DCIT Vs Hitesh Shantilal Mehta (ITAT, Mumbai)
Section 57 Does Not Carry an “Income-Sized Cap” — Once Nexus Is Proved, Interest Deduction Cannot Be Restricted To Interest Income
Summary: The assessee was a notified person under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, consequent to which his properties & assets vested in the Custodian.
Long before such notification, the assessee had borrowed funds from related brokerage entities, namely, Ashwin S. Mehta, Harshad S. Mehta & J.H. Mehta, under an arrangement providing for interest at 12% per annum. The borrowed funds were utilised for acquiring shares & securities. Upon their subsequent sale or liquidation, the realisations were either placed in fixed/term deposits or otherwise dealt with pursuant to directions governing the notified entities.
The assessee earned interest on such deposits & offered it under the head “Income from other sources”. Against this income, he claimed deduction of interest payable on the original borrowings u/s 57.
For AY 2009-10, for example, the assessee earned interest of ₹15.52 crore while the gross interest liability was ₹18.76 crore. After making a suo motu disallowance of ₹57.72 lakh u/s 14A, the assessee claimed net interest expenditure of ₹18.18 crore.
AO treats an old liability as contingent
The AO disallowed the entire interest claim principally on the grounds that there was no written agreement, the liability was tentative or provisional, the basis of computation had not been satisfactorily demonstrated & the obligation to pay interest was not crystallised or enforceable.
The AO also relied upon the alleged non-filing of returns by certain creditor entities to infer that they had not charged interest. Alternatively, he observed that section 14A r/w Rule 8D would apply.
The CIT(A), following earlier orders in the assessee’s own case & cases of family members, accepted that the interest expenditure was allowable in principle. However, relying upon Cascade Holdings Pvt. Ltd. v. DCIT, he restricted the deduction to the amount of interest income earned during each year.
Thus, while the Revenue challenged the allowance itself, the assessee challenged the artificial ceiling imposed by the CIT(A).
An oral arrangement is not an imaginary arrangement
The ITAT observed that these were not liabilities created for the first time during the years under appeal. The borrowings originated before the notification under the Special Court Act & the arrangement to pay interest at 12% had been examined in several earlier proceedings.
The conduct of the parties, historical accounting treatment, provision/payment of interest & material emanating from proceedings before the Custodian supported the existence of the liability.
An agreement creating an interest liability need not invariably be reduced to writing. It may be established from the intention, conduct & surrounding circumstances of the parties. In the absence of any subsequent material showing that the arrangement had ceased or the liability had been extinguished, the recurring interest liability could not be branded as contingent merely because the arrangement was oral.
The Tribunal also rejected the Revenue’s contention that the liability depended upon adjudication by the Special Court. The proceedings relied upon by the AO principally related to the sale of specified properties & did not concern the existence of the assessee’s interest liability.
Shares became deposits—but the nexus did not disappear
The financial trail showed that the borrowed money was originally invested in shares & securities. Those investments were subsequently realised & the sale proceeds were placed in fixed/term deposits or utilised under directions applicable to notified entities.
The Tribunal held that the mere transformation of an asset from shares into sale proceeds & thereafter into fixed deposits does not snap the nexus with the original borrowed funds.
For the purposes of section 57, what matters is the real financial connection between the borrowing & the income-producing asset into which the borrowed funds or their traceable realisations ultimately flowed.
Relying upon Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC), CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.) & CIT v. Smt. Sushila Devi Khadaria [2009] 319 ITR 413 (Bom.), the ITAT reiterated that the connection between expenditure & earning of income need not necessarily be direct. A genuine indirect nexus is sufficient.
Section 57 contains no matching-income ceiling
The ITAT found no statutory warrant for limiting the deduction to the amount of interest income earned during the year.
Once an expenditure satisfies the conditions of section 57, its deductibility must be determined by those statutory conditions. The mere fact that expenditure exceeds the corresponding income cannot convert the excess into inadmissible expenditure.
Indeed, the statutory scheme itself contemplates that deductions u/s 57 may result in a negative figure under the head “Income from other sources”, which is thereafter governed by the provisions relating to set-off & carry forward.
The decision in Cascade Holdings Pvt. Ltd. did not prescribe a universal ceiling. In that case, the assessee had itself made a suo motu disallowance & the Tribunal allowed deduction in its peculiar factual setting. A fact-specific conclusion could not be converted into a limitation which Parliament had not enacted.
