notices given for furnishing the details, on two occasions the assessee furnished confirmation of unsecured loans from some of the lenders, which are placed on record. After issue of show cause assessee uploaded copy of various confirmations on 24/25.12.2018. On Sh. Kapil Taneja vs. ACIT perusal of the details uploaded by the assessee he noted that, no confirmation for the unsecured loan taken from TK Films has been filed. After issue of show cause further time was allowed to the assessee. Inspite of providing time beyond the showcause date, confirmation of unsecured loans claimed to have been taken from M/s TK Films has not been filed. As the assessee has failed to discharge his basic onus of furnishing the confirmation from the lender, therefore, the genuineness of the transaction, identity of the person lending the money and creditworthiness of the lender is not proved. It is also pertinent to mention that even in the details given in the audit report regarding unsecured loans, PAN No. and address of lenders is not given. Therefore, the amount of Rs.3,00,000/- shown to have received from M/s T K Films is treated as income of the assessee from undisclosed sources with the meaning of section 68 of the IT Act to be taxed u/s 115BBE of the IT Act. Further ld. AO noted that in case of other five case the addition of Rs. 79,00,000/- was made because the PAN number and address was not mentioned in the confirmation and the audit report filed, therefore, ld. AO treated as non-genuine transaction and was added as income of the assessee u/s. 68 of the Act.

Sh. Kapil Taneja vs. ACIT 3.3 On perusal of Profit & Loss account submitted by the assessee ld. AO noted that two profit & loss accounts have been submitted. On one of the P&L. account heading is "Pinc Freight Movers". This P&L account shows income relating to transportation charges, clearing & forwarding agent service charges and other related income and consequently on debit side transportation charges and related charges have been claimed. Thus, this P&L account seems to be related to assessee's transportation and related work. In the other P&L account bearing the heading of assessee's name, in the trading account portion, sale and intraday income with closing stock has been shown on the credit side and the debit side bears detail of opening stocks, purchases and direct expenses. As no further details were provided it seems that this account is related to the share trading activities of the assessee. The P&L portion of this account is having interest and other income, shown in the credit side and various expenses under the head indirect expenses has been shown in debit side, including interest payment of Rs. 3,60,43,574/-.

3.4 On perusal of P&L account ld. AO observed that maintenance charges of Rs. 20,000/- has been debited in the P&L Sh. Kapil Taneja vs. ACIT account. As no details have been furnished it is not clear for what purpose these expenses have been claimed. The nature of these expenses cannot be known in absence of any clarification/justification by the assessee. As no justification for the claim of these expenses has been furnished and even the nature of expenses cannot be explored suo moto, the claim of these expenses cannot be allowed. In view of these facts, the claim of maintenance expenses of Rs. 20,000/- was disallowed and added back to the income of the assessee.

3.5 In the P&L account the assessee has shown trading loss of Rs. 1,50,529/-, The assessee was required to furnish separate details of each business, but no such details were filed by the assessee. On perusal of P&L account it is observed that on the trading account part, total purchases and sales and direct expenses of share trading were given by the assessee. Therefore, if the trading loss would have been related to share transactions, it would have been reflected in the trading account part. As trading loss has been claimed in the P&L portion and nature of this loss has not been appraised by the assessee and no reply to the show cause, even after being asked specifically, has been filed, the 3.6 In the P&L account the assessee has claimed locker rent of Rs. 2,584/- and NSC charges of Rs. 73,553/-, By the heading of these expenses, these seem to be of personal nature. As no details of these expenses have been provided by the assessee even after asking specifically, the claim of these expenses are disallowed taking them to be personal expenses of the assessee. This will result in an addition of Rs. 76,137/- to the income of the assessee.

