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Facts
The Revenue appealed against the CIT(A)'s order deleting the disallowance of interest paid by the assessee on loans. The Assessing Officer had made the disallowance, treating the loans from M/s Sarvottam Securities Pvt. Ltd. and M/s Upaj Leasing Finance Company Ltd. as bogus. However, the CIT(A) found that the genuineness of these loans had been established in previous assessment years and the loans were not disputed as bogus, thus the interest disallowance was not maintainable.
Held
The Tribunal upheld the CIT(A)'s decision, confirming that the loans in question were not bogus and their genuineness was established in prior proceedings. Since the principal loans were not treated as bogus, the interest paid thereon could not be disallowed. The Revenue's appeal was dismissed.
Key Issues
Whether the disallowance of interest paid on loans was sustainable when the genuineness of the principal loans had been established in earlier assessment years and proceedings, including orders from the ITAT and the Delhi High Court.
Sections Cited
143(3), 143(3A), 143(3B), 263, 148, 148A, 14A, 133(6), 147, 151
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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’ NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
Date of hearing 09.09.2025 Date of pronouncement 09.09.2025 ORDER
PER SATBEER SINGH GODARA, JM
This Revenue’s appeal for assessment year 2018-19, arises against the Commissioner of Income Tax (Appeals)-29 [in short, the “CIT(A)”], New Delhi’s order dated 24.01.2025 passed in case No. CIT(A), Delhi-29/10421/2017-18, involving proceedings under section 143(3) r.w.s. 143(3A) & 143(3B) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Heard both the parties. Case file perused.
2. It next emerges with the able assistance coming from both the parties that the Revenue’s sole substantive grievance of disallowance of the assessee’s interest claim herein is no more res- integra since settled before the tribunal in the preceding assessment year 2017-18 in the Revenue’s appeal decided on 03.09.2025 as follows: “2. Brief facts of the case are that assessee is a company and e-filed its return of income on 21.11.2018 declaring total income at Rs.2,80,29,572/-. The case of the assessee was taken up for scrutiny and the assessment was completed wherein disallowance of Rs. 3,23,93,370/- was made towards the interest paid on funds borrowed from two entities namely M/s Sarvottam Securities Pvt. Ltd. and M/s Upaj Leasing Finance Company Ltd. by holding that the loan taken from these two companies as bogus. The Ld. CIT(A) deleted the disallowance so made by observing that loans taken from these two companies on which the interest paid is disallowed in the year under appeal was not disputed by the Revenue nor held as bogus in the year when they were taken. Thus, no disallowance could be made of the interest paid on the said loan in any subsequent year. Against such order, the Revenue is in appeal before us by taking following grounds of appeal.
1. Whether on the facts of the case and in law, the Ld. CIT(A)- 29, Delhi has erred on fact and in law by validating the interest claim of the assessee for A.Y. 2017-18 amounting to Rs. 3,23,93,370/- on the grounds that the original loans were not disputed by Assessing officer. Thereby, disregarding credible evidence that the companies M/s Servottam Securities Pvt Ltd, M/s Upaj Leasing & Finance Company Pvt Ltd were engaged in providing bogus entries.
2. The appellant craves to be allowed to add any fresh ground(s) of appeal and/or deleted or amend any of the ground(s) of appeal."