Recipient’s taxability is a separate assessment
Ashwin S. Mehta & J.H. Mehta followed the mercantile system, whereas Harshad S. Mehta followed the cash system. Therefore, the timing of taxation in their hands could differ.
The ITAT held that the allowability of expenditure in the borrower’s hands & taxation of the corresponding receipt in the creditor’s hands must be independently determined according to the law & method of accounting applicable to each person. Non-taxation or deferred taxation in the recipient’s hands cannot by itself defeat an otherwise lawful deduction in the payer’s assessment.
Decision
The ITAT directed the AO to allow the entire interest expenditure having the requisite nexus with income assessable under “Income from other sources”, without restricting it to the interest income earned during the year.
The deduction remained subject to year-wise quantification & independent statutory disallowances, including any subsisting disallowance u/s 14A.
The Revenue’s surviving appeals were dismissed & the assessee’s Cross Objections were allowed. Revenue appeals for certain years were also dismissed on account of low tax effect under CBDT Circular No. 09/2024 dated 17.09.2024.
Legal Principle
Where the assessee receives the entire consideration under a genuine registered sale agreement & directly invests that amount in purchasing new agricultural land, deduction u/s 54B cannot be denied merely because the investment precedes execution of the final sale deed. The investment trail matters more than the ceremonial order of registration—advance consideration reinvested in the eligible asset retains its exemption character.
Note: The final paragraph above concerning section 54B belongs to the separate supplied case note preceding this matter and is not part of the Hitesh Shantilal Mehta judgment. It is therefore excluded from the judgment-based Summary below and does not appear in the Full Text.
Cases Discussed
- Cascade Holdings Pvt. Ltd. v. DCIT, ITA Nos. 6965, 6966 & 6968/Mum/2018, dated 16.03.2020.
- Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC).
- CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.).
- CIT v. Smt. Sushila Devi Khadaria [2009] 319 ITR 413 (Bom.).
- Assessee’s own case for AY 2012-13, ITA No.4430/Mum/2017, dated 27.12.2017.
- Assessee’s own consolidated proceedings for AYs 2000-01, 2004-05 & 2018-19, dated 09.02.2026.
- Proceedings in the case of Pratima H. Mehta, including AY 1992-93, as referred to in the order.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
1. The above-captioned appeals have been preferred by the Revenue and the corresponding Cross Objections by the assessee against the respective orders passed by the learned Commissioner of Income Tax (Appeals) for Assessment Years 1996-97, 1998-99, 1999-2000, 2002-03, 2003-04, 2007-08, 2009-10, 2010-11, 2015-16, 2017-18 and 2020-21. Since all these appeals and Cross Objections pertain to the same assessee and involve a common issue relating to allowability of interest expenditure claimed under section 57 of the Income-tax Act, 1961, they were heard together and are being disposed of by this consolidated order. The principal grievance of the Revenue is against the relief granted by the learned CIT(A) in respect of such interest expenditure, whereas the assessee, in the Cross Objections, has challenged the action of the learned CIT(A) in restricting the deduction of interest expenditure only to the extent of interest income earned during the respective assessment years.
2. The procedural background, though extending over several assessment years, can be stated briefly. In Assessment Years 1996-97, 1998-99, 1999-2000, 2002-03, 2003-04, 2007-08, 2009-10 and 2010-11, the assessments had originally been completed after making, inter alia, disallowance of interest expenditure. The matter travelled in appeal and the Tribunal, in the respective earlier proceedings, restored the issue of allowability of interest expenditure to the file of the learned CIT(A) for fresh adjudication. The impugned orders for these years have thus been passed pursuant to such directions of the Tribunal. Insofar as Assessment Years 2015-16, 2017-18 and 2020-21 are concerned, the Assessing Officer made similar disallowances of interest expenditure and the assessee carried the matter in appeal before the learned CIT(A). While disposing of the appeals for all these years, the learned CIT(A) accepted the allowability of interest expenditure in principle, but restricted the deduction to the extent of interest income earned, principally following the decision of the Tribunal in Cascade Holdings Pvt. Ltd. v. DCIT, ITA Nos. 6965, 6966 & 6968/Mum/2018 dated 16.03.2020. It is this common determination which has resulted in the present appeals by the Revenue and the Cross Objections by the assessee.