3.7 On perusal of details appearing in P&L account it is observed that assessee has claimed Rs. 1,44,519/- on account of interest on TDS. In the reply filed on 25.12.2018 the assessee submitted that the nature of the payment was not penal but compensatory as decided in the decision of Kolkatta ITAT in the case of DCTT vs. Narayani Ispat (Pvt.) Ltd. The reply of the assessee has been considered and is not tenable. These expenses are related to payment of interest for late deposition of TDS amount deducted by the assessee, as these expenses are penal in nature, they cannot be allowed as expenditure. In view of these facts, claim of the 3.8 On perusal of the details in the profit & loss account it is noticed that the assessee has claimed house property tax of Rs. 21,725/- as deduction. In the reply filed on 25.12.2018, the assessee submitted that on account of some legal & statutory requirements the amount was paid. In the reply the assessee has not uttered any word on how this expenditure can be treated as business expenditure. In both the Profit & Loss accounts filed by the assessee there is no income arising from the property business. The assessee has shown income from sale of property only under the head capital gain. Moreover, there is no detail of any stock in trade of business of the assessee. In view of these facts, the claim of the assessee for deduction of house property tax was disallowed and added back to the income of the assessee.

3.9 On perusal of P&L account in the name of 'Kapil Taneja' it was observed by the ld. AO that in this P&L account assessee has credited interest income of Rs. 3,31,86,010/- and debited interest payment of Rs. 3,60,43,574/-. In the query letter issued on 06.08.2018 the assessee was required to furnish justification for Sh. Kapil Taneja vs. ACIT claim of interest payment of Rs. 3,60,43,574/- giving details of use of unsecured loan amount. No such details were furnished by the assessee. On 16.11.2018 the assessee submitted that main purpose and justification of accepting and use of loan for business purposes only where they claimed interest of R.s 3,60,43,574/- in P & L Account for business purposes and for justification of the claim the copy of the ledger of interest paid was placed on record. On 20.12.2018 the assessee was again requested to furnish specific justification for claim of interest expenditure specifying the details where the unsecured loan has been invested. He was also requested to give specific details of each business and the amount invested therein. In response the assessee vide submission dated 25.12.2018 submitted that all the unsecured are of general use of the business of the assessee and interest income and expenditure both duly recorded in the books of accounts and thus related to the business of the assessee. Ld. AO considered the reply filed by the assessee but was not accepted based on the following reasoning given by him:--

Sh. Kapil Taneja vs. ACIT 2. In the balance sheet loans and advances of Rs. 24,81,18,305/- has been shown. 3. As per the balance sheet total unsecured loans of the assessee were of Rs. 28,60,02,040/- 4. As per balance sheet the assessee was having capital balance of Rs. 4,15,88,484/-. 5. The assessee has not given any details of using the unsecured loans. 6. Total interest payment of Rs. 3,60,43,574/- has been claimed on total unsecured loans of Rs. 28,60,02,040/-.

3.10 Ld. AO thus noted that the assessee was having personal investment of Rs. 6,50,49,551/- and personal capital of Rs. 4,15,88,484/-. Thus, it is sure that some portion of unsecured loans were used by the assessee in acquisition of personal assets. Moreover, the assessee has made investment of Rs. 2,98,66,450/- in shares of various companies and investment in firms from where assessee has not earned any income. The assessee was specifically required to furnish the details of business-wise investment of unsecured loans but no such details were filed by the assessee in spite of providing ample opportunity. However, in absence of any specific details or justification given by the assessee, the amount on which interest is to be allowed/disallowed cannot be specifically calculated. As mentioned above, the amount Sh. Kapil Taneja vs. ACIT of unsecured loans of assessee are of Rs. 28,60,02,040/- and advances are of Rs. 24,81,18,305/- only. As per assessee himself the total cost of taking unsecured loans of Rs. 28,60,02,040/- is Rs. 3,60,43,574/-. As the total unsecured loans were not used for advancing the money therefore, interest in proportion to the money advanced was only allowed and the remaining amount was disallowed. Accordingly, an amount of Rs.3,12,69,254/- of interest expenditure is allowed and the remaining amount of Rs.47,74,320/- was disallowed and added back to the income of the assessee.

