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Facts
For AY 2018-19, the assessee declared an income of Rs. 2,23,740/-, but the CPC/AO processed the return by adding Rs. 9,90,120/-, disallowing the deduction for interest on unsecured loans claimed under Section 36(1)(iii). The CIT(A) upheld this addition, finding no direct nexus between the borrowed funds and their utilization for business purposes, and dismissed the assessee's appeal.
Held
The ITAT held that the CIT(A)'s order was "bereft of facts" and "not a speaking order" as it failed to address the assessee's submissions regarding the balance sheet showing investment of funds and the department's consistent allowance of the deduction in previous assessment years. The ITAT set aside the CIT(A)'s order and remanded the matter back for fresh verification and adjudication, directing the CIT(A) to consider all submissions and issue a speaking order within three months.
Key Issues
The primary issue was the eligibility of deduction for interest on unsecured loans under Section 36(1)(iii) due to the absence of a direct nexus between borrowed funds and business utilization. A secondary issue was the validity of the appellate authority's non-speaking order which failed to address the assessee's submissions and past conduct of the department regarding the deduction.
Sections Cited
143(1), 250, 36(1)(iii), 250(4), 250(6), 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAIPUR BENCH “SMC”, RAIPUR
Before: SHRI PARTHA SARATHI CHAUDHURY
आदेश / ORDER
PER PARTHA SARATHI CHAUDHURY, JM
This appeal preferred by the assessee emanates from the order of the Ld.ADDL/JCIT(A)-5/NFAC, Delhi dated 20.12.2024 for the assessment year 2018-19 as per the following grounds of appeal on record:
“1. That on the facts and in law, the adjustment made by the CPC, Bengaluru is illegal and uncalled for, therefore, consequential addition of Rs.9,90,120.00 is also illegal and liable to be deleted.
That without prejudice to above, on the facts and in law, the Ld. ADDL/JCIT(A) erred in confirming the addition of Rs.9,90,120.00 made by CPC u/s. 143(1) without appreciating the facts and provision of law and therefore, the impugned addition is liable to be deleted.
That the appellant reserves the right to add, alter or modify any ground of appeal.”
2. The brief facts in this case are that the assessee filed his return of income for the year under consideration on 28.09.2018, declaring an income of Rs.2,23,740/-. The A.O/CPC, Bengaluru while processing the return of income, enhanced the same to Rs.12,13,860/- which resulted to an addition of Rs.9,90,120/- a/w. demand of Rs.1,30,870/-.
3. On appeal before the first appellate authority, the Ld. CIT(Appeals)/NFAC upheld the addition made by the A.O/CPC, Bengaluru observing as follows:
“6. DECISION I have perused the grounds of appeal taken by the appellant. In this regard, it is reiterated that the appellant, the brief facts of the case are that the appellant filed his ITR for the year under consideration on 28.09.2018, declaring a total income of Rs.2,23,740/-. However, while processing the ITR, the said income was enhanced to Rs.12,13,860/-. This resulted in an addition of Rs.9,90,120/- and a demand of Rs. 1,30,870/-. Aggrieved by this order, the appellant preferred an appeal before this forum. The appellant contended that the intimation order is bad-in- law, illegal, and void ab-initio. Additionally, the Assessing Officer erred in charging interest, and the appellant reserved the right to amend, add, or alter grounds of appeal during the hearing. The appellant mainly derived his income from business during the financial year 2017-2018. An intimation order under Section 143(1)(a) was issued to him for the A.Y. 2018-2019 on 11.01.2019 by the Deputy Commissioner of Income Tax, CPC, Bengaluru. Through this order, disallowances of validly claimed expenditures were made, which the appellant found uncalled for. During the appellate proceedings, a notice under Section 250 of the Income Tax Act, 1961, was issued. In response, the appellant submitted that he had e-filed his return on 28.09.2018, declaring a total income of Rs.2,23,740/-. The net profit as per the Profit & Loss Account was Rs. 14,30,226/-, reduced by: interest on FDR (Rs.2,45,685), interest on unsecured loans (Rs.9,90,121 and interest on savings bank account (Rs.1,531), totaling Rs.12,73,338/-. While the CPC accepted the reductions for interest on FDR and savings bank accounts which were considered by