3. Before proceeding to the merits, two preliminary aspects require consideration. The first relates to maintainability of the Revenue’s appeals for Assessment Years 1998-99, 1999-2000, 2002-03, 2015-16, 2017-18 and 2020-21 in ITA Nos. 6492 to 6497/Mum/2025. It was submitted before us that the tax effect involved in these appeals is below the monetary limit prescribed by the CBDT Circular No. 09/2024 dated 17.09.2024. It was further pointed out that Revenue’s appeals involving the identical issue in the assessee’s own case for Assessment Years 2000-01, 2004-05 and 2018-19 in ITA Nos. 7796 to 7798/Mum/2025 had already been dismissed on account of low tax effect by the Tribunal vide order dated 09.02.2026. Having regard to the monetary limits prescribed by the aforesaid Circular and there being nothing brought before us to show that these appeals fall within any of the exceptions carved out therein, the Revenue’s appeals for Assessment Years 1998-99, 1999-2000, 2002-03, 2015-16, 2017-18 and 2020-21 are dismissed as not maintainable on account of low tax effect. Needless to say, such dismissal is solely on account of the monetary limit and does not constitute an adjudication of the issues raised therein on merits.
4. The second preliminary aspect concerns a delay of eight days in filing the Cross Objections for Assessment Years 1996-97, 1998-99, 1999-2000, 2002-03, 2003-04, 2007-08, 2010-11, 2015-16 and 2020-21. The assessee has filed applications for condonation of delay supported by affidavit, explaining that the notices of the departmental appeals were served at his residential address on 25.10.2025 when he was travelling and, in his absence, were received by the house help. On returning, the assessee came across the said notices while examining the documents received during his absence and immediately forwarded them to his consultant, who in turn placed them before the counsel. Upon being advised to file Cross Objections, the same were filed on 03.12.2025, resulting in the short delay of eight days. Considering the explanation furnished and the circumstances in which the delay occurred, we find the cause shown to be reasonable and bona fide. The delay of eight days is accordingly condoned and the Cross Objections are admitted for adjudication on merits. The Cross Objections for Assessment Years 2009-10 and 2017-18, being within time, require no such consideration. We shall now proceed to the substantive controversy arising in the surviving Revenue appeals and in the Cross Objections of the assessee.
5. Coming to the substantive controversy, the material facts relevant for adjudication are substantially common across the assessment years under consideration. The assessee is a notified person under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 and, consequent to such notification, his properties and assets came to be vested in the Custodian appointed under the said Act. The case of the assessee throughout has been that borrowings had originally been made from related brokerage entities, namely, M/s Ashwin S. Mehta, M/s Harshad S. Mehta and M/s J.H. Mehta, for making investments in shares and securities and that, under the arrangement between the parties, interest was payable at the rate of 12% per annum. According to the assessee, these borrowings were made much prior to the notification and were utilised for acquiring investments; subsequently, upon sale/liquidation of such investments, the proceeds were either placed in term/fixed deposits or dealt with in accordance with the directions operating under the Special Court regime. It was on this factual foundation that the assessee claimed the interest expenditure against income assessable under the head “Income from other sources”.
6. The nature of the controversy can conveniently be understood from Assessment Year 2009-10, the facts of which are representative of the issue arising in the other years. During this year, the assessee had earned interest of ₹15,51,80,555 on term/fixed deposits maintained by the Custodian and offered the same to tax under the head “Income from other sources”. Against such income, the assessee had debited aggregate interest expenditure of ₹18,76,05,698, comprising ₹7,97,15,047 payable to M/s Ashwin S. Mehta, ₹9,66,22,118 payable to M/s Harshad S. Mehta and ₹1,12,68,533 payable to M/s J.H. Mehta. Out of the aforesaid interest expenditure, the assessee had itself disallowed proportionate interest of ₹57,71,502 under section 14A and, consequently, claimed net interest expenditure of ₹18,18,34,196. The controversy before us, therefore, is not about the mere existence of an accounting entry, but concerns the allowability under section 57 of the interest liability arising on the aforesaid borrowings and, further, whether such deduction, even if otherwise allowable, can be restricted to the amount of interest income earned during the relevant year.
7. The Assessing Officer disallowed the claim essentially on the ground that the assessee had failed to establish a crystallised and enforceable liability to pay interest. According to him, there was no written agreement containing the terms governing payment of interest; the liability was tentative and provisional; there was no established basis demonstrating the assessee’s obligation to pay and the corresponding right of the creditors to receive the amount; the basis of computation had not been satisfactorily established; and the provision represented a contingent liability. The Assessing Officer also observed that the concerned brokerage entities had not filed returns for the corresponding period and, therefore, presumed that they had not charged interest from the assessee. On these premises, the entire claim was disallowed. Without prejudice, he further observed that, even if the interest expenditure were otherwise allowable, the provisions of section 14A read with Rule 8D would apply.
