Case Law Details
Jaiswal Rice Mill Vs ITO (ITAT Lucknow)
The Income Tax Appellate Tribunal (ITAT), Lucknow Bench, partly allowed the assessee’s appeal and restored the issue relating to the disallowance of interest expenses amounting to Rs. 6,00,000 to the file of the Assessing Officer (AO) for fresh examination. The Tribunal held that the matter required reconsideration as there was no material on record establishing that interest-bearing funds had been diverted for non-business purposes, and the basis for adopting an interest rate of 12% was not adequately explained.
The assessee had challenged the appellate order dated 20.01.2026 passed by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [CIT(A)/NFAC] for Assessment Year 2020-21. Among the grounds raised were objections to the ex-parte disposal of the appeal, the validity of reassessment proceedings, and the addition of Rs. 6,00,000 on account of interest expenses. The assessee also contended that interest-free loans had been received from various parties and, therefore, the advances granted could not automatically be presumed to have originated from interest-bearing funds.
The assessment order under Section 147 of the Income Tax Act had determined the assessee’s total income at Rs. 14,22,140. The addition of Rs. 6,00,000 was made by the Assessing Officer by disallowing interest expenses. The Assessing Officer computed this amount by applying an interest rate of 12% per annum on an interest-free loan of Rs. 50,00,000 allegedly given by the assessee to Smt. Sunita Jaiswal. According to the Assessing Officer, the amount represented “deemed interest received” on the loan.
The Tribunal observed that the records clearly showed that the assessee had not actually received any interest from the recipient of the loan. Consequently, the amount of Rs. 6,00,000 did not constitute real income earned by the assessee but was merely a notional figure derived by applying an assumed rate of interest.
The CIT(A) had upheld the addition on the premise that the assessee had diverted interest-bearing funds for non-business purposes. However, after examining the assessment records and the impugned appellate order, the Tribunal found that there was no material available on record to establish that the interest-free advance of Rs. 50,00,000 had been made through diversion of interest-bearing funds. The Tribunal noted that neither the assessment order nor the appellate order contained evidence demonstrating such nexus.
The Tribunal further found that neither the Assessing Officer nor the CIT(A) had provided any rational basis for adopting an interest rate of 12% per annum while computing the disallowance. It observed that the rate appeared to have been selected purely on an ad hoc basis and was based on guesswork rather than any objective criteria or supporting material.
The Tribunal also noted that the statement of facts filed by the assessee before the CIT(A) contained assertions relevant to the dispute, including the claim that the assessee had received interest-free loans from various parties. However, the CIT(A) had not adequately discussed these factual aspects while adjudicating the appeal.
In view of these deficiencies, the Tribunal concluded that the entire dispute required fresh factual examination. Specifically, the Tribunal held that verification was necessary to determine whether interest-bearing funds had actually been diverted by the assessee for granting the interest-free advance to Smt. Sunita Jaiswal. It also held that the correctness and justification for adopting the interest rate of 12% required reconsideration.
Accordingly, the Tribunal set aside the appellate order passed by the CIT(A) on this issue and restored the matter to the file of the Assessing Officer. The Assessing Officer was directed to pass a de novo order in accordance with law after carrying out due verification and after providing the assessee with a reasonable opportunity of being heard.
As a result, the appeal filed by the assessee was partly allowed.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
(A) This appeal has been filed by the assessee against the impugned appellate order of learned CIT(A)/NFAC, Delhi vide order dated 20.01.2026 for the AY 2020-21. The assessee has raised the following grounds of appeal:
“1. That the Id. CIT (A), NFAC erred on facts and in law in passing the appeal order ex-parte without granting the proper opportunity of being heard to appellant and accordingly the appeal order is liable to be set aside.
2. That the Id. CIT (A), NFAC erred on facts and in law in sustaining the assessment order without appreciating the fact that appellants submission were not considered during the assessment proceedings and assessment order was passed ex-parte and accordingly the assessment order is liable to be set-aside.
