ITAT Mumbai Upholds Loan and Interest Relief; Remands Rule 8D Computation

ACIT Vs Jayant Shamji Chheda (ITAT Mumbai)

A Loan Cannot Be Called Bogus Merely Because a Notice Went Unanswered—or a Portal Said the Lender Was Struck Off

In a consolidated order spanning three assessment years, the Mumbai Tribunal considered unsecured loans, interest and borrowing costs, and section 14A disallowances. The Revenue’s principal loan additions under section 68 failed because the documentary record established the lenders’ identity, financial capacity and the transactions’ genuineness. On section 14A, however, the Tribunal ordered limited fresh computations, making clear that the AO must examine the assessee’s own working before invoking Rule 8D.

AY 2017–18: two lenders did not answer section 133(6) notices

The assessee had received unsecured loans from 38 creditors. The AO issued notices under section 133(6), and 36 creditors responded. The remaining two were Jayesh K. Haria, who had lent ₹50 lakh, and Bharat T. Chheda, who had lent ₹80 lakh. Because they had not complied with the notices during assessment and were not produced for examination, the AO added ₹1.30 crore under section 68.

The CIT(A) examined the loan confirmations, ledgers and bank statements; an income-tax return acknowledgement was also available for one creditor. The loans had subsequently been repaid through banking channels. The Tribunal found no material showing suspicious cash deposits immediately funding the advances or indicating that the assessee’s own money had been routed back as loans. The AO had also not disallowed the interest paid to these lenders.

Repayment alone was not treated as conclusive. It was one supporting circumstance alongside the contemporaneous records. Since the Revenue identified no specific defect in the evidence examined by the CIT(A), the Tribunal upheld deletion of the ₹1.30 crore addition.

AY 2018–19: the lender was “Active-Compliant”

For the next year, the AO added a further ₹5 crore loan from Blacksoil Capital Pvt. Ltd. His principal premise was departmental information suggesting that the lender had been struck off by the Ministry of Corporate Affairs.

The assessee produced MCA master data showing “Active-Compliant” status, together with the loan confirmation, ledger, bank statements and the lender’s financial statements. The lender’s shareholders’ funds, bank balances, revenue and profits demonstrated capacity to advance ₹5 crore. The loan was received and repaid through banking channels. An opening balance of ₹20 crore from the same lender had also been accepted in the preceding year’s scrutiny assessment.

The Tribunal held that the AO’s principal factual premise was incorrect. With no evidence of an accommodation entry or of funds originating from the assessee, it confirmed deletion of the ₹5 crore section 68 addition. The related disallowances of ₹1,47,20,547 interest and ₹5,90,000 legal and professional charges also did not survive on the basis on which they had been made.

For this year, the Tribunal further upheld deletion of an addition of ₹3 lakh concerning Form 26AS reconciliation. It also sustained relief granted by the CIT(A) on other interest and borrowing-related disallowances, including the challenge concerning interest paid on certain loans.

Borrowings and interest-free funds

For AYs 2017–18 and 2018–19, the Revenue also challenged deletion of substantial interest disallowances under section 36(1)(iii) and associated brokerage, commission and loan-processing expenses. The Tribunal examined the assessee’s financing activity and the availability of his own and other interest-free funds. It found no established nexus between the interest-bearing borrowings and the alleged non-business deployment sufficient to restore the AO’s disallowances.

The business connection of the borrowings mattered for the associated costs as well. Where the Revenue’s basis for treating the borrowing as non-business was not sustained, the related expenditure could not be disallowed merely by repeating that conclusion.

Section 14A: relief was sent back for a limited enquiry

The section 14A issues had a different outcome. For AY 2017–18, the assessee had voluntarily disallowed ₹1,66,741. The AO made a further disallowance of ₹1,02,698 under Rule 8D, which the CIT(A) deleted because the AO had not adequately recorded dissatisfaction with the assessee’s claim. The Tribunal agreed that Rule 8D cannot be applied automatically, but found that the CIT(A) had also failed to examine the basis of the voluntary disallowance.

It therefore directed the AO to examine the accounts and the assessee’s working, record objective reasons if dissatisfied, and then, if warranted, apply Rule 8D using only investments that actually yielded exempt income during the year. Credit must be given for the amount already disallowed.

A similar limited remand was ordered for AY 2018–19, where the assessee had voluntarily disallowed ₹1,90,432 and the AO had added ₹1,95,517. Thus, the Tribunal neither finally sustained nor finally deleted those additional section 14A amounts.

AY 2021–22: refinancing a relative’s loan

In the assessee’s own appeal for AY 2021–22, the AO had disallowed ₹2,89,380 interest on a Kotak Mahindra Bank loan used to repay an earlier loan from a relative. The Tribunal held that repayment of a relative’s loan does not itself make the fresh borrowing personal. The purpose of the original borrowing had to be examined, and the Revenue had identified no personal expenditure or non-business asset funded by it. The assessee also had substantial interest-free funds. The interest disallowance and consequential ₹5,21,400 loan-processing charge disallowance were deleted.