8. In the appellate proceedings, the assessee placed considerable material relating to the origin and character of the borrowings, the historical treatment of the interest liability and the orders passed in his own case as well as in the cases of other family members and group entities. It was specifically contended that the absence of a written agreement could not render the liability contingent when the arrangement to pay interest stood evidenced by the conduct of the parties and had been recognised in earlier proceedings. It was further pointed out that the question whether such liability was contingent upon adjudication by the Hon’ble Special Court had also arisen in earlier years and that the proceedings relied upon by the Assessing Officer did not involve any pending adjudication concerning the existence of the interest liability. The assessee also contended that the corresponding creditors were accounting for interest according to their respective methods of accounting and that the allowability of expenditure in the hands of the borrower could not be denied merely by reference to the year in which the corresponding amount became taxable in the hands of a particular creditor.
9. The learned CIT(A), after considering the earlier orders of the Tribunal, did not sustain the basic premise of the Assessing Officer that the entire interest expenditure was inadmissible. He noticed that in the assessee’s own case for Assessment Year 2012-13, as also in the cases of other members of the group, the Tribunal had accepted the claim of interest expenditure under section 57 on substantially similar facts. He also took note of the decision in the case of Pratima H. Mehta, wherein the Tribunal had examined the historical borrowings, their deployment in shares, subsequent realisation of those investments and utilisation of the proceeds, and had accepted the requisite nexus for purposes of section 57. Thus, to this extent, the learned CIT(A) accepted that the interest expenditure could not be rejected merely by treating the underlying liability as provisional or contingent.
10. The learned CIT(A), however, proceeded to restrict the deduction to the quantum of interest income earned or offered during the respective years. For doing so, he principally referred to the decision of the Tribunal in Cascade Holdings Pvt. Ltd. v. DCIT, ITA Nos. 6965, 6966 & 6968/Mum/2018 dated 16.03.2020, wherein deduction of interest expenditure had been allowed to the extent of interest income. On that basis, he concluded that the maximum amount allowable under section 57 would be the amount of interest income earned or offered by the assessee. He further directed the Assessing Officer to verify whether the corresponding interest payable to M/s Ashwin S. Mehta, M/s J.H. Mehta and M/s Harshad S. Mehta had been offered to tax by the respective recipients in accordance with the method of accounting followed by them and, if not, to take appropriate action in their cases in accordance with law. Thus, while the learned CIT(A) accepted the allowability of interest expenditure in principle, he imposed a quantitative restriction by limiting the deduction to the corresponding interest income of the year. It is this restriction which constitutes the principal grievance raised by the assessee in the Cross Objections, whereas the Revenue continues to challenge the relief granted by the learned CIT(A).
11. Before us, the learned counsel for the assessee submitted that the learned CIT(A), having accepted the allowability of interest expenditure in principle and having also noticed the consistent orders of the Tribunal in the assessee’s own case and in the cases of other family members and group entities, was not justified in restricting the deduction merely to the extent of interest income earned during the respective years. She submitted that the borrowings in question were old borrowings, substantially originating in the year 1990, which had been utilised for acquisition of shares and securities. The subsequent sale of such shares and deployment of the realisation in fixed/term deposits or utilisation thereof pursuant to directions operating under the Special Court regime did not alter the source or character of the funds. Thus, according to her, there existed a continuing nexus between the borrowed funds on which interest liability had accrued and the investments and assets from which income assessable under the head “Income from other sources” was derived. It was further submitted that the absence of a formal written agreement could not render the liability non-existent or contingent when the arrangement to pay interest at 12% per annum stood evidenced by the consistent conduct of the parties, the treatment accorded to such liability over the years and the findings recorded in the earlier appellate proceedings. In this regard, reliance was also placed upon the earlier finding of the learned CIT(A) that an oral agreement, when supported by the conduct and intention of the parties and the surrounding material, was sufficient to establish the existence of the liability.
