Only TDS Component Taxable When Assessee Acts as Facilitator; Section 57 Disallowance Partly Deleted

Bharath Bail Vs DCIT (ITAT Bangalore)

The assessee arranged borrowings of ₹1.77 crore for a company, where funds were directly advanced by lenders to the company and interest was also paid directly by the company to the lenders. However, TDS on interest (₹2.04 lakh) was deducted in the assessee’s name, and he offered the gross interest income (₹20.49 lakh) to tax while claiming equal deduction under Section 57. The AO disallowed the deduction due to lack of proof of actual interest payment by the assessee, which was upheld by the CIT(A).

The ITAT observed that the assessee merely acted as a facilitator and did not actually receive or pay the interest—hence the real income belonged to the lenders, and the gross interest could not be taxed in his hands. However, since the assessee claimed TDS credit in his name, the burden was on him to prove that such TDS benefit was passed on to the actual lenders.

In absence of evidence showing transfer or adjustment of the TDS component, the Tribunal held that only the TDS amount of ₹2.04 lakh remained taxable in the assessee’s hands, while the balance addition was deleted.

Accordingly, the appeal was partly allowed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The present appeal has been instituted by the assessee against the order of the Ld. CIT(A) dated 07.01.2026 relevant to the AY 2010-11.

2. The facts in brief are that the assessee is an individual and managing director of the company namely Dustven Private Limited. The assessee claimed that the company was in need of fund. He arranged borrowing of Rs. 1.77 crores from several parties. The fund was directly credited into bank of the company on his behalf by the lenders. The company debited interest of Rs. 20,49,500/- on the impugned borrowing and TDS of Rs. 2,04,950/- deducted in his name.

3. The impugned interest of Rs. 20,49,500/- was offered to tax as income under the head other sources. Against the income corresponding expenses under section 57 of the Act were claimed for Rs. 20,49,500/-on account of interest paid to the lenders. However, the AO found that the assessee has not substantiated the payment of interest of Rs. 20,49,500/- to the lenders. Hence, the AO in the assessment order dated 27-02-2013 disallowed the claim under section 57 of the Act and made addition of Rs. 20,49,500 to the total income of the assessee.

3.1 The disallowances made by the AO were further confirmed by the learned CIT(A) and dispute reached the Tribunal in assessee’s appeal in ITA No. 1198/Bang/2018. The bench vide order dated 21-02-2018 restored back the issue to the file of the AO with following observation and direction.

4. I have carefully examined the orders of authorities below in the light of rival submissions and I find that assessee himself has declared the interest income of Rs.20,49,500/- on which TDS was deducted by the company for which TDS certificate was issued to the assessee and the assessee has also claimed the benefit of TDS deducted by the company on payment of interest. The contentions of the assessee that he has simply organised the borrowings for the company and it was directly given to the company by the lender and interest was also directly paid to the lender. I am unable to understand as to why TDS certificate deducting the TDS on payment of interest was issued to the assessee. If the assessee has received the borrowings from the lender and further advanced to the company and whenever the company paid the interest to the assessee and it was further paid to the lender, the TDS was also required to be deducted at both the points whenever interest was paid to the lenders. In the instant case, the contention of the assessee is that he has simply organized the borrowings for the company and the borrowing was directly given to the company and the company directly paid the interest to the lenders. In such circumstance where is the need to issue the TDS certificate in favour of the assessee. If the assessee received the TDS certificate on deduction on interest payment and claimed the benefit of the same, then he should have offered the corresponding income accrued on account of deduction of TDS. If the income is accrued to the assessee, the onus is upon the assessee to establish as to how he has made the payment to the lender. In the instant case, all these aspects were not examined by the lower authorities. Under these circumstances, I am of the view that CIT(A) has not properly examined the facts of the case. Therefore, I set aside the order of the CIT(A) and restore the matter to the AO to re-examine the claim in the light of above observations.

3.2 The AO in pursuance to the observation and direction of the Tribunal issued notice under section 142(1) of the Act, requiring the assessee to explain why TDS deducted his name when lender directly credited fund to company and company directly paid interest to the lender. Why the income corresponding the TDS not offered. And what is the mode of payment to the lender along with documentary evidences.

3.3 In response, the assessee made identical submission as discussed in preceding para. The assessee further furnished confirmation letter from certain lenders confirming the fact that those lenders have advanced loans.

3.4 The AO noted that the assessee has not provided the required detail as observed and directed by the Hon’ble bench of Tribunal. The confirmation letters furnished can substantiate the interest paid to the lenders. Hence, the AO again disallowed the claim of deduction under section 57 of the Act for Rs. Rs. 20,49,500/- and added to the total income of the assessee.

4. The aggrieved assessee preferred an appeal before the learned CIT(A) who also confirmed the addition made by observing as under:

The record shows that the assessment under section 143(3) r.w.s. 254 was passed strictly in compliance with the directions of the Hon’ble ITAT, Bengaluru in ITA No. 1198/Bang/2018. Pursuant thereto, multiple statutory notices under sections 129 and 142(1) were issued, adequate opportunity was granted and the appellant made submissions along with certain confirmations. The Assessing Officer has examined the matter afresh, considered the submissions and confirmations filed, and thereafter passed a detailed speaking order. No violation of principles of natural justice is discernible. Since the grounds 1,2 and 3 are general in nature, do not require separate adjudication and are dismissed.