The year’s larger ₹49,27,979 section 14A disallowance was remanded only for recalculation. The AO must use the monthly values of investments that actually yielded positive exempt income, including the qualifying partnership capital balances and PPF investment. Loss from one firm could not be netted against positive exempt income from others to reduce the ceiling.

Author’s comments

The order is particularly useful for its issue-by-issue approach. A lender’s non-response or an adverse portal entry did not outweigh confirmations, bank records, financial capacity and corrected MCA data. Equally, a defect in the AO’s section 14A reasoning did not automatically establish that the assessee’s own disallowance was correct. The loan and borrowing-cost relief was substantially sustained, while the section 14A figures remain subject to the Tribunal’s narrowly defined verification.

Cases Discussed

• CIT (LTU) v. Reliance Industries Ltd., [2019] 410 ITR 466 (Supreme Court) — Relied upon and applied for the principle that where interest-free funds available with the assessee are sufficient to meet the investments or advances in question, a presumption arises that the deployment was made from such interest-free funds, particularly where the Revenue cannot establish a direct nexus between a specific interest-bearing borrowing and a non-business application.
• Maxopp Investment Ltd. v. CIT, [2018] 402 ITR 640 (Supreme Court) — Relied upon on the statutory requirement that the AO examine the assessee’s accounts and record dissatisfaction with the correctness of the assessee’s section 14A claim before applying Rule 8D.
• PCIT v. Bombay Stock Exchange Ltd., [2020] 113 taxmann.com 303 (Bombay High Court) — Relied upon for the proposition that dissatisfaction with a suo motu section 14A disallowance must be arrived at objectively on the basis of the assessee’s accounts before Rule 8D is invoked.
• ACIT v. Vireet Investment (P.) Ltd., [2017] 82 taxmann.com 415 (Delhi-Trib.) (SB) — Relied upon for restricting the average value of investments under Rule 8D to investments which actually yielded exempt income during the relevant previous year.
• Cargo Motors (P.) Ltd. v. DCIT, ITA No. 7/2020, judgment dated 07.10.2022 (Delhi High Court) — Referred to as reiterating the principle that the investment base for the Rule 8D computation should be confined to investments which actually yielded exempt income during the year.
• Cheminvest Ltd. v. CIT, [2015] 378 ITR 33 (Delhi High Court) — Relied upon by the assessee in AY 2021-22 for the principle that section 14A operates with reference to exempt income received or receivable; considered by the Tribunal while dealing with the assessee’s contention concerning the ceiling of the disallowance.
• DCIT v. Jayant Shamji Chheda, ITA No. 3548/Mum/2026, order dated 19.08.2026 (ITAT Mumbai) — Followed in relation to the underlying ₹50 lakh loan from B.K. Trading for AY 2016-17; the coordinate Bench had dismissed the Revenue’s challenge to deletion of the section 68 addition, and the consequential interest disallowance therefore could not survive.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These three appeals pertain to the same assessee and are directed against three separate orders, all dated 08.05.2026, passed by the learned Commissioner of Income-tax (Appeals)-50, Mumbai [“CIT(A)”], under section 250 of the Income-tax Act, 1961 [“the Act”], for assessment years 2017-18, 2018-19 and 2021-22. Since these appeals concern the same assessee and certain issues arising therein have a common factual background, they are being disposed of by this consolidated order. However, each issue shall be considered and adjudicated separately with reference to the facts and grounds pertaining to the relevant assessment year.

2. Briefly stated, the assessee is an individual and a director in Prince Pipes & Fittings Pvt. Ltd. During the years under consideration, the assessee derived income under various heads, including salary, income from house property, profits and gains of business or profession, capital gains and income from other sources. The returns filed by the assessee for the respective assessment years were selected for scrutiny under CASS. Pursuant to the statutory notices issued under sections 143(2) and 142(1) of the Act, the assessee furnished the details called for by the Assessing Officer. The assessments were thereafter completed under section 143(3) of the Act after making various additions and disallowances.

3. Aggrieved by the relief granted by the CIT(A) for assessment years 2017-18 and 2018-19, the Revenue is in appeal before the Tribunal. For assessment year 2021-22, the assessee is aggrieved by the disallowances sustained by the CIT(A) and has preferred the appeal before us. The grounds raised by the respective parties are:

ITA No. 8137/Mum/2026, Assessment Year 2017-18 – Revenue’s Appeal

1. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.1,30,00,000/- made under section 68 of the Income-tax Act, 1961 in respect of unsecured loans received from Shri Jayesh K. Haria and Shri Bharat T. Chheda, without appreciating that the said lenders failed to comply with notices issued under section 133(6) and the assessee failed to satisfactorily establish their identity, creditworthiness and the genuineness of the loan transactions during the assessment proceedings?

2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs.4,58,53,641/- made under section 36(1)(iii) of the Income-tax Act, 1961, without appreciating that the assessee had substantial interest- bearing borrowings and had failed to establish with cogent evidence that the investments, advances and other applications of funds not yielding taxable income or business benefit were made entirely out of interest-free funds?