3. Heard both the parties and perused the materials available on record. From the perusal of the order, it is seen that in immediately preceding year i.e. in Assessment Year 2016-17, assessment was completed u/s 143(3) and against that order proceedings u/s 263 2 | P a g e were initiated vide notice dated 28.03.2021 and in terms of order passed u/s 263 on 31.03.2021, the Ld. PCIT set aside the assessment order and direct the AO to pass the assessment order afresh after considering the existence, creditworthiness and genuineness of the loans taken from these two companies. Against such order, assessee filed the appeal before the Tribunal wherein the Co-ordinate Delhi Bench of ITAT in Appeal No.388/Del/2021 vide order dated 14.02.2022 quashed the order passed u/s 263 by holding that proper examination was done with respect to these companies. Thereafter, the proceedings u/s 148 were initiated and they were dropped by the AO in the order passed u/s 148A(d) dated 26.07.2022. It is thus clear that loans taken from these two entities i.e. M/s Sarvottam Securities Pvt. Ltd. and M/s Upaj Leasing Finance Company Ltd. were held as explained and genuine loans and thus the interest paid to them on the loan amount cannot be treated as bogus or unexplained expenditure. Whle making disallowances, the AO solely relied upon the conclusion drawn in the order passed u/s 263 of the Act wherein the ld. PCIT doubted and observed that loan taken from these companies were not genuine loans which observations are contrary to the facts on record as has ben decided by the Co-ordinate Bench in assessee’s own case.
4. Ld. CIT(A) appreciated these facts and deleted the disallowance by observing in para 6.1 to 6.7 of his order as under: “6.1 During the course of assessment proceedings, it was noted by the AО that the appellant company had shown interest of Rs. 1,11,24,000/- and Rs. 2,12,69,370/- on unsecured loans taken during F.Y. 2015-16 relevant to A.Y. 2016-17 from M/s Sarvottam Securities Pvt. Ltd. and M/s Upaj Leasing & Finance Company Ltd. respectively. Since the aforesaid companies were found to be the shell companies of entry operator Himanshu Verma, the interest debited by the appellant was not held to be bona fide and added back by the AO. 6.2 During the appellate proceedings following chronology of facts were submitted by the appellant: 6.2.1 Appellant's case for the A.Y. 2016-17 was initially assessed by ACIT, Circle -19(2), Delhi u/s 143(3) vide order dated 26.12.2018 and no additions were made either on account of bogus unsecured loans taken during the year or interest paid thereon. Vide said order, additions of only Rs. 2,76,610/- were made on account of disallowance u/s 14A r.w.r. 8D(2)(iii) of the Act. Appellant has strongly contested that no addition was made by AO either on account of bogus loans received from M/s Sarvottam Securities Pvt. Ltd. & M/s Upaj Leasing & Finance Company Ltd. of Rs. 13,90,50,000/- and Rs. 32,95,00,000/- respectively in F.Y. 2015-16 relevant to A.Y. 2016-17 ог interest paid thereon. 3 | P a g e Appellant has submitted a copy of this order during the appellate proceedings. 6.3 Appellant has claimed that the said loans from the above two companies were received through banking channels, on which interest was also paid and tax at source (TDS) was deducted. Appellant has also filed statement of account of these lender companies showing the amount received through banking channels and also claimed that their complete address and permanent account number (PAN) details were submitted during the relevant assessment proceedings of the assessment year 2016-17. 6.4 Thereafter, PCIT, Delhi-7 initiated the proceedings u/s 263 for the A.Y. 2016-17 vide its notice dated 28.03.2021, in which specific query was raised regarding the unsecured loans taken from M/s Sarvottam Securities Pvt. Ltd. & M/s Upaj Leasing & Finance Company Ltd. Subsequently, vide order dated 31.03.2021, u/s 263, the orders passed by the AO u/s 143(3) of the Act were set aside and AO was directed to assess the case afresh. In compliance thereto, AO initiated proceedings u/s 147 r.w.s. 143(3) vide notice issued u/s 148 dated 30.06.2021. However, against the said notice appellant company filed a writ petition before Hon'ble Delhi High Court. Hon'ble Delhi High Court quashed the notice issued u/s 148 of the Act vide order dated 16.12.2021. A copy of this order was submitted by the appellant during the appellate proceedings, the relevant part of which is reproduced as under: “power to issue Notifications under Section 3(1) of the Relaxation Act, 2020 to undermine the expression of Parliamentary supremacy in the form of an Act