6.2.1 The appellant claimed deduction of Rs. 20,49,500/- under section 57 against interest income assessed under the head “Income from Other Sources”. The claim was that the funds were borrowed by the appellant from various persons, such funds were directly invested in Dustven Private Limited, the company paid interest directly to the lenders on behalf of the appellant, TDS was deducted in the name of the appellant, who accordingly offered the interest income to tax. This issue was earlier disallowed by the AO and confirmed by the CIT(A). The Hon’ble ITAT restored the matter to the AO for fresh examination, specifically observing that if income is assessed in the hands of the assessee, the onus lies on him to establish how payments to lenders were made.

6.2.2 Upon remand, the Assessing Officer called for the complete confirmations from lenders, evidence of actual payment of interest to lenders, mode and dates of payment, proof of TDS compliance by the appellant. The appellant furnished certain confirmation letters, which were stereotyped in nature, did not specify dates or mode of payment of interest, did not establish that interest was actually paid by the appellant to the lenders. Further, it is an admitted position that no part of the alleged interest payments was routed through the appellant’s bank account; there is no documentary evidence showing payment of interest by the appellant, no evidence of TDS deduction by the appellant on alleged payments to lenders was furnished.

6.2.3 Section 57 allows deduction only of expenditure laid out or expended wholly and exclusively for the purpose of earning such income. The burden to establish the nexus, actual incurrence of expenditure, genuineness of payment, squarely lies on the assessee. In the present case, while the interest income has been offered to tax, the appellant has failed to prove that the corresponding interest expenditure was actually incurred by him. Mere confirmations, unsupported by bank trails, vouchers, or statutory compliance, do not discharge this burden.

The disallowance of Rs. 20,49,500/- u/s 57 is confirmed.

5. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

6. The learned AR before us submitted that the assessee has merely acted as a facilitator in arranging funds for the company. The loans were directly advanced by third party lenders to the company and the interest was also directly paid by the company to such lenders. Therefore, the assessee has not earned any real income and the gross interest amount cannot be taxed in his hands.

6.1 It was further submitted that TDS was deducted in the name of the assessee only for procedural reasons and the same does not determine the taxability of income. The Ld. AR contended that since the actual income belongs to the lenders, the corresponding addition should be deleted. However, without prejudice, it was submitted that if any addition is to be sustained at all, it should be restricted only to the extent of TDS amount, as the assessee could not demonstrate the exact flow of such amount to the lenders.

7. Per contra, the learned DR before us supported the orders of the AO and the Ld. CIT(A). It was submitted that the assessee himself has claimed TDS credit and offered interest income in his return. Therefore, the income has rightly been assessed in his hands. The Ld. DR further argued that despite specific directions of the Tribunal in the earlier round, the assessee has failed to produce any evidence to show actual payment of interest to the lenders or the manner in which the TDS component has been passed on. Mere confirmations are not sufficient. Accordingly, it was submitted that the assessee has failed to discharge the burden cast upon him and the entire addition made by the AO deserves to be upheld.

8. We have heard the rival contentions of both the parties and perused the materials available on record. The undisputed facts are that the assessee had arranged funds from third party lenders which were directly advanced to the company, namely Dustven Private Limited. It is also not in dispute that the company has directly paid interest to such lenders. However, the TDS on such interest amounting to Rs. 2,04,950/-was deducted in the name of the assessee and credit thereof was claimed by him.

8.1 In the earlier round, the Tribunal had clearly directed that once TDS credit is claimed by the assessee, the corresponding income is deemed to have accrued in his hands and the onus lies upon him to demonstrate as to how such income has been passed on to the actual lenders. The AO was specifically directed to examine the mode of payment and supporting evidences.

8.2 In the set-aside proceedings, we note that the assessee has merely reiterated that the interest was directly paid by the company to the lenders. However, no cogent evidence has been placed on record to establish the flow of the TDS component of Rs. 2,04,950/- to the respective lenders. There is no documentary evidence such as bank trail, reconciliation or any proof showing that the benefit of such TDS has been transferred or adjusted in favour of the lenders.

8.3 At the same time, from the facts on record, it is evident that the gross interest amount of Rs. 20,49,500/- cannot be brought to tax in the hands of the assessee. The material on record clearly demonstrates that the funds were advanced by third parties directly to the company and the interest was also paid by the company directly to such lenders.

Therefore, the assessee has only acted as a facilitator and the real income in respect of interest belongs to the lenders.

8.4 However, the position stands on a different footing in respect of TDS credit. Once the TDS of Rs. 2,04,950/- has been deducted in the name of the assessee and credit thereof has been claimed, the burden squarely lies on the assessee to establish that the corresponding TDS benefit has been passed on to the actual recipients of income. In the absence of any such evidence, the said amount remains unexplained in the hands of the assessee.

8.5 Accordingly, we hold that the addition to the extent of TDS amount of Rs. 2,04,950/- is justified and is hereby confirmed. However, the addition of the balance gross interest amount is not sustainable in the hands of the assessee. Hence the ground of appeal of the assessee is partly allowed.

9. In the result, the appeal of the assessee is hereby partly allowed.

Order pronounced in court on 17^th day of April, 2026