3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs.30,36,230/- comprising brokerage, commission and loan processing charges incurred in connection with raising borrowed funds, without appreciating that the assessee failed to establish that the entire borrowings obtained during the year were utilized wholly and exclusively for business purposes?

4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs.1,02,698/- made under section 14A read with Rule 8D of the Income-tax Rules, 1962, without appreciating that the Assessing Officer had examined the assessee’s financial statements, investment position and exempt income and had rightly invoked the provisions of section 14A for determining expenditure attributable to exempt income?

5. The appellant craves leave to add, amend, alter, modify or withdraw any of the above grounds of appeal at or before the time of hearing.

ITA No. 8138/Mum/2026, Assessment Year 2018-19 – Revenue’s Appeal

1: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 5,00,00,000/- made u/s 68 without properly appreciating the adverse information available with the Department regarding the lender company and without adequately examining the identity, creditworthiness and genuineness of the loan transaction.

2: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs.1,47,20,547/- made u/s 69C being interest paid on the loan received from M/s Blacksoil Capital Pvt. Ltd. Since the underlying loan transaction was treated as unexplained during assessment proceedings?

3: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 5,90,000/- made u/s 69C towards legal and professional charges incurred for obtaining loan from M/s Blacksoil Capital Pvt. Ltd. without independently examining the genuineness and allowability of the expenditure.

4: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 3,00,000/- made on account of unreconciled receipts appearing in Form No. 26AS without proper verification of the reconciliation furnished by the assessee. 5: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 1,62,86,836/- made u/s 36(1)(iii) by presuming that investments and advances were made out of interest-free funds, without establishing a direct nexus and without adequately examining the utilization of borrowed funds.

6: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 1,95,517/- made u/s 14A r.w. Rule 8D without appreciating that the Assessing Officer had examined the assessee’s claim and computed the disallowance in accordance with the statutory provisions.

7: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 6,34,500/- being interest paid on loans from B.K. Trading, Bharat T. Chheda and Jayesh K. Haria, despite the fact that the Department has challenged the appellate orders relating to the underlying loan additions before the Hon’ble ITAT and the issue has not attained finality.

8: Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 30,96,979/- comprising brokerage, commission and legal/professional expenses incurred for obtaining borrowings, without appreciating that the assessee failed to establish that the entire borrowed funds were utilized wholly and exclusively for business purposes.

The appellant craves leave to add, amend, alter, modify or withdraw any of the above grounds of appeal at or before the time of hearing.

ITA No. 6062/Mum/2026, Assessment Year 2021-22 – Assessee’s Appeal

1. The Commissioner of Income-tax (Appeals) – 50, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Assistant Commissioner of Income-tax, Central Circle 8(4), Mumbai (hereinafter referred to as the Assessing Officer) in making a disallowance of Rs 49,27,979 under section 14A of the Act.

The appellant contends that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer inasmuch as the same is not in accordance with the prescription of section 14A and hence, the impugned disallowance of Rs 49,27,979 is bad in law and needs to be deleted..

2. The CIT(A) erred in upholding the action of the Assessing Officer in making a disallowance of Rs 2,89,380 under section 36(1)(iii), being interest paid on loan obtained from Kotak Mahindra Bank on the ground that the appellant has utilised the said loan for non-business activities.

The appellant contends that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance inasmuch as he has not correctly appreciated the facts of the case in its entirety and hence, the impugned disallowance of Rs 2,89,380 is bad in law and needs to be deleted.

3. The CIT(A) erred in upholding the action of the Assessing Officer in making a disallowance of Rs 5,21,400, being loan processing charges paid on loan obtained from Kotak Mahindra Bank on the ground that the appellant has utilised the said loan for non- business activities.

The appellant contends that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance inasmuch as he has not correctly appreciated the facts of the case in its entirety and hence, the impugned disallowance of Rs 5,21,400 is bad in law and needs to be deleted.

The appellant craves leave to add to, alter or amend the afore stated grounds of appeal.

4. We shall now take up the grounds and the issues arising in these appeals separately.

ITA No. 8137/Mum/2026 – Assessment Year 2017-18 – Revenue’s Appeal

Ground No. 1: Addition under section 68 of Rs.1,30,00,000/-

5. During the relevant previous year, the assessee obtained unsecured loans aggregating to Rs.68,11,00,000/- from 38 creditors. For verification of the loan transactions, the Assessing Officer issued notices under section 133(6) to all the creditors. According to the Assessing Officer, the following two creditors did not comply with the notices:

Name of the creditor	Loan received	Interest paid
Shri Jayesh K. Haria Rs.50,00,000/-		Rs.1,47,500/-
Shri Bharat T. Chheda Rs.80,00,000/-		Rs.5,89,666/-
Total	Rs.1,30,00,000/-

6. The Assessing Officer observed that neither of the aforesaid creditors had complied with the notices issued under section 133(6), nor had the assessee produced them for examination. He therefore concluded that the identity and creditworthiness of the creditors and the genuineness of the transactions remained unverified. Accordingly, for the reasons recorded in paragraphs 4.2 to 4.2.4 at pages 2 to 5 of the assessment order, the Assessing Officer treated the loans aggregating to Rs.1,30,00,000/- as unexplained cash credits under section 68 of the Act.