of Parliament, namely, the Finance Act, 2021. This Court is also of the opinion that the Executive/Respondents/Revenue cannot frustrate the purpose of substituted statutory provisions, like Sections 147 to 151 of Income Tax Act, 1961 in the present instance, by emptying it of content or impeding or postponing their effectual operation." Keeping in view the aforesaid, Explanations A(a)(ii)/A(b) to the Notifications dated 31 March, 2021 and 27th April, 2021 are declared to be ultra vires the Relaxation Act, 2020 and are therefore bad in law and null and void. Consequently, the impugned reassessment notices issued under Section 148 of the Income Tax Act, 1961 are quashed and the present writ petitions are allowed. If the law permits the respondents/revenue to take further steps in the matter, they shall be at liberty to do so. Needless to state that if and 4 | P a g e when such steps are taken and if the petitioners have a grievance, they shall be at liberty to take their remedies in accordance with law. DECEMBER 16, 2021 MANMOHAN, J NAVIN CHAWLA, J 6.5 Meanwhile, aggrieved with the order u/s 263 dated 31.03.2021, appellant filed an appeal before Hon'ble ITAT. Hon'ble ITAT after considering all the facts of the case vide its order in ITA number 388/DEL/2021 dated 14.02.2022, set aside the order u/s 263 of the Act dated 31.03.2021 and restored the order passed by AO dated 26.12.2018. In the said order, Hon'ble ITAT has observed as under: "12. The afore mentioned factual matrix clearly establish that specific queries were raised by the Assessing Officer during the course of assessment proceedings, to which specific replies were filed by the assessee/loan creditors along with complete documents in support of the transactions.
In our considered opinion, for exercising power u/s 263 of the Act, there should be material on record which would satisfy the ld. PCIT in a prima facie manner that the order is not only prejudicial to the interest of the Revenue but also erroneous in nature. If any of these factors is not satisfied, he cannot assume jurisdiction to initiate suo moto power of revision.
Facts mentioned elsewhere clearly show that this is not a case oflack of enquiry or assessment being framed in haste. Proper enquiries were made by the Assessing Officer during the course of assessment proceedings and after considering all the facts and evidences, the Assessing Officer took a view which is a plausible view. Therefore, it is not open to the ld. PCIT to direct a re-enquiry as he is of a different view.
Considering the facts of the case in hand as discussed elsewhere and in light of the judicial decisions disused hereinabove, we are of the considered opinion that the assessment order dated 26.12.2018 is neither erroneous nor prejudicial to the interest of the Revenue. Therefore, assumption of jurisdiction u/s 263 of the Act by the ld. PCIT is bad in law. We, accordingly, set aside the order of the ld. PCIT dated 31.03.2021 and restore that of the Assessing Officer dated 26.12.2018.
In the result, the appeal of the assessee in is allowed." 6.6 Thereafter, a notice u/s 148A(b) was also issued on 23.05.2022 in which details regarding the loan of Rs. 32,95,00,00/- and Rs. 13,09,50,000/- from M/s Upaj Leasing & Finance Company Ltd. & M/s Sarvottam Securities Pvt. Ltd. respectively were asked by the AO. Against the said notice, appellant company filed its objections u/s 148A(c) on 06.06.2022 and AO considered the reply of the appellant company and on 26.07.2022, passed an order u/s 148A(d) of the Act to drop the proceedings. The order of AO passed u/s 148A(d) dated 26.07.2022 is reproduced as under: Sir/Madam/ M/s, Subject: Proceedings u/s 148A(d) in consequence to Hon'ble SC Order dated 04.05.2022-Order Order U/s 148A(d) of the Income Tax Act 1961 Assessee is a company files its Return of income on 17.10.2016 showing total income of Rs.4,52,68,500/-. The assessee filed revised return on 28.02.2018 showing total income of Rs.4,52,68,500/-. The case was selected for scrutiny assessment and order u/s 143(3) of the I.T Act, 1961 was passed on 26.12.2018 by determining income of Rs.4,55,45,110/- Subsequently, as per the information available in the case of assessee from the Insight Portal of Income Tax Department, revealed that sufficient income chargeable to tax which is likely to have escaped assessment for A.Y. 2016-17. On the information mentioned below: Information in the case has been received from DCIT, Central Circle29, New Delhi. As per the information, it is noticed that the assessee company is one of the beneficiary of receiving accommodation entries from Sh. Himanshu verma, an entry operator.