3. That the notice issued u/s 148 of the Income Tax Act, 1961 dated 29-03-2024 is without jurisdiction and liable to be quashed as it has been issued by ITO-3(4), Lakhimpur i.e. Jurisdictional Assessing Officer (JAO) instead of Faceless Assessing Officer (FAO) contrary to the mandatory provisions of section 151A read with e-assessment scheme dated 29-03-2022 as the authority to issue notice u/s 148 of the Income Tax Act, 1961 vests with FAO.
4. That the Id. A.O. erred on facts and in law making the addition of Rs. 6,00,000 on account of unsecured loans without rejecting and without pointing out any specific defect in the books of accounts.
5. That the Id. CIT (A), NFAC has erred in not appreciating the fact that the appellant had also received interest-free loans from various parties and therefore the advance given cannot be said to be out of interest-bearing funds.
6. That the appellant respectfully reserves the right to add, alter, amend OR withdraw any ground of appeal at the time of hearing. and to submit additional grounds as may be necessary in the interest of justice and in accordance with law..
(B) In this case assessment order dated 06.01.2025 was passed under section 147 of the Income Tax Act, 1961 (the Act) whereby the assessee’s total income was determined at Rs. 14,22,140/-. In the assessment order an addition of Rs. 6,00,000/- was made on account of disallowance of interest expenses. The assessee’s appeal against the aforesaid addition amounting to Rs. 6,00,000/- was dismissed by the Learned CIT(A) vide impugned appellate order dated 20.01.2026. The present appeal has been filed by the assessee against the aforesaid impugned appellate order dated 20.01.2026. At the time of hearing there was no representation from the assessee’s side. In the absence of any written representation from the assessee’s side, the Learned Departmental Representative was heard. He relied on the assessment order and the impugned appellate order of the Learned CIT(A).
(B.1) On perusal of the assessment order, it is found that the Assessing Officer calculated the aforesaid amount of Rs. 6,00,000/- by applying rate of interest @ 12% p.a. on interest free loan given to Smt. Sunita Jaiswal. In the words of the Assessing Officer, the aforesaid amount of Rs. 6,00,000/- is “deemed interest received for loan given to Smt. Sunita Jaiswal”. Thus the records clearly show that the assessee did not actually receive any interest from the aforesaid Smt. Sunita Jaiswal, and the that the aforesaid interest amounting to Rs. 6,00,000/- is not ‘real’ income earned by the assessee; but just a notional amount. The Learned CIT(A) has confirmed the aforesaid addition on the ground that interest bearing funds of the assessee were diverted for non-business purposes. However, on perusal of records and on careful consideration of the assessment order and impugned appellate order of the Learned CIT(A), it is found that there is no material on record to show that an amount of Rs. 50,00,000/- was given by the assessee to aforesaid Smt. Sunita Jaiswal by diversion of interest bearing funds for non-business purposes. Further, there is no rational basis stated in either the assessment order or in the impugned appellate order as to why the aforesaid rate of 12% was adopted. Therefore, it is obvious that the interest rate 12% has been adopted merely on adhoc basis, based on guesswork. The appeal filed by the assessee in Form-35 in the office of the Learned CIT(A), contains statement of facts under Serial No. 11 of the Form, which is reproduced below for the ease of reference:
(B.2) However, the Learned CIT(A) has not discussed these facts in his impugned appellate order adequately.
(B.2.1) In view of the foregoing, it is held that the entire dispute regarding addition of the aforesaid amount of Rs. 6,00,000/- requires fresh examination on facts, as regards whether interest bearing funds were diverted by the assessee for giving interest free loan to aforesaid Smt. Sunita Jaiswal; and as regards correctness of aforesaid rate of interest @ 12% per annum. Therefore, the impugned appellate order of the Learned CIT(A) is set-aside and the issue in dispute regarding the aforesaid addition of Rs. 6,00,000/- is restored back to the file of the Assessing Officer with the direction to pass denovo order on this issue, in accordance with law, after due verification and after providing reasonable opportunity to the assessee.
(C) In the result, the appeal of assessee is partly allowed.
(Order was pronounced in the open court on 15/05/2026)
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