7. The learned CIT(A), in paragraphs 7.2.3 to 7.2.11 at pages 19 to 27 of the impugned order, noted that 36 out of the 38 creditors had responded to the notices issued by the Assessing Officer. The disputed addition related only to the loans received from Shri Jayesh K. Haria and Shri Bharat T. Chheda. The learned CIT(A) examined the confirmations, ledger accounts and bank statements produced in respect of both creditors. In the case of Shri Jayesh K. Haria, the acknowledgement of return of income was also examined. The learned CIT(A) further noticed that the loans had subsequently been repaid through banking channels. It was also noted that the response of Shri Bharat T. Chheda, together with the supporting documents, had been received after the assessment order was passed and, therefore, was not considered by the Assessing Officer. On an examination of the documentary evidence, the learned CIT(A) held that the assessee had established the identity and creditworthiness of the creditors and the genuineness of the transactions. The addition of Rs.1,30,00,000/- made under section 68 was accordingly deleted.

8. During the course of hearing before us, the learned Authorised Representative (AR) submitted that the assessee had discharged the primary onus cast upon him under section 68 by furnishing documentary evidence in respect of both creditors. In respect of Shri Jayesh K. Haria, the learned AR referred to pages 32 to 37 of the paper book and specifically invited our attention to the acknowledgement of return of income; the ledger account; the loan confirmation at page and the bank statements. It was submitted that Shri Jayesh K. Haria had disclosed total income of Rs.50,26,245/- and exempt income of Rs.4,99,84,443/- in his return of income. The bank statements did not disclose any cash withdrawal of a material amount connected with the transaction. The learned AR further submitted that the loan was subsequently repaid, as evidenced by the ledger account at page 33 and the bank statement at page 36 of the paper book.

9. The learned AR pointed out that the Assessing Officer had not disallowed the interest of Rs.1,47,500/- paid on the loan obtained from Shri Jayesh K. Haria. It was also emphasised that the Assessing Officer had not alleged that the loan constituted an accommodation entry.

10. In respect of Shri Bharat T. Chheda, the learned AR referred to pages 28 to 31 and page 37 of the paper book. Specific reference was made to the ledger account and the loan confirmation. The learned AR submitted that Shri Bharat T. Chheda had responded to the notice issued under section 133(6). However, the response was received after the assessment order had already been passed and, therefore, could not be considered by the Assessing Officer. It was further submitted that the loan had subsequently been repaid. The learned AR also pointed out that the Assessing Officer had not disallowed the interest of Rs.5,89,666/- paid on the loan obtained from Shri Bharat T. Chheda. There was no allegation in the assessment order that the transaction represented an accommodation entry.

11. On these facts, the learned AR submitted that the identity and creditworthiness of both creditors and the genuineness of the transactions stood established. Mere non-compliance or delayed compliance by the creditors with the notices issued under section 133(6), according to him, could not justify the addition when the assessee had furnished the relevant documentary evidence.

12. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer.

13. We have considered the rival submissions and perused the material available on record. Under section 68, the initial burden lies upon the assessee to offer a satisfactory explanation regarding the nature and source of the credit appearing in the books. In the case of a loan transaction, the assessee is ordinarily required to establish the identity and creditworthiness of the creditor and the genuineness of the transaction. Whether this burden has been discharged must be determined from the cumulative effect of the evidence placed on record and not merely from the response or non- response of the creditor to a notice issued by the Assessing Officer.

14. In the present case, the assessee furnished the confirmations, ledger accounts and bank statements of both creditors. Both the loans were received through banking channels and were subsequently repaid.

15. The addition was made principally because the two creditors had not responded to the notices under section 133(6) before completion of the assessment and had not been produced by the assessee. However, the failure of a creditor to respond within the time allowed may warrant further verification, but it cannot, by itself, constitute sufficient ground for treating the loan as unexplained when relevant documentary evidence is available on record. The Assessing Officer has not pointed out any specific defect in the confirmations, ledger accounts or bank statements. No cash deposit or other immediate source of funds of a doubtful nature has been identified in the bank accounts of the creditors. There is also no allegation, much less any material, indicating that the assessee’s own unaccounted money was routed back in the form of the impugned loans.

16. We also find that the interest of Rs.1,47,500/- paid to Shri Jayesh K. Haria and the interest of Rs.5,89,666/- paid to Shri Bharat T. Chheda were not disallowed by the Assessing Officer. The subsequent repayment of the loans, though not conclusive by itself, constitutes an additional corroborative circumstance when considered together with the confirmations, ledger accounts and bank statements. The deletion by the learned CIT(A) is thus not founded merely upon the subsequent repayment of the loans.