“4. Decision: I have carefully considered the relevant and material facts on record, in respect of this ground of appeal, as brought out in the assessment order. On perusal of the audit report it was noticed by the Assessing Officer that the assessee took huge unsecured loans. The assessee during the assessment proceedings furnished confirmation of unsecured loans from some of the lenders but on perusal on the details provided by the assessee it was found that no confirmation of unsecured loan from T.K Films was filed by the assessee. It was also noticed that PAN No of the lenders was not provided in the confirmation filed by the assessee. Fruther, on perusal of the P & L account the Assessing Officer found a Sh. Kapil Taneja vs. ACIT total of five discrepancies namely false claim of the maintenance expences of Rs. 20,000/-, false trading loss of Rs. 1,50,529/-, false claim of locker rent and NSC charges, false claim of Interest on TDS of Rs. 1,44,519/- as expenditure, false claim of house property tax of Rs. 21,725/- as deduction and false claim of interest payment of Rs. 3,60,43,574/-. 4.1 The A.O has briefly pointed the discrepancies found in the audit report and P&L account of the assessee, Hence the onus lies on the assessee to prove the genuineness of the transactions related to the alleged bogus unsecured loans and discrepancies in P & L account, during the appellate proceedings the assessee failed to provide any evidence in his written submission that explains the genuineness of the transactions related to unsecured loans and no evidences were provided by the assessee weakens the findings of the Assessing Officer regarding the false claims of the assesse of the maintenance expences of Rs. 20,000/-, false trading loss of Rs. 1,50,529/-, false claim of locker rent and NSC charges, false claim of Interest on TDS of Rs. 1,44,519/- as expenditure, false claim of house property tax of Rs. 21,725/- as deduction and false claim of interest payment of Rs. 3,60,43,574/-. The onus lies on the appellant to support any claim by bringing in cogent documentary evidence 4.2 In absence of any substantial documentary evidence in support of its grounds of appeal

, I have no basis to take a contrary view in the appellate proceedings as I have no reason to interfere with the assessment order As such, I do not find any infirmity in the order of Assessing Officer. Therefore, Addition of Rs. 1,88,17,780/- is hereby sustained on merits. Accordingly, Grounds No.1 to 4 are dismissed. Ground No.5 is general in nature and does not call for specific adjudication.

7. In the result, the appeal is Dismissed.”

Sh. Kapil Taneja vs. ACIT Appellant prays that ld.CIT(A) ought to have decided appeal after taking into consideration submission made and evidences adduced by assessee and order passed without considering the same is not in accordance with law. Grounds of Appeal No. 3 & 3.1: In these grounds of appeal, assessee has challenged the action of ld.CIT(A) in confirming disallowance of interest to the tune of Rs.47,74,320/- out of interest expenses claimed by assessee. Facts pertaining to the grounds of appeal are that during the year under consideration, assessee has debited interest expenditure of Rs.3,60,43,574/- to profit & loss account. On the other hand, assessee had credited interest income worth Rs.3,31,86,010/- to profit & loss account. During the course of assessment proceedings, ld.AO sought clarification as to utilization of funds, in respect of which interest was paid by assessee. Ld.AO, on the observation that assessee had given advances worth Rs.24,81,18,305/- as against unsecured loans taken of Rs.28,60,02,040/-, computed proportionate interest in respect of unsecured loans, which was utilized for making advances at Rs.3,12,69,254/- and thus disallowed balance interest cost of Rs.47,74,320/-. In this regard, at the outset, it is submitted that it was explained by assessee throughout the assessment proceedings that borrowed funds were utilized for common business purposes and for making advances, however submission of assessee was not accepted by ld.AO. At this juncture, kind attention of your honours is invited to profit & loss account of assessee (page 10 - 11 of WS), from perusal of which, it is apparent that assessee has traded in shares as well as made certain advances, on which interest income of Rs.3,31,86,010/- has been received and has also earned other income of Rs.1,08,97,120/-. However, ld.AO has presumed that funds borrowed were solely utilized either for making advances or for making personal investments, which interpretation is absolutely arbitrary. Ld.AO has simply compared figure of unsecured loans taken of Rs. 28,60,02,040/- with advances made of Rs. 24,81,18,305/- and has inferred that remaining funds were not utilized for business purpose. Your honours would appreciate that in the case of running business, funds borrowed form part of common pool and thus are parked in a number of assets, which may be in the shape of current assts, i.e. stock/debtors/ TDS/ cash/bank balance etc. and in fixed assets as well and which also keep changing due to realization/sale of assets and it is thus not possible to show direct nexus between funds borrowed and utilized. Your honours would appreciate that gross profit of assessee is Rs 1,93,069.82/- whereas assessee has eventually earned net profit to the tune of Rs 15,71,139.83/- and it is not the case that assessee has debited interest to reduce his income.