12. The learned counsel further submitted that the premise adopted in the earlier proceedings that the liability remained contingent upon adjudication by the Hon’ble Special Court was factually incorrect. Referring to the proceedings in M.P. No.41 of 1999, it was pointed out that the prayers therein related essentially to sale of specified properties and did not involve adjudication of the assessee’s obligation to pay interest. The proceedings referred to by the authorities had already culminated and, therefore, no dispute concerning the existence of the interest liability remained pending before the Hon’ble Special Court. It was also pointed out that this aspect had earlier been noticed by the Tribunal while restoring similar matters for fresh adjudication. The learned counsel further submitted that the corresponding interest was being accounted for in the hands of the creditor entities according to the method of accounting respectively followed by them. M/s Ashwin S. Mehta and M/s J.H. Mehta were stated to follow the mercantile system, whereas Shri Harshad S. Mehta followed the cash system of accounting. Thus, the year of taxability of corresponding interest in the hands of a particular recipient may depend upon the method of accounting followed by such recipient, but that could not determine the existence or allowability of the liability in the hands of the assessee.
13. The principal contention of the learned counsel, however, was that the restriction imposed by the learned CIT(A) has no statutory basis under section 57. It was submitted that once the requisite nexus between the expenditure and the income assessable under the head “Income from other sources” is established, there is no further requirement that the expenditure allowable under section 57(iii) must necessarily be restricted to the quantum of income actually earned in that particular year. In support, reliance was placed upon the Tribunal’s order in the assessee’s own case for Assessment Year 2012-13 in ITA No.4430/Mum/2017 dated 27.12.2017; the orders in the cases of Smt. Pratima H. Mehta; and the decisions rendered in several other family and group cases on an identical factual foundation. Particular reliance was placed upon the Tribunal’s recent order dated 09.02.2026 in the assessee’s own case for Assessment Years 2000-01, 2004-05 and 2018-19, wherein the entire interest expenditure was allowed and the reliance upon Cascade Holdings Pvt. Ltd. for restricting the deduction to the amount of interest income was specifically held to be misplaced. It was submitted that Cascade Holdings Pvt. Ltd. turned upon its peculiar facts, where the assessee itself had restricted its claim, and the decision does not lay down any general proposition that interest expenditure otherwise allowable under section 57 must invariably be capped at the amount of interest income earned. The learned counsel accordingly submitted that the entire interest expenditure, after giving effect to such disallowance as may otherwise be applicable in accordance with law, should be allowed and the restriction imposed by the learned CIT(A) be deleted. Without prejudice, the alternative plea for capitalisation of such interest expenditure as may ultimately be held inadmissible was also reiterated.
14. Per contra, the learned Special Counsel for the Revenue supported the orders of the authorities below insofar as the Revenue’s surviving appeals are concerned and opposed the Cross Objections filed by the assessee. The Revenue’s case, in substance, is that the assessee must establish the requisite nexus contemplated under section 57 between the interest expenditure claimed and the income sought to be earned; and that the mere existence of outstanding balances in favour of related notified entities would not, by itself, establish the deductibility of the entire interest liability. Reliance was placed upon the reasoning adopted by the learned CIT(A), including the decision in Cascade Holdings Pvt. Ltd., to support the restriction of the deduction to the extent of interest income earned. It was accordingly submitted that no further relief was called for in the Cross Objections and, insofar as the surviving departmental appeals are concerned, the relief granted by the learned CIT(A) should be reversed.
15. We have heard the rival submissions, perused the material placed on record and carefully considered the orders passed in the assessee’s own case as well as in the cases of other family members and group entities which have been referred to before us. The controversy which now survives for our adjudication is essentially whether, on the facts obtaining in the present cases, the interest expenditure satisfies the requirement of section 57 and, if so, whether there is any legal basis for restricting such otherwise allowable expenditure to the amount of interest income earned during the corresponding assessment year.
16. We have given our thoughtful consideration to the rival submissions and have examined the material placed before us. At the outset, it needs to be borne in mind that the controversy before us is no longer at the stage where the very existence of the borrowings or their historical deployment is being examined for the first time. The same borrowings, the arrangement for payment of interest at 12% per annum, their deployment in shares and securities and the subsequent treatment of the investments have travelled through several rounds of appellate proceedings in the assessee’s own case as well as in the cases of other members of the group. Even the learned CIT(A), in the impugned orders, has accepted the allowability of interest expenditure in principle. The surviving question, therefore, is whether, after accepting the nexus contemplated under section 57, the deduction can nevertheless be restricted to the amount of interest income earned during a particular assessment year.