17. The learned CIT(A), after examining the creditor-wise documentary evidence in paragraphs 7.2.3 to 7.2.11 at pages 19 to 27 of the impugned order, recorded a categorical finding that the assessee had established the identity and creditworthiness of the creditors and the genuineness of the transactions. The Revenue has not brought before us any contrary material or pointed out any specific infirmity in the documents examined by the learned CIT(A). The general reliance placed by the learned Departmental Representative upon the assessment order does not dislodge these factual findings.

18. In view of the foregoing, we find no infirmity in the order of the learned CIT(A) deleting the addition of Rs.1,30,00,000/- made under section 68 of the Act. Ground No. 1 raised by the Revenue is accordingly dismissed.

Ground No. 2: Disallowance of interest under section 36(1)(iii) of Rs.4,58,53,641/-

19. On examination of the financial statements, the Assessing Officer noticed that the assessee had interest-bearing borrowings aggregating to Rs.128,42,07,342/-. According to him, the assessee had utilised Rs.90,20,93,640/- for advancing interest-bearing loans, while substantial funds were deployed in interest-free loans and advances, investments in partnership firms and other personal or non-business assets. During the assessment proceedings, the assessee submitted that the loans and advances appearing in the balance sheet amounted to Rs.90,20,93,640/- and not Rs.99,00,00,000/- as stated in the show-cause notice. It was further submitted that the assessee had earned interest of Rs.1,16,27,083/- from Aditya Developers and Rs.55,76,439/- from Parshwanath Corporation. As regards the investment in Prince Marketing, it was submitted that the firm was assessed to tax at the maximum marginal rate and had declared profit of Rs.1,57,00,000/-.

20. The Assessing Officer did not accept the explanation of the assessee. In paragraph 4.3 at pages 6 and 7 of the assessment order, he recorded the following reasons:

i. out of the total loans and advances of approximately Rs.90.20 crore, no interest income had been earned on advances amounting to Rs.13.78 crore;

ii. the assessee had investments in six partnership firms, whereas interest was received from only two firms; and

iii. the assessee had not satisfactorily explained the utilisation of funds amounting to Rs.13.26 crore, which, according to the Assessing Officer, had been deployed towards personal investments.

21. The Assessing Officer consequently concluded that interest- bearing funds of Rs.38,21,13,672/- had been utilised for interest- free advances, investments and personal purposes. Applying the rate of 12 per cent to the said amount, he made a disallowance of Rs.4,58,53,641/- under section 36(1)(iii).

22. The learned CIT(A) considered the issue and observed that the methodology adopted by the Assessing Officer was based on the difference between the aggregate interest-bearing borrowings and the interest-bearing loans advanced by the assessee. The Assessing Officer had not established a direct nexus between any particular borrowing and the amounts deployed for interest-free or non- business purposes. On examination of the balance sheet and the accompanying schedules, the learned CIT(A) recorded the following fund position:

Particulars	Amount
Capital of the assessee	Rs.16,71,73,835/-
Interest-free unsecured loans	Rs.1,10,00,000/-
Total interest-free funds available	Rs.17,81,73,835/-
Funds deployed in interest-free loans, equity investments, personal purposes and other non-business assets	Rs.17,03,36,594/-

23. The learned CIT(A) further found that the funds deployed for business purposes and for advancing interest-bearing loans amounted to Rs.1,29,93,36,730/-, which exceeded the total interest-bearing funds available with the assessee. Since the interest-free funds of Rs.17,81,73,835/- exceeded the amount of Rs.17,03,36,594/- deployed in interest-free loans, investments and other non-business assets, the learned CIT(A) held that the impugned deployment was covered by the interest-free funds available with the assessee. Relying upon the decision of the Hon’ble Supreme Court in CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC), the learned CIT(A) directed the Assessing Officer to delete the disallowance of Rs.4,58,53,641/-.

24. Before us, the learned AR referred to the balance sheet placed at page 5 of the paper book and the tabulated details of the sources and application of funds appearing at pages 15 to 17 of the impugned order. It was submitted that the interest-free funds available with the assessee were greater than the amounts utilised for personal, interest-free or non-business purposes. The learned AR submitted that the Assessing Officer had not established any direct nexus between the interest-bearing borrowings and the interest-free advances or investments. The disallowance was made merely by reducing the interest-bearing loans advanced by the assessee from the aggregate interest-bearing borrowings and treating the resulting difference as funds diverted for non-business purposes. It was further submitted that the investments and interest-free advances were fully covered by the assessee’s capital and other interest-free funds. Therefore, a presumption arose that such investments and advances had been made from the interest- free funds available with the assessee. On the strength of the balance sheet, the fund-flow details and the aforesaid judicial principle, the learned AR submitted that the learned CIT(A) had correctly deleted the disallowance of Rs.4,58,53,641/- made under section 36(1)(iii).

25. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer.

26. We have considered the rival submissions and perused the material available on record. The controversy is whether the Assessing Officer was justified in disallowing interest of Rs.4,58,53,641/- under section 36(1)(iii) on the ground that a part of the interest-bearing borrowings was utilised for making interest- free advances, investments and other applications of funds not yielding taxable income or business benefit.