Sh. Kapil Taneja vs. ACIT Ld.AO has further observed that assessee has personal assets worth Rs.6,50,49,551/- and investment of Rs.2,98,66,450/- in shares of various companies. In this regard, kind attention of your honours is invited to Balance sheet, from perusal of which it is evident that assets worth Rs. 6,50,49,551/- includes property situated at “B 62, Hanuman Nagar, Vaishali Nagar” shown at Rs. 2,52,34,120/-, which was acquired by assessee by obtaining loan worth Rs. 1.4t Crores from Financial Institution appearing in Financial Statement of assessee. Also, Fixed assets include “Office premises at Time Square” shown at Rs. 1,04,91,000/- as well as “Showroom at Barmer” shown at Rs.70,37,330/- and assessee has shown gross rental income worth Rs. 12,61,668/- and Rs.18,00,000/- from these rented properties, which has been subject to tax. Moreover, ld. AO himself has stated that assessee was having capital worth Rs. 4,15,88,484/-, thus observation of ld.AO that borrowed funds were utilized for acquisition of Personal Assets is not correct so far as there is no diversion of funds and assessee has duly paid taxes on income earned on such assets. It is further pertinent to note here that the mechanism followed by ld.AO to disallow part of the interest shows that ld.AO has simply compared loans taken and loans given and has completely brushed aside other current/ fixed assets generated in the course of business and it appears that disallowance has been made as per section 57(iii), though provisions of section 57(iii) have not been invoked specifically. Even w.r.t. section 57(iii), Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 held that: "the plain natural construction of the language of section 57(iii) of the Act irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) of the Act requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned." The Supreme Court went on to hold that "it is true that the language of section 37(1) of the Act is a little wider than that of section 57(iii) of the Act but we do not see how that can make any difference in the true interpretation of section 57(iii) of the Act. The language of section 57(iii) of the Act is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it Sh. Kapil Taneja vs. ACIT does not mean that section 57(iii) of the Act should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language." In view of above, it is submitted that interest expenditure incurred by assessee during the course of business deserves to be allowed as claimed. Grounds of Appeal No. 4 & 4.1: In these grounds of appeal, assessee has challenged the action of ld.AO in making addition of Rs. 82,00,000/- u/s 68 of the Income Tax Act. Facts pertaining to the grounds of appeal are that during the year under consideration, assessee had taken certain unsecured loans from various parties. During assessment proceedings, ld.AO directed to furnish details including confirmations etc. of such loans, which were duly furnished by assessee except in one case, i.e. T K Films from whom assessee had taken unsecured loan worth Rs.3,00,000/-. Accordingly, ld.AO issued show cause notice dated 20.12.2018 (page 12-13 of WS), whereby it was proposed that:”As substantial time has passed still confirmation of all unsecured loans have not been filed. You are therefore, showcaused as to why the amount of unsecured loans shown by you, for which no confirmation has been filed, may not be treated as your undisclosed income for the year under consideration.” Apart from this, no further query was raised w.r.t. unsecured loans, whose confirmations were already filed by assessee. It was thus presumed by assessee that confirmations already filed were found in order. However, while passing assessment order, ld.AO w.r.t. unsecured loans worth Rs.79,00,000/-(as tabulated at page 3 of Assessment order) observed