17. Before examining this restriction, we may first deal with the foundational objections which had weighed with the Assessing Officer, namely, that the interest liability was tentative, provisional or contingent; that there was no written agreement creating an enforceable obligation; and that the basis for payment of interest had not been established. On this aspect, the record shows that these are not fresh liabilities created during the assessment years before us. The borrowings go back to the period prior to notification under the Special Court Act and the consistent case of the assessee is that they were taken for making investments in shares and securities under an arrangement carrying interest at 12% per annum. Significantly, in the earlier appellate proceedings, the existence of the arrangement has been examined and accepted. It had specifically been found that, notwithstanding the absence of a formal written agreement, the intention of the parties, their conduct, the historical claim and payment/provision of interest and the material emanating from the proceedings before the Custodian supported the existence of the liability. It was also noticed that an agreement creating such liability need not necessarily be reduced into writing and could be established from the surrounding facts and conduct of the parties. In these circumstances, the same recurring liability cannot be characterised as contingent or non-existent merely because the underlying arrangement was oral, particularly when no subsequent material has been brought on record demonstrating that the arrangement had ceased to operate or that the liability had otherwise been extinguished.
18. Equally, the premise that allowability of the liability remained dependent upon some pending adjudication before the Hon’ble Special Court does not survive on the material available before us. The assessee had specifically demonstrated that M.P. No.41 of 1999, which was referred to in the earlier proceedings, principally concerned sale of specified properties and did not involve adjudication of the existence of the present interest liability. The relevant proceedings had already culminated, and this factual position had also been noticed by the Tribunal in earlier years while directing the appellate authority to consider the matter afresh. Therefore, neither the absence of a written agreement nor the proceedings under the Special Court Act provide any subsisting factual basis for treating the interest liability as merely tentative or contingent.
19. We now come to the more fundamental requirement of nexus under section 57. The material placed on record shows a continuing financial trail. The borrowings were made for acquisition of shares and securities; the investments so acquired were subsequently realised; and the sale proceeds were thereafter either placed in fixed/term deposits or utilised for payments pursuant to the directions operating in relation to the notified entities. In the case of Pratima H. Mehta, while examining substantially the same factual pattern, the Tribunal had specifically noticed that the borrowings were made in the year 1990 and invested in shares, which were subsequently sold, and the realisations were either retained in fixed deposits or utilised for payments to notified entities. The mere transformation of the asset from shares into their sale proceeds and thereafter into fixed deposits cannot, by itself, snap the nexus with the original source of funds. What is material is the financial connection between the borrowing and the income-producing assets into which those borrowed funds, or their traceable realisations, ultimately flowed.
20. Section 57, insofar as relevant to the controversy before us, predicates allowability upon the relationship between the expenditure incurred and the earning of income chargeable under the head “Income from other sources”. The requirement is of a real nexus with the earning of such income; it does not postulate that the amount of expenditure must bear an arithmetical equivalence to the income actually realised in the same year. The earlier orders referred to in the impugned proceedings have themselves noticed the principle emanating from Seth R. Dalmia v. CIT [1977] 110 ITR 644 (SC), read with CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.), that the connection between expenditure and earning of income need not necessarily be direct and that an indirect connection may also establish the requisite nexus. Likewise, in CIT v. Smt. Sushila Devi Khadaria [2009] 319 ITR 413 (Bom.), the jurisdictional High Court upheld the deduction of finance expenditure against income falling under the head “Income from other sources” in the factual circumstances considered therein. These principles were specifically applied by the Tribunal in the group proceedings while accepting the claim under section 57.
21. Once the matter is viewed in this perspective, we are unable to discern any statutory basis for the further restriction imposed by the learned CIT(A). If expenditure satisfies the conditions governing its deduction under section 57, its allowability has to be determined by those statutory conditions. The mere circumstance that the expenditure exceeds the corresponding income earned in a particular year cannot, by itself, convert the otherwise allowable portion into an inadmissible expenditure. In fact, the statutory scheme relating to computation under the head “Income from other sources” itself contemplates a situation where deductions under section 57 may result in a negative figure which is thereafter dealt with under the provisions relating to set-off and carry forward, as applicable. The statutory return framework also separately recognises deductions under section 57 while computing the net income under this head. (Income Tax Department) Thus, save where the statute itself prescribes a specific limitation, the quantum of income ultimately earned cannot be substituted for the statutory test governing deductibility of the expenditure.
22. This brings us to the decision in Cascade Holdings Pvt. Ltd., which constitutes the principal foundation for the restriction imposed by the learned CIT(A). A closer examination of that decision shows that the factual position therein was materially different. In that case, against interest expenditure of ₹9,86,14,668, the assessee itself had made a suo motu disallowance of ₹2,84,13,820 and claimed the balance amount. While dealing with the claim, the Tribunal noticed the interest income earned from term deposits and, in the peculiar factual setting before it, allowed deduction to that extent. What is significant is that the decision does not enunciate a general proposition that, irrespective of the facts and the nexus established, deduction of interest under section 57 must invariably be restricted to the amount of interest income earned. A conclusion reached in the setting of the claim made in that particular case cannot be converted into a quantitative ceiling which the statute itself does not prescribe.
