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Facts
The assessee borrowed funds from HDFC Bank and advanced loans to other parties at a higher interest rate. The assessee claimed a deduction for interest paid on borrowed funds, but incurred a net loss due to non-receipt of full interest from the borrowers. The AO restricted the interest deduction, and the CIT(A) upheld this action, treating the income as business income on accrual basis.
Held
The Tribunal held that the matter requires further investigation. It noted that the purpose of the loans taken and given was not sufficiently explained, and the lack of due diligence by HDFC Bank in lending such a large sum was questionable. The Tribunal also observed that the assessee did not provide adequate justification for diverting interest-bearing funds to non-interest-bearing loans.
Key Issues
Whether the disallowance of interest paid on borrowed funds, when a net loss was incurred due to non-receipt of interest from borrowers, is justified. Whether additional grounds of appeal related to unsigned notice and computation errors require further factual verification.
Sections Cited
143(3), 282A(1), 57(iii), 56
AI-generated summary — verify with the full judgment below
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKAR
Date of Hearing 19.01.2026 Date of Pronouncement 16.02.2026 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 19.08.2025 is filed 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) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 18.12.2018 for the Assessment Year [A.Y.] 2016-17.
P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa 2. The grounds of appeal are as under:
1. Learned Commissioner of Income tax(Appeals) erred in confirming the addition made to Total Income of the Appellant u/s 143(3) of the Act to the tune of Rs 38,21,341/- being disallowance of interest paid on the plea that there is no nexus between the deduction of interest claimed over and above the interest received without referring to submission made by the appellant giving full detail of Interest received and paid.
2. Appellant submits that in view of the facts and circumstances of the case as well as in law, the said addition to Total Income of the Appellant to the tune of Rs 38,21,341/- is bad in law and ought to be deleted in full while passing order u/s 143(3) of the Act. The Tax effect of addition is Rs 15,21,543/- as per notice of demand u/s 154.
3. Appellant submits that in view of the facts and circumstances of the case as well as in law, the said additions made to the Total Income of the Appellant to the tune of Rs 38,21,341/- may please be deleted. 2.1 Additional Grounds The assessee has raised two additional grounds of appeal on the issues of Unsigned Notice u/s 143(2) and Errors in Computation of total income and consequential demand.
2.2 In this regard, requesting admission of the additional ground, it is contended that the AO passed the assessment order u/s 143(3) of the Act, without serving duly signing the notice u/s 143(2) of the Act and hence, the said notice is violative of provisions of section 282A(1) of the Act. This ground goes to the root of the validity of the order. Further, there were errors committed in computation sheet while computing the total income and tax thereon. These grounds were P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa neither raised before AO/CIT(A) nor before the Bench while filing appeal in Form No. 36.It is submitted that the additional grounds could be adjudicated from the material already available on record and no fresh facts are required to be adduced for adjudicating the additional ground. Reliance has been placed on National Thermal Power Co. Ltd. v. CIT (1999) 157 CTR (SC) 249 etc.
On careful consideration of the above facts qua the records, we admit the additional ground respectfully following the case of NTPC Ltd vs CIT(supra), wherein it was held that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee, in accordance with law. If a valid claim is made for the first time as long as the relevant facts are on record in respect of that item, there is no reason to restrict the powers of the Tribunal.
According to the assessment order, return of income was filed declaring total income at Rs. 2,52,85,000/-.While scrutinising the return, the AO noticed that the assessee is an employee of IDFC Ltd and IDFC Bank Ltd deriving income from salaries. He was also dealing in shares and derivative transactions. It was seen that he had claimed deduction u/s 57 of the Act of interest paid against interest earned which resulted in loss of Rs. 38,21,341/-,reflected under the head Income from Other Sources and the said loss had been adjusted against P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa the salary income. In this regard, the assessee was told to give the justification of deduction claimed Rs.50,73,055/- against the income from other sources with supporting documents. In response, it was submitted that he had taken a loan of Rs.5,84,61,493/- from HDFC Bank Ltd. The assessee had advanced to Tridhatu Suraj Villa Developers LLP/Tridhatu Builders LLP a sum of Rs.3,71,07,367/- and Jinaam Fashions a sum of Rs.3,00,00,000/- at an interest rate of 15% p.a. as evident from the respective confirmations. He had paid interest to HDFC Bank during the year amounting to Rs.50,73,056/- on the loan taken by him. He received interest from Tridhatu Suraj Villa Developers LLP amounting to Rs.8,85,825/- and Tridhatu Builders LLP amounting to Rs.3,60,000/-. The assessee had offered the interest received during the year for tax and had claimed the interest paid during the year. He did not receive the full interest he was supposed to receive from Tridhatu Builders LLP and from Jinaam Fashions. Since the assessee had not received the full interest on advances, the same was not offered to tax which would be offered to tax in the year of receipt. It may be noted that the parties to whom amounts had been advanced had also not claimed