that “No PAN in confirmation and no PAN in audit report”. Ld.AO further observed that since address of lenders were also not mentioned in confirmations, their identity remained unproved and thus doubted creditworthiness and genuineness of such parties. In this regard, it is submitted that first of all, there was no whisper in the show cause notice regarding intention of ld.AO of making addition in respect of unsecured loans worth Rs.79,00,000/-. Your honours would appreciate that issuance of show cause notice is not a mere technical formality and is rather very important part of assessment proceedings as the same is issued as a compliance of principle of natural justice, according to which an assessee must be afforded with adequate opportunity of being heard and to give explanation, prior to taking any adverse view in his case. In the present case, ld.AO, in the show cause notice has nowhere specified any discrepancy in confirmations already filed by assessee and has not expressed his intention of making addition w.r.t. unsecured loans, in respect of which assessee had filed Sh. Kapil Taneja vs. ACIT confirmations and has merely proposed addition in respect of loan for which no confirmation was filed by assessee, i.e. M/s T.K.Films, from whom assessee had taken loan worth Rs.3,00,000/-. Whereas to utter surprise of assessee, eventually ld.AO has made addition to the tune of Rs.82,00,000/- by alleging unsecured loans taken by assessee as unexplained cash credit u/s 68 of the Income Tax Act. Your hobours would appreciate that such action of ld.AO is contrary to the principle of natural justice. So far as merits of the issue are concerned, as stated above, ld.AO has basically made addition by alleging that no PAN /address was mentioned in confirmations furnished by assessee. In this regard, it is submitted that in aggregate interest to the tune of Rs. 3,60,43,754/- was paid by assessee in respect of unsecured loans, out of which interest of Rs. 3,59,62,334/- was subject to TDS and during the course of assessment proceedings, vide notice dated 30.11.2018 (Page 14 of WS), assessee was directed to furnish details of expenses on which TDSs deducted, which was duly furnished by assessee vide letter dated 03.12.2018 (Page 15 of WS), wherein complete details of tax deducted and deposited (Page 16 of WS) was furnished. In fact, in Tax audit report also (Page 19 – 34 of WS), at clause 34(a) and 34(b), complete details of TDS alongwith details of TDS Returns filed by assessee were duly reported, however ld.AO has not even considered the same and has drawn adverse inference from list of loans mentioned, and confirmations, wherein PANs were omitted to be mentioned inadvertently. Moreover, as stated above, in final show cause notice dated 20.12.2018, no doubt was raised w.r.t. unsecured loans worth Rs.79,00,000/- for which assessee had already furnished confirmations (Page 35 - 39 of WS), which also implied that loans worth Rs.79,00,000/- were treated as explained. In view of above, it is submitted that addition made in respect of loans to the tune of Rs.79,00,000/- are fully explained and deserve to be deleted outrightly. Similarly, w.r.t. addition of Rs.3,00,000/- made in respect of loan taken from M/s T.K. Films, it is submitted that loan was taken through banking channels and interest paid to this party was also subject to TDS, which was duly mentioned in TDS Return filed by assessee and therefore identity, creditworthiness and genuineness of this loan was also proved beyond doubt and it is submitted that loan so taken is fully explained and addition made on this account also deserve to be deleted. Ground of Appeal No. 5: In this ground of appeal, assessee has challenged the action of ld.AO in making disallowance of Rs.20,000/- being repairs and maintenance expenses debited by assessee to P & L account.