23. This distinction assumes greater significance because the very same issue has subsequently been examined in the assessee’s own case. In the consolidated order dated 09.02.2026 for Assessment Years 2000-01, 2004-05 and 2018-19, the Tribunal specifically considered the reliance placed upon Cascade Holdings Pvt. Ltd. and held that the restriction therein was founded upon its peculiar facts and could not be understood as laying down a general proposition that interest expenditure allowable under section 57 must invariably be capped at the interest income earned. The Tribunal consequently directed allowance of the entire interest expenditure for those assessment years. The factual substratum before us has not been shown to be materially different from that considered in the aforesaid order.
24. This is also consistent with the manner in which the issue has been dealt with in the assessee’s own case for Assessment Year 2012-13 and in the cases of other family members. In the assessee’s case for Assessment Year 2012-13 in ITA No.4430/Mum/2017, the Tribunal directed allowance of deduction under section 57 in respect of interest accrued at 12%, subject to verification of quantification. Similar claims have thereafter been considered in the cases of Pratima H. Mehta and other members of the group. Of particular relevance is the decision in the case of Pratima H. Mehta for Assessment Year 1992-93, wherein, after examining the governing principles, the Tribunal held that the assessee was entitled to deduction of interest expenditure under section 57 because the expenditure had the requisite nexus with income falling under the head “Income from other sources”, even though such nexus was not necessarily direct.
25. Thus, the conclusion follows both from the statutory requirement and from the consistent adjudication on the same factual foundation. The decisive test is the existence of the requisite nexus between the expenditure and the income sought to be earned under the relevant head, and not whether the expenditure happens to be lower than, equal to or higher than the income realised in a particular year. In the present cases, the historical origin of the borrowings, their deployment in investments, the subsequent realisation and redeployment of those investments and the treatment consistently accorded to the interest liability establish the requisite nexus. No fresh material has been brought on record by the Revenue to sever that nexus or to distinguish the facts of the years before us from those already examined in the assessee’s own case.
26. We, therefore, hold that the learned CIT(A) was justified in rejecting the Assessing Officer’s action of disallowing the interest expenditure in its entirety, but was not justified in thereafter restricting the allowable deduction merely to the quantum of interest income earned or offered during the respective assessment years. Such restriction neither follows from section 57 nor from the decision in Cascade Holdings Pvt. Ltd. on which reliance has been placed. Accordingly, subject to the year-specific quantification of the interest expenditure and such other statutory disallowance as may independently be applicable, the assessee is entitled to deduction of the entire interest expenditure having the requisite nexus with income assessable under the head “Income from other sources”. The corresponding grounds raised by the Revenue are, therefore, dismissed and the substantive ground raised by the assessee in the Cross Objections is allowed.
27. There remains the direction of the learned CIT(A) regarding corresponding taxation of interest in the hands of the recipient entities. The learned CIT(A) noticed that the interest expenditure had been claimed in respect of amounts payable to M/s Ashwin S. Mehta, M/s J.H. Mehta and M/s Harshad S. Mehta and, following the earlier directions of the Tribunal, directed the Assessing Officer to verify whether the corresponding interest income had been offered to tax by the respective recipients in accordance with the method of accounting followed by them and, if not, to take appropriate action in their cases. The assessee’s specific case before the authorities has been that M/s Ashwin S. Mehta and M/s J.H. Mehta follow the mercantile system of accounting, whereas Shri Harshad S. Mehta follows the cash system and, consequently, the point of time at which corresponding interest becomes taxable in their respective hands may not necessarily be identical. In our view, the allowability of expenditure in the hands of the assessee and the taxability of the corresponding receipt in the hands of the creditor have to be determined in accordance with the provisions applicable to each assessee and the method of accounting lawfully followed by the respective recipient. Therefore, if any corresponding interest income is liable to tax in the hands of a recipient but has not been offered in accordance with the method of accounting followed by such recipient, the Assessing Officer would be at liberty to take such action as is permissible in law in that person’s case. However, that circumstance cannot, by itself, operate either to deny or quantitatively restrict an expenditure which is otherwise allowable in the assessee’s hands under section 57.