27. The Assessing Officer noticed that the assessee had interest- bearing borrowings of Rs.128,42,07,342/-. According to him, the assessee had utilised Rs.90,20,93,640/- for advancing interest- bearing loans. He treated the balance amount of Rs.38,21,13,672/- as having been utilised for interest-free advances, investments in partnership firms and personal or other non-business purposes. Applying the rate of 12 per cent to this amount, the Assessing Officer computed the disallowance as follows:

Particulars	Amount
Total interest-bearing borrowings considered by the Assessing Officer	Rs.128,42,07,342/-
Less: Amount stated to have been utilised for advancing interest-bearing loans	Rs.90,20,93,640/-
Amount treated as diverted for non-business purposes	Rs.38,21,13,672/-
Rate applied by the Assessing Officer	12 per cent
Interest disallowed under section 36(1)(iii)	Rs.4,58,53,641/-

28. The above computation shows that the Assessing Officer proceeded by taking the arithmetical difference between the total interest-bearing borrowings and the interest-bearing loans advanced by the assessee. He did not identify any particular borrowing which was directly utilised for making a specific interest- free advance or investment. Nor did he examine the availability and utilisation of the assessee’s interest-free funds before drawing an inference of diversion.

29. The learned CIT(A), on the other hand, examined the balance sheet and the accompanying schedules. In paragraph 7.3.5 of the impugned order, he recorded the following position regarding the availability and deployment of funds:

Particulars	Amount
Capital of the assessee	Rs.16,71,73,835/-
Interest-free unsecured loans	Rs.1,10,00,000/-
Total interest-free funds available	Rs.17,81,73,835/-
Funds deployed in interest-free loans, equity investments, personal purposes and other non-business assets	Rs.17,03,36,594/-
Excess of interest-free funds over the disputed deployment	Rs.78,37,241/-

30. The learned CIT(A) further recorded that the funds deployed for business purposes and for advancing interest-bearing loans amounted to Rs.1,29,93,36,730/-. This amount was greater than the total interest-bearing funds of Rs.128,42,07,342/- considered by the Assessing Officer. Thus, the factual position recorded by the learned CIT(A) shows that the interest-bearing borrowings were fully absorbed by the business assets and the interest-bearing loans and advances.

31. Simultaneously, the assessee had interest-free funds of Rs.17,81,73,835/-, whereas the aggregate amount deployed in interest-free loans, equity investments, personal purposes and other non-business assets was Rs.17,03,36,594/-. The interest-free funds therefore exceeded the disputed deployment by Rs.78,37,241/-. These factual findings have been recorded from the balance sheet and the tabulated fund position referred to by the learned AR in the impugned order.

32. At this stage, it is apposite to refer to the decision of the Hon’ble Supreme Court in CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC). While considering the allowability of interest under section 36(1)(iii), the Hon’ble Supreme Court observed as under:

“7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03.

8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.”

33. The principle emerging from the aforesaid decision is that where interest-free funds available with the assessee are sufficient to meet the investments or advances in question, a presumption arises that such investments or advances were made out of the interest-free funds. The presumption operates particularly where the funds are maintained in a common pool and the Revenue is unable to establish a direct nexus between a specific interest- bearing borrowing and a particular interest-free or non-business application.

34. In the present case, the interest-free funds of Rs.17,81,73,835/- were sufficient to cover the disputed deployment of Rs.17,03,36,594/-. The Assessing Officer has not traced any direct nexus between the borrowed funds and any particular interest-free advance, investment or personal asset. His conclusion is based only upon the difference between the aggregate interest- bearing borrowings and the interest-bearing loans advanced. Such a broad arithmetical comparison cannot displace the presumption arising from the availability of sufficient interest-free funds.

35. The learned DR has not controverted the figures recorded by the learned CIT(A) or pointed out any error in the fund position reproduced above. No material has been brought before us to establish that any specific interest-bearing borrowing was diverted for a non-business purpose.

36. In these circumstances, the ratio of Reliance Industries Ltd. (supra) is squarely applicable. We therefore find no infirmity in the conclusion of the learned CIT(A), recorded in paragraph 7.3.8 at page 30 of the impugned order, directing deletion of the disallowance of Rs.4,58,53,641/- made under section 36(1)(iii).

37. Ground No. 2 raised by the Revenue is accordingly dismissed.

Ground No. 3: Disallowance of brokerage, commission and loan- processing charges of Rs.30,36,230/-

38. During the relevant previous year, the assessee claimed the following expenditure incurred in connection with the raising of borrowed funds:

Nature of expenditure	Amount claimed
Brokerage and commission	Rs.52,46,026/-
Loan-processing charges	Rs.29,60,000/-
Total	Rs.82,06,026/-

39. The Assessing Officer noticed that the unsecured loans of the assessee had increased from Rs.88,06,16,037/- to Rs.117,42,07,342/-. Thus, according to him, the incremental unsecured loans obtained during the year amounted to Rs.29,35,91,305/-.