Sh. Kapil Taneja vs. ACIT In this regard, it is submitted that during the course of assessment proceedings, various details/information was sought, however no query whatsoever was made w.r.t. repairs and maintenance expenses. Even in show cause notice dated 20.12.2018 issued prior to completion of assessment, no disallowance was proposed in this regard and disallowance was made directly in assessment order. Your honours would appreciate that such action of ld.AO in making addition without affording assessee with adequate opportunity tantamounts to violation of principle of natural justice. It is therefore requested that disallowance so made is not in accordance with law and deserves to be deleted. Ground of Appeal

No.6: In this ground of appeal, assessee has challenged the action of ld.AO in making addition of Rs.1,44,519/- on account of Interest on TDS debited to Profit & loss account. Brief facts of the case are that during the year under consideration, assessee has debited interest on TDS amounting to Rs.1,44,519/- to P/L a/c. Ld. AO issued show cause notice seeking explanation as to why the same should not be disallowed. In response to such notice, it was submitted the Interest on TDS being compensatory in nature and not penal in nature deserves to be allowed. However, submission of assessee was brushed aside and interest on TDS claimed by assessee was disallowed. In this regard, kind attention of your honours is invited to section 40(a)(ii), which reads as under: Amounts not deductible

40. Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee— (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. [Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have Sh. Kapil Taneja vs. ACIT included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;] A bare perusal of above makes it amply clear that any rate or tax on profit or gains of business or profession, shall not be allowable under section 40(a)(ii) of the Income Tax Act. Further, explanations have been inserted to clarify that any taxes paid by assessee abroad in respect of income taxable out of India also shall also be construed as “tax or levy” in accordance with this section. Thus, intention of Law in this regard is quite clear not to allow “tax on income of assessee” as deductible expenditure as the same is appropriation of income towards a statutory liability and not an expense. Further, tax on income, cannot be in any way construed as expenditure incurred wholly and exclusively for the purpose of business, which is pre condition for allowability of any expenditure. In the instant case, disallowance is made of “Interest on TDS”, which is paid in respect of late payment of TDS. Such TDS is not made from income of deductor, rather it is the income tax liability of the deductee being discharged by deductor because of the vicarious liability cast upon him by the statute. It is further submitted that such liability of deductor to deduct tax at source is not computed as a percentage of or on the basis of profits or gains of his business or profession, rather it is at the rates prescribed under the Act, from the payment due/ made by him of a particular expense. In fact, TDS itself is nothing more than a portion of expense, which is retained by payer and deposited in Government account in order to fulfil liability cast upon him as payer by statue. Thus, once a particular business expense to which TDS provisions are attracted and duly fulfilled by assessee, TDS is also allowed as deduction being part of such expense. Your honour would appreciate that once principal amount i.e. TDS is allowable, then interest thereon should also be allowable. Accordingly, the same cannot be treated to be covered within the ambit of section 40(a)(ii). It is a settled position of law that interest on purchase tax/ sales tax is deductible in view of the fact that those taxes are also deductible. Following the same analogy, interest on TDS should also be allowable as TDS itself is deductible being portion of respective expenditure. In this regard, reliance is placed on:

Sh. Kapil Taneja vs. ACIT [2023] 151 taxmann.com 322 (Delhi - Trib.) Delhi Cargo Service Center v. ACIT Section 37(1) of the Income-tax Act, 1961- Business expenditure - Allowability of (Interest)-Assessment year 2015-16- Assessee-company was engaged in cargo handling services -For assessment year 2015-16, it e-filed its return - Assessing Officer made disallowance on account of interest payment on late deposit of TDS on ground that same was penal in nature- Whether since interest paid on late payment of TDS being compensatory in nature was an allowable deduction under section 37(1) and therefore, impugned disallowance was to be deleted - Held, yes [Paras 8 and 9] [In favour of assessee] D.V. Properties (P.) Ltd. vs. Principal Commissioner of Income-tax [2023] 155 taxmann.com 119 (Surat-Trib.)/[2023] 203 ITD 283 (Surat-Trib.)[29-08- 2023] IV. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Late payment of TDS) - Whether amount of TDS is not income tax for assessee but it is amount of income tax deducted and paid by assessee on behalf of third party - Held, yes - Whether thus, said expenditure incurred by assessee is wholly and exclusively for purpose of business and delay in making payment of TDS late, is not like a penalty, and it does not amount to payment for breach of law or illegal act or prohibited act, thus interest on late payment of TDS is allowable - Held, yes [Para 18] [In favour of assessee] Ground of Appeal No.7: In this ground of appeal, assessee has challenged the action of ld.AO in making disallowance of Rs.1,50,529/- on account of Trading loss declared by assessee. In this regard, as stated above, assessee is engaged in the business of trading and investment in shares, during the course of which assessee suffered above loss. During the course of assessment proceedings, ld.AO vide notice dated 30.11.2018 sought “Scrip wise details of profit/ loss on F & O transactions”, in response to which assessee furnished complete details of share transactions including Client Global account (Page 17 - 18 of WS). Apart from this, no details whatsoever were sought w.r.t. share transactions. In fact, at no stage of assessment proceedings, any specific details were sought regarding trading loss of Rs.1,50,529/- as shown in profit & loss account Also, prior to completion of assessment proceedings, show cause notice dated 20.12.2018 was issued by ld.AO, wherein no Sh. Kapil Taneja vs. ACIT addition/disallowance was proposed in respect of trading loss of Rs.1,50,529/- shown by assessee in profit & loss account. It is thus submitted that addition of Rs.1,50,529/- has been made by ld.AO without affording adequate opportunity and is thus against the principle of natural justice and deserve to be deleted.”