appellant separately as income from other sources, it disallowed the deduction for interest on unsecured loans. The appellant stated that this deduction was allowable under Section 36(1)(iii) of the Income Tax Act. He came to know of the disallowance only when contacted by the department regarding the demand. The appellant argued that the interest on unsecured loans is a valid deduction under Section 36(1)(iii), as it relates to capital borrowed for business purposes. He maintained two sets of books: the main books and the firm's books. The main books included the capital of the firm as an investment and recorded unsecured loans on the liability side, which were utilized for purposes. He provided evidenee, including Form 26Q, balance sheets, and profit and loss accounts, showing TDS deduction and consistent treatment (*unsecured loans since A.Y.2014-2015. Reliance was placed on precedents emphasizing the rule of consistency and the allowance of business-related expenses, irrespective of their reflection in the profit and loss account. Citing decisions from the Supreme Court and ITAT, the appellant underscored that deductions cannot be disallowed solely because they were not recorded in the firm's accounts, provided they were genuinely incurred for business. He referenced cases such as Maruti Suzuki India Ltd., Godrej & Boyce Manufacturing Company Ltd., Radhasoami Satsang vs. CIT, Ernst & Young Ltd. vs. ACIT, and Kedarnath Jute Mills Co. Ltd. These rulings established that expenses, if legitimate and incurred for business, must be allowed, even if omitted from specific account books. He sought an order under Section 250(6) of the Act, allowing the deduction of interest on unsecured loans as a valid claim and dismissing the demand raised. However, upon examining the appellant's submissions and the relevant provisions of the Income Tax Act, it is evident that the claim for interest on unsecured loans lacks merit. Section 36(1)(iii) of the Act allows the deduction of interest paid on capital borrowed for the purposes of business or profession, prove that such interest is incurred wholly and exclusively for business purposes. The appellants contention that the loans and interest thereon were recorded in separate books of accounts does not suffice to establish the business purpose of the expense. Nexus has not been established between the loans taken and recorded in main accounts of individual and capital introduced in books of account of firm. The appellant's assertion that expenses recorded in other books should be allowable if genuinely incurred is flawed. Section 37 of the Income Tax Act requires that expenses must not only be incurred for business purposes but also be supported by proper documentation and accounting practices. The mere existence of unsecured loans in a separate set of books does not automatically qualify the associated interest for deduction under Section 36(1)(iii). Furthermore, it is reiterated that the appellant failed to demonstrate a direct "nexus between the bowed funds and their utilization for the business of the firm. Without such nexus, the deduction cannot be allowed.
The reliance on judicial precedent such as Suzuki India Ltd. and others is misplace. These cases emphasizes consistency and certainty but do not override the statutory requirement of substantiating, a claim with evidence and proving its eligibility under the provisions of the Act. The principle of consistency cannot be invoked to perpetuate an error or grant a deduction that is not allowable under the law. Each assessment year is a separate unit, and the eligibility of deductions must be examined afresh based on the facts and evidence of that year. The appellant's reliance on deo4ions permitting deductions despite their absence from specific accounts is also misplaced. These rulings pertain to circumstances where the genuineness and business purpose of the expenses were undisputed. In the present case, the appellant has not provided sufficient evidence to substantiate the claim that the interest expense was incurred wholly and exclusively for business purposes. The lack of such evidence undermines the credibility of the claim and renders it inadmissible. Therefore, in view of the above facts and the relevant provisions of the Income Tax Act, the claim for deduction of interest on unsecured loans is hereby disallowed. The appeal is dismissed, and the demand raised by the department stands confirmed. 6.2 Therefore, the appeal stands dismissed.”