28. We may also clarify the position regarding section 14A, since the Assessing Officer had made an alternative observation in this regard. As noticed hereinabove, for Assessment Year 2009-10, against the gross interest expenditure of ₹18,76,05,698, the assessee had itself made a proportionate disallowance of ₹57,71,502 under section 14A and had claimed only the net amount of ₹18,18,34,196 as deduction. The Assessing Officer, having disallowed the entire interest claim itself, did not make any further separate disallowance under section 14A, though he observed that the provisions of section 14A read with Rule 8D would otherwise apply. Our finding in the preceding paragraphs is confined to the proposition that interest expenditure satisfying the conditions of section 57 cannot be restricted merely to the amount of interest income earned in the relevant year. It does not disturb any year-specific disallowance already made by the assessee under section 14A or any other independent statutory adjustment which has attained finality. The Assessing Officer shall, therefore, while giving effect to this order, allow the interest expenditure under section 57 in accordance with our findings hereinabove after giving effect to such year-specific disallowance, if any, which is otherwise subsisting in accordance with law.
29. The assessee had also raised, without prejudice, an alternative contention that to the extent any portion of the interest expenditure was ultimately held not allowable as a revenue deduction, the same should be permitted to be capitalised, relying upon earlier orders rendered in the cases of the family members. Since we have held that the interest expenditure having the requisite nexus with income assessable under the head “Income from other sources” is allowable under section 57 and cannot be restricted merely to the quantum of interest income, the aforesaid alternative plea does not survive for separate adjudication and is, therefore, rendered academic.
30. Thus, the position which emerges is that the existence and character of the interest liability cannot be rejected on the grounds on which the Assessing Officer proceeded; the requisite nexus between the historical borrowings and the income-producing investments stands established on the factual matrix already examined in successive proceedings; and, once such nexus satisfies the requirement of section 57, there is no statutory warrant for limiting the deduction to the corresponding interest income of that particular year. The direction concerning corresponding taxation in the hands of the recipients remains independent and shall operate in accordance with their respective methods of accounting and the applicable provisions of law. With these findings, we now proceed to record the result of the respective appeals and Cross Objections.
31. In view of our findings hereinabove, the Revenue’s appeals for Assessment Years 1998-99, 1999-2000, 2002-03, 2015-16, 2017-18 and 2020-21 in ITA Nos. 6492 to 6497/Mum/2025 stand dismissed on account of low tax effect in terms of CBDT Circular No. 09/2024 dated 17.09.2024. As already observed, such dismissal is on account of the prescribed monetary limit and does not amount to adjudication of the issues raised therein on merits.
32. Insofar as the surviving appeals of the Revenue are concerned, for the reasons discussed in the foregoing paragraphs, we find no infirmity in the conclusion of the learned CIT(A) insofar as he has accepted the allowability of interest expenditure under section 57. However, his further restriction of such deduction only to the extent of interest income earned or offered during the respective assessment years cannot be sustained. The decision in Cascade Holdings Pvt. Ltd., relied upon for imposing such restriction, was rendered in its own factual setting and does not lay down any general proposition that interest expenditure otherwise allowable under section 57 must invariably be restricted to the amount of interest income earned during the year. This aspect also stands specifically considered in the assessee’s own case for Assessment Years 2000-01, 2004-05 and 2018-19, wherein the Tribunal directed allowance of the entire interest expenditure. Accordingly, the surviving appeals filed by the Revenue are dismissed.
33. The delay of eight days in filing the respective Cross Objections, as specified in paragraph 4 above, having already been condoned, all the Cross Objections have been adjudicated on merits. In view of our findings, the Assessing Officer is directed to allow the interest expenditure claimed by the assessee under section 57 having the requisite nexus with income assessable under the head “Income from other sources”, without restricting such deduction merely to the quantum of interest income earned or offered during the relevant assessment year. The allowance shall, however, remain subject to verification of the year-wise quantification wherever such verification is required in terms of the earlier directions of the Tribunal and after giving effect to any independent year-specific statutory disallowance which otherwise subsists in accordance with law. The direction of the learned CIT(A) regarding taxation of corresponding interest income in the hands of the respective recipients shall remain subject to the method of accounting followed by them and the provisions of law applicable in their respective cases; but such taxation, or the timing thereof, shall not constitute a condition for determining the allowability of the expenditure in the assessee’s hands. The alternative plea regarding capitalisation consequently becomes academic.
34. Accordingly, all the appeals filed by the Revenue are dismissed and all the Cross Objections filed by the assessee are allowed in terms indicated hereinabove.
Order pronounced on 17th August, 2026.