any interest expenditure since they had not provided for it nor paid it. Under the Act, according to the assessee, only real income is to be taxed except notional income in the case of income from house P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa property. Since, in the instant case there was no income received by the assessee and interest had been actually paid by him, the same had been claimed. Thus, there was no reason why the interest actually paid should be disallowed, as it is lesser than the interest received by the assessee. The submissions were considered but not found to be acceptable by the AO who noted that the assessee had given loans and advances of Rs. 3.95 cr. to M/s Tridhatu Construction and Rs. 3 cr. to M/s Jinaam Fashions, on which the assessee had not received any interest. As per assessee’s own admission, the loan taken from HDFC bank had been advanced to M/s Tridhatu Construction and M/s Jinaam Fashion on which no interest was received. It was not the case of the assessee that the loans were given out of own capital. Even otherwise, there was no justification that the assessee was paying huge interest and at the same time, diverting the interest bearing funds towards non interest bearing loans and advances. The assessee had stated that as it did not receive the full interest on advances the same was not offered to tax. However, the assessee had not given any explanation why the full interest was not received with the documentary evidences. The assessee’s submission was considered just a self-serving submission by the AO without there being any substance and supporting evidence. It was of no concern whether the parties had provided the interest in their books or not and P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa the fact remained that the assessee had diverted the interest bearing fund to the non-interest bearing loans and advances and according to the assessee’s own submission there was a direct nexus between these two. It was also observed by the AO that the loans were not given towards any commercial exigency. Thus, there was no nexus between the deduction of interest claimed over and above the interest received. In view of this, the interest paid was restricted to the interest received and the loss claimed Rs. 38,21,341/- was disallowed.
Aggrieved, the assessee filed appeal before the ld.CIT(A) contesting the action of the AO who noted that the assessee borrowed total of Rs. 5,84,61,493/- from HDFC Bank under two sanctioned loan accounts and had advanced the aggregate loan of Rs. 6,71,07,367/- to two parties at the rate of 15% per annum. He claimed to suffer a loss of Rs. 38,21,341/- over non-payment of interest and showed the said amount as his Business loss and adjusted the same against the salary income. The ld.CIT(A) observed that business income and salaried income were two separate heads and interest income was always calculated on accrual basis. Under the Act and General Accounting standards, income is always computed on accrual basis unless specifically permitted otherwise. The assessee had advanced substantial interest bearing funds to third parties. Merely obtaining a letter P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa from the borrower stating non-payment, did not negate the fact that interest accrued as per the lending arrangement unless a written agreement to the contrary was produced. He had taken interest bearing loan, paid interest on that loan but utilised that loan by advancing to some parties who had not paid any interest or less interest that what he had paid. The loans given by the assessee were out of borrowed fund, so, the interest part the AO disallowed correctly. There was no logic, in somebody borrowing some interest-bearing fund and paying interest on that but lent it for no interest.
Before us, the ld.AR has contended that the issue involved in the appeal, on merits, pertained to the disallowance of interest u/s.57(iii) of Rs.38,27,231/-.During the impugned year, the assessee had obtained the interest bearing loan and had provided the interest bearing loans and accordingly, earned the interest income u/s.56 and had correspondingly claimed the interest paid u/s.57(iii), in understated manner: Interest Bearing Loan taken Loan Taken % Interest Paid a) HDFC Bank (for 12 months) Rs.3,50,00,000/- 11% Rs. 33,44,726/- b) HDFC Bank (for 9 months) Rs.2,50,00,000/- 11% Rs. 17,28,330/- Total (A) Rs.6,00,00,000/- Rs. 50,73,056/- Interest Bearing Loan given Loan Given % Interest Rcvd. a) Tridaatu Suraj Villa Developers Rs.3,32,64,000/- 12% Rs. 8,85,825/- LLP (for 3 months)
P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa b) Tridaatu Builders LLP (for 12 Rs. 30,00,000/- 12% Rs. 3,60,000/- Months) c) Tridaatu Constructions Pvt Ltd Rs.3,71,07,367/- 15% Rs.Nil (for 9 months) d) Jinam Fashion World (for 9 Rs.3,00,00,000/- 15% Rs. Nil months) Total (B) Rs.6,71,07,367/- Rs. 12,45,825/- Net interest received/paid (A-B) Rs.(-) 38,27,231/- 6.1 It is stated that the assessee in return of income, had offered the interest income of Rs. 12,45,825/- and had correspondingly claimed the interest paid of Rs.50,73,056/- under the head “Income from other sources”. The assessee was eligible to claim the loss incurred on account of net interest income/paid of Rs.38,27,231/-, since the entire interest had been paid on the loans, being utilized to provide the interest bearing loans. There existed a direct nexus of interest bearing loans taken from HDFC bank of Rs.6,00,00,000/- @ 11% р.а. towards the interest bearing loans given of Rs.6,71,07,367/- @ 12% to 15% p.a. The tabular chart disclosing the direct nexus of interest bearing loan taken from HDFC bank and interest bearing loans given along with relevant dates of receipts and payments, rate of interest, interest received/paid, etc. submitted is already reproduced in the preceding para. Also, the confirmation of account of the borrowers disclosed the fact that such loans were given for the purpose of earning interest.