In support of the ground so taken before us the ld. AR of the assessee submitted that ld.AO made addition by alleging that no PAN /address was mentioned in confirmations furnished by assessee. In this regard, it was submitted that in aggregate interest to the tune of Rs. 3,60,43,754/- was paid by assessee in respect of Sh. Kapil Taneja vs. ACIT unsecured loans, out of which interest of Rs. 3,59,62,334/- was subject to TDS and during the course of assessment proceedings, vide notice dated 30.11.2018 (Page 14 of WS), assessee was directed to furnish details of expenses on which TDSs deducted, which was duly furnished by assessee vide letter dated 03.12.2018 (Page 15 of WS), wherein complete details of tax deducted and deposited (Page 16 of WS) was furnished. In fact, in Tax audit report also (Page 19 – 34 of WS), at clause 34(a) and 34(b), complete details of TDS along with details of TDS Returns filed by assessee were duly reported, however ld.AO has not even considered the same and has drawn adverse inference from list of loans mentioned, and confirmations, wherein PANs were omitted to be mentioned inadvertently. Moreover, as stated above, in final show cause notice dated 20.12.2018, no doubt was raised w.r.t. unsecured loans worth Rs.79,00,000/- for which assessee had already furnished confirmations (Page 35 - 39 of WS), which also implied that loans worth Rs.79,00,000/- were treated as explained. The bench noted that the assessee filed the copy of confirmation in the paper book wherein the details of the TDS deducted has already been recorded this shows that since the assessee has submitted 258 confirmation out of 259 the mistake is inadvertent Sh. Kapil Taneja vs. ACIT and therefore, addition made in respect of loans to the tune of Rs.79,00,000/- stands fully explained and directed to be deleted as the same are subjected to TDS which were supported by PAN. Based on this information ground no. 4 and 4.1 stands partly allowed.

“7. In the Mittal Steel case (supra), the proviso to s. 201 was under consideration. The said proviso empowers levy of penalty if the TDS deduction is not effected for any valid reason. However, s.201(1A) is a distinct provision to levy interest for delayed remittance. It is in the practice of Revenue that for belated payment of tax for any reasonable cause, the assessee is liable to pay interest @ 12 per cent per annum. Similarly, for refunds, Revenue pays interest to the assessee.

Sh. Kapil Taneja vs. ACIT Therefore, the levy of interest under s. 201(1A) cannot at any rate be construed as a penalty………….” The Judgment of Karnataka High Court decision in the case of ORIENTAL INSURANCE CO. LTD. (supra) amply covers the current issue i.e, claim of interest expense on late payment of TDS as business expenditure, which is compensatory in nature, and respectfully following that finding we hold that interest on late payment of TDS is compensatory in nature as there is no contrary material on record brought by the revenue. In the result ground no. 6 raised by the assessee is allowed.

The bench noted that the finding of the ld. AO is contrary to the record placed on record. Even the ld. CIT(A) confirmed the view of the AO stating that it was false claim. But since the assessee has placed on record that details of share transactions including Client Global account (Page 17 - 18 of WS) and the same has not been In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open Court on 07/03/2025.