The Ld. CIT(Appeals)/NFAC in its aforesaid order observed that as per provisions of Section 36(1)(iii) of the Act, deduction will only be allowed in the interest paid on the capital borrowed and only if it is used wholly and exclusively for the purpose of business. In this regard, the Ld. CIT(Appeals)/NFAC observed that only contention that was raised by the assessee during appellate proceedings was that such interest paid on the unsecured loan was maintained in separate books of accounts and not in the regular books of accounts of the assessee and apart from this submission, there was no direct nexus which the assessee could establish between borrowed fund and their utilization for the purpose of business activities of the firm. In absence of any such nexus between borrowed fund and business activities of the firm, the deduction of interest paid u/s. 36(1)(iii) of the Act was denied by the Ld. CIT(Appeals)/NFAC.
At the time of hearing, the Ld. Counsel for the assessee has brought to my notice at Page 43 of the paper book wherein the balance sheet for the year ending 31.03.2018 for A.Y.2018-19 has been annexed. By relying on the balance sheet, it was contented by the Ld. Counsel that in the balance sheet, there is mention of entire capital account as well as unsecured loan a/w. the provisions and the entire money has been invested as per the investments mentioned on the asset side, therefore, there is direct nexus between the unsecured loans and business of the assessee. It was submitted by the Ld. Counsel that the assessee has been consistently taking deduction on interest regarding the unsecured loan taken for the purpose of business u/s. 36(1)(iii) of the Act since A.Y.2014- 15 till now. These facts have not been disputed by the department. The Ld. Counsel submitted that the interest were paid from personal account of the proprietor and against such interest paid, the TDS has been reflected in his personal return of income which has been filed. These facts are not disputed by the department. Also, the Ld. Counsel submitted that for the first time during the year under consideration, such dispute has been raised denying the deduction u/s.36(1)(iii) of the Act and that for all the other years that has been granted.
The Ld. Sr. DR submitted that this being the first year for which such allegation has been raised and as pointed out by the Ld. CIT(Appeals)/NFAC, that since the assessee was not able to demonstrate the nexus regarding unsecured loan taken and interest paid which was wholly and exclusively for the purpose of business, therefore, the matter may be remanded to the file of the Ld. CIT(Appeals)/NFAC for fresh verification and adjudication.
I have heard the parties herein and carefully considered the entire facts and circumstances involved in the present case. As per the order of the Ld. CIT(Appeals)/NFAC, though he has mentioned that there is no nexus between the unsecured loan/interest paid and business activities of the assessee, however, he has not brought on record any finding with regard to the submissions which were reiterated before me by the Ld. Counsel which were already there on record. Meaning thereby, the Ld. CIT(Appeals)/NFAC had not dealt with the submissions of the assessee that as per the balance sheet the entire fund available in assessee’s own capital account as well as unsecured loan a/w. provisions the entire money which has been invested as per the investment, the Ld. CIT(Appeals)/NFAC is silent on the said aspect. All throughout the department has accepted that when such loan was taken and interest paid it was allowable u/s.36(1)(iii) of the Act, therefore, what are the reasons that the same has been disallowed in the present year, is not coming out from the order of the Ld. CIT(Appeals)/NFAC. The reasoning is missing. In other words without reasons the order of the quasi-judicial authority takes the form of a perverse order. Accordingly, I am of the considered view that the order of the Ld.CIT(Appeals)/NFAC is bereft of facts and is not a speaking order, hence it is set-aside. In the interest of natural justice, the matter is restored to the file of the Ld.CIT(Appeals/NFAC for fresh verification and adjudication. It is directed that the Ld. CIT(Appeals)/NFAC shall consider all the submissions of the assessee and come up with a speaking order in terms with Section 250(4) & (6) of the Act within three months from receipt of this order.
As per the above terms, the grounds of appeal raised by the assessee are allowed for statistical purposes.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in open court on 16th day of April, 2025.