40. The Assessing Officer further noticed that the loans and advances made by the assessee had increased from Rs.71,74,78,452/- to Rs.90,20,93,670/-. The incremental loans and advances made during the year were therefore determined at Rs.18,46,15,218/-.

41. On the basis of the above comparison, the Assessing Officer concluded that only 63 per cent of the incremental unsecured loans had been utilised for advancing interest-bearing loans and that the remaining 37 per cent had not been utilised for the purposes of the assessee’s business. He accordingly attributed 37 per cent of the brokerage, commission and loan-processing charges to borrowings allegedly utilised for non-business purposes.

42. The computation made by the Assessing Officer in the assessment order was as follows:

43. The Assessing Officer accordingly disallowed Rs.30,36,230/- and added the same to the total income of the assessee.

44. The learned CIT(A) observed that the disallowance was founded entirely upon the Assessing Officer’s conclusion that 37 per cent of the borrowed funds had been utilised for interest-free loans, investments and other non-business purposes. Referring to the findings recorded while deciding the disallowance under section 36(1)(iii), the learned CIT(A) held that the assessee had sufficient interest-free funds to cover the amounts deployed in interest-free loans, investments and personal or other non-business assets. Therefore, no part of the borrowed funds could be regarded as having been diverted for non-business purposes. The learned CIT(A) further observed that the Assessing Officer had made the disallowance on an ad hoc and proportionate basis without identifying any particular borrowing or any particular item of brokerage, commission or loan-processing expenditure as relating to a non-business purpose. The disallowance of Rs.30,36,230/- was accordingly deleted.

45. Before us, the learned AR submitted that the present ground was consequential to Ground No. 2 concerning the disallowance of interest under section 36(1)(iii). It was submitted that the Assessing Officer had presumed that 37 per cent of the incremental unsecured loans was utilised for non-business purposes merely because the incremental loans and advances made during the year represented approximately 63 per cent of the incremental unsecured loans obtained during the year. According to the learned AR, the aforesaid comparison did not establish the actual utilisation of the borrowed funds. The Assessing Officer had not traced any particular borrowing to any personal or non-business investment or advance.

46. The learned AR further submitted that the assessee had sufficient interest-free funds to cover the interest-free advances, investments and other non-business assets. Therefore, once the allegation of diversion of borrowed funds had been rejected while deciding the disallowance under section 36(1)(iii), the proportionate disallowance of the expenditure incurred for raising such borrowings could not survive. It was also pointed out that the Assessing Officer had not disputed the genuineness of the brokerage, commission and loan-processing charges. The supporting bills and details had been furnished, and there was no finding that the expenditure was bogus or had not been incurred.

The learned AR accordingly submitted that the learned CIT(A) had correctly deleted the disallowance of Rs.30,36,230/-.

47. Per contra, the learned DR relied upon the order of the Assessing Officer.

48. We have considered the rival submissions and perused the material available on record. The Assessing Officer arrived at the percentage of 37 per cent by comparing the incremental unsecured loans of Rs.29,35,91,305/- with the incremental loans and advances of Rs.18,46,15,218/-. Since the latter represented approximately 63 per cent of the former, he presumed that the balance 37 per cent of the fresh borrowings had been utilised for non-business purposes. The expenditure was disallowed in the same proportion. The aforesaid computation, as tabulated in the preceding paras, is based only upon a comparison between the increase in unsecured borrowings and the increase in loans and advances during the year. Such a comparison, by itself, does not establish that the balance amount of the incremental borrowings was utilised for personal or non-business purposes. The Assessing Officer has not traced any particular borrowing to a specific non- business investment, advance or expenditure. He has also not identified any particular payment of brokerage, commission or loan- processing charges as having been incurred for raising funds utilised for non-business purposes.

49. While deciding Ground No. 2, we have upheld the categorical finding of the learned CIT(A) that the assessee had interest-free funds of Rs.17,81,73,835/-, whereas the aggregate amount deployed in interest-free loans, equity investments, personal purposes and other non-business assets was Rs.17,03,36,594/-. Thus, the available interest-free funds exceeded the disputed non- business deployment by Rs.78,37,241/-. We have also upheld the finding that the funds deployed for business purposes and for advancing interest-bearing loans amounted to Rs.1,29,93,36,730/-, which exceeded the interest-bearing funds of Rs.128,42,07,342/- The Revenue did not establish any direct nexus between the interest-bearing borrowings and the interest-free or non-business deployment.

50. The impugned disallowance is founded upon the same allegation of diversion of borrowed funds which formed the basis of the disallowance under section 36(1)(iii). Once it is found that the assessee had sufficient interest-free funds to cover the non- business deployment and no nexus between the borrowed funds and such deployment has been established, the basic premise underlying the present proportionate disallowance ceases to survive.

51. We further notice that the Assessing Officer has not disputed that the brokerage, commission and loan-processing charges were actually incurred. There is no finding that the expenditure was bogus, excessive or unsupported by documentary evidence. The expenditure has been disallowed only by applying an estimated percentage of 37 per cent. In the absence of any identified nexus between the expenditure and a specific non-business borrowing or utilisation, such an ad hoc proportionate disallowance cannot be sustained.