6.2 The relevant provision of Sec. 57(iii) is reproduced as under :-
P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa “The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely :- (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income:” It is argued that as per the provision of Sec.57(iii), the expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income is allowable as deductible expense. The words incorporated u/s.57(iii) are “For the purpose of making or earning the income.” prescribes that the assessee is eligible to claim the expenditure, if incurred for the purpose of earning income. There is no pre-condition laid under specific provision of Sec.57(iii) that the expenditure would be allowed only upon earning the income. Accordingly, though the assessee had not been able to earn the interest income, such would not lead to disallowance of interest paid u/s 57(iii) of the Act. He, upon obtaining the interest bearing loans from HDFC bank @ 11% p.a., had correspondingly given the interest bearing loans to various parties for the purpose of earning the interest @ 12% to 15% p.a. He had been able to recover certain interest of Rs. 12,45,825/-, however due to sudden default of the borrowers, the assessee was unable to recover the balance interest income and accordingly, had incurred the net loss in such loan transactions. In this regard, reliance has been P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa placed on various judicial decision i.e.CIT v. Rajendra Prasad Moody115 ITR 519 (SC),CIT v. Smt. Sushila Devi Khadaria 319 ITR 413 (Bom- HC),Seth R. Dalmia v. CIT, Delhi 110 ITR 644 (SC),CIT v. Darashaw & Co. Pvt. Ltd. -ITA No. 2627 and 2628 of 2011 (Bom-HC),CIT v. Ballarpur Industries Ltd. -ITA No. 138 of 2003 (Bom-HC) etc.
The ld.DR on the other hand placed reliance on the orders of the authorities below contenting further that no purpose for loan given to builder was adduced nor any agreement was made for giving loan.
We have carefully considered all the relevant facts of the case, perused the records and heard rival submissions. We find that while the AO has restricted the interest paid to the extent of interest earned u/s 57(iii) of the Act, the ld.CIT(A) though upheld such action, but he treated the income earned as Business income to which the concept of accrual was applicable. Therefore, on the basis of accrual system of accounting the amount receivable from the parties was considered by him to be liable to be taxed as business income on accrual basis irrespective of the receipt or not. It appears from the grounds of appeal
that the assessee has not contested such observation and finding of fact by the ld.CIT(A).Moreover, many important facts of the case have not been brought on record ,more especially the purposes of loan taken from P a g e | A.Y. 2016
17. Piyush Subhash Wadhwa HDFC Bank. It is incomprehensible that such a well known bank which is one of the biggest private sector bank would lend the money to any person for lending it further on high interest without any due diligence. Besides, the assessee has merely submitted the confirmation of the recipients without filing any agreement with them entered into considering the huge amount of loan advanced. There is nothing on record that can substantiate his contention that these loans were taken by him for the purpose of lending funds to his sister concerns. It is also not clear how two of the such borrowers did not pay any interest and the assessee did not elaborate on this vital aspect nor did bring on record any justifiable reasons and also the financial condition of these borrowers. The contention that the interest income would be disclosed in subsequent years, if earned are also not further elaborated as to whether such income has been disclosed ever in the subsequent years or nor? The assessee has kept stoic silence on this important aspect of the case nor the AO has also looked into this aspect.
8.1 The assessee has placed reliance on various case laws in support of the claim of deduction. However, facts of the instant case are themselves not very transparent, none of the said decision could be stated to be applicable to the facts of the case.
P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa 8.2 Accordingly, the entire matter requires thorough scrutiny and investigation in the light of our above stated observations. Thus, we deem it fit to set aside the appellate order and send back entire issue to the AO for making fresh assessment de novo as per the provisions of law giving sufficient opportunity of hearing to the assessee.
In so far as the additional grounds of appeal are concerned, even though we have admitted the same, facts involved therein require factual verification by the lower authorities especially in the light of the facts that the assessee did not raise any such issue either during assessment or appellate proceedings and even before us in the memo of appeal. The ground does not emanate from the appellate or the assessment orders and both the authorities did not examine the same since the assessee never agitated these issues before them. Principles of equity and justice demand that both the parties are allowed fair trial. Therefore, these grounds are also restored to the file of the AO to examine the claim and act as per the provisions of law after allowing adequate opportunity of hearing to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes.
P a g e | A.Y. 2016-17 Piyush Subhash Wadhwa Order pronounced in the open court on 16/02/2026.
Sd/- Sd/- NARENDER KUMAR CHOUDHRY PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)