Accordingly a letter no. ITBA/COM/F/17/2022- 23/1043124311(1) u/s 148A(b) in consequence to the Hon'ble SC Order dated 04.05.2022 for the Assessment Year 2016-17 alongwith the relevant documents was issued to assessee on 23.05.2022 for examining the above facts or filing the response within 2 weeks (i.e. by 06.06.2022).
In response to notice. Reply furnished by the assessee on 06.06.2022 is placed on records. In its reply assessee furnished that. 1. Assessee object that assessment u/s 143(3) was already completed on26.12.2018 established in the this existence, year and AO verified the transaction amount u/s 133(6) and creditworthiness and genuineness of the transaction. 2. Assessee object that assessment, the ld. PCIT-7 Delhi exercised the revisionary power u/s 263 and issued a notice 28.03.2021 and Set aside the passed by AO on 26.12.2018 and pass and passed order u/s 263 on 31.03.2021 3. Assessee informed that against the order passed u/s 263 by PCIT, -7, Delhi (copy enclosed), an appeal was filed before the Hon'ble ITAT in ITA Appeal No 388/Del/2021, Delhi. The Hon'ble ITAT vide its order dated 14.02.2022 (copy enclosed), where entire issue of verification of loans taken from the two lenders Sarvottam and Upaj were discussed and decided the appeal in favour of the assessee company.
Assessee also object the reopening of the same identical issue for the same assessment is bad in law, the re- assessment proceedings has been initiated by issuing notice dated 23.05.2022, which was already decided by the Hon'ble ITAT who is superior authority than the PCIT by quashing the order of PCIT on the ground that AO has done proper verification and examined the credits from sarvottam and Upaj during the course of assessment.
5. Assessee object the reopening of the case is illegal and bad in law because on the matter of this issue Hon'ble ITAT Reply of the assessee dated has been considered and found to be tenable. In view of the above, it emerges that the material available and evidence clearly indicate that there has been no escapement of income during the A.Y.2016-17. Hence it is a fit case for drop the proceedings u/s 148 5. This issues with the prior approval of Pr.CIT-7, Delhi. ‘6.7 Thus, it is clear from the above chronology of events that, as on date there exist no additions of either unsecured loan taken from M/s Upaj Leasing & Finance Company Ltd. & M/s Sarvottam Securities Pvt. Ltd. of Rs. 32,95,00,00/- and Rs. 13,09,50,000/- respectively, or interest paid thereon during the A.Y. 2016-17 by the appellant company. Hence, if the principal amount of loan is 7 | P a g e not disputed by the AO or not held to be bogus, amount of interest paid on the said loan in the succeeding year i.e. A.Y. 2017-18 cannot be disallowed. In other words, without the treatment of principal amount of loan as bogus, the question of disallowance of interest thereon does not arise. The additions on account of disallowance of the interest paid on these loans are therefore not sustainable on merits, as on date. Hence, ground nos. 2 and 3 are allowed.
Before us, the revenue has failed to controvert the findings of ld. CIT(A) who deleted the disallowance by observing that once the loans are not treated as bogus, interest paid on the same loans during the year under appeal could not be disallowed. In view of these facts, we find no infirmity in the order of Ld. CIT(A) which is hereby upheld. Accordingly, the ground of appeal taken by the revenue is dismissed.”
3. That being the case, we hereby adopt judicial consistency in absence of a distinction in law and on facts to uphold the learned lower authorities’ action deleting the impugned interest disallowance in the assessee’s favour in very terms. No other ground or argument has been pressed before us.