52. In these circumstances, we find no infirmity in the conclusion of the learned CIT(A), recorded in the impugned order, directing deletion of the disallowance of Rs.30,36,230/-. Ground No. 3 raised by the Revenue is accordingly dismissed.

Ground No. 4: Disallowance under section 14A read with Rule 8D of Rs.1,02,698/-

53. During the relevant previous year, the assessee earned dividend income of Rs.4,000/-, which was claimed as exempt. In the computation of total income, the assessee made a suo motu disallowance of Rs.1,66,741/- under section 14A of the Act. The Assessing Officer issued a show-cause notice requiring the assessee to explain why the disallowance under section 14A read with Rule 8D should not be recomputed. The assessee furnished its explanation. The Assessing Officer did not accept the computation made by the assessee. He observed that expenditure directly or indirectly connected with the earning of exempt income was required to be disallowed and proceeded to apply the method prescribed under Rule 8D. The Assessing Officer computed the disallowance as follows:

Particulars	Amount
Direct expenditure under Rule 8D(2)(i)	Nil
One per cent of the annual average of the monthly averages of the opening and closing balances of investments	Rs.2,69,439/-
Less: Suo motu disallowance made by the assessee	Rs.1,66,741/-
Further disallowance made by the Assessing Officer	Rs.1,02,698/-

54. For computing the amount of Rs.2,69,439/-, the Assessing Officer adopted an average investment value of Rs.2,69,43,937/-. After granting credit for the suo motu disallowance of Rs.1,66,741/-, he made a further disallowance of Rs.1,02,698/- under section 14A read with Rule 8D.

55. The learned CIT(A) considered the issue in paragraphs 7.5.1 to 7.5.3 at pages 31 to 34 of the impugned order. It was noticed that the assessee had earned exempt dividend income of Rs.4,000/- and had already made a suo motu disallowance of Rs.1,66,741/-. The learned CIT(A) observed that the Assessing Officer had not examined the accounts of the assessee or recorded objective dissatisfaction with the correctness of the suo motu disallowance before invoking Rule 8D. According to the learned CIT(A), the Assessing Officer had proceeded to apply Rule 8D without explaining why the disallowance offered by the assessee was incorrect. The learned CIT(A) relied upon paragraph 41 of the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC), wherein it was held:

“Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

56. The learned CIT(A) also relied upon PCIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bom.), wherein the Hon’ble jurisdictional High Court observed:

“Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper.”

57. The learned CIT(A) consequently held that the invocation of Rule 8D, without recording the satisfaction contemplated under section 14A(2), was not sustainable. He accordingly directed the Assessing Officer to delete the further disallowance of Rs.1,02,698/-.

58. Before us, the learned AR submitted that the Assessing Officer had not recorded the dissatisfaction contemplated under section 14A(2) with reference to the accounts of the assessee. The Assessing Officer had neither identified any defect in the suo motu disallowance of Rs.1,66,741/- nor explained why the computation furnished by the assessee was incorrect. It was submitted that the recording of objective dissatisfaction was a statutory condition precedent to the application of Rule 8D. A general discussion regarding the object of section 14A or the nature of expenditure capable of being disallowed could not substitute the examination of the assessee’s accounts required under section 14A(2). The learned AR accordingly submitted that the learned CIT(A) had correctly deleted the additional disallowance of Rs.1,02,698/-.

59. Without prejudice to the aforesaid contention regarding the absence of satisfaction under section 14A(2), the learned AR submitted that the Assessing Officer had erred in considering the entire investment portfolio for computing the disallowance under Rule 8D. It was submitted that only those investments which had actually yielded exempt income during the relevant previous year could be included in the average value of investments for the purpose of applying Rule 8D. The learned AR therefore submitted that, even if Rule 8D were held to be applicable, the computation made by the Assessing Officer required to be suitably restricted and recomputed by considering only the investments which had yielded exempt income during the year.

60. The learned AR also invited our attention to the computation of income. It was pointed out that the computation separately disclosed the share of profit or loss from the following partnership firms:

Partnership firm	Share of profit/(loss)
M/s Prince Marketing	Rs.14,10,380/-
M/s Kingdom Commodities LLP	Rs.1,146/-
Arena Enterprises	Rs.8,71,304/-
Parshwanath Corporation	(Rs.1,08,28,018/-)
Ellora Chem (Firm)	(Rs.3,95,789/-)
Net share of loss	(Rs.89,40,978/-)

61. The learned AR submitted that the net share of loss of Rs.89,40,978/- was not claimed in the computation in view of section 10(2A). Apart from the partnership-firm items, the computation disclosed the following exempt receipts:

Nature of receipt	Amount	Provision under which exemption was claimed
Interest on Public Provident Fund	Rs.1,45,145/-	Section 10(11)
Dividend received on shares	Rs.4,000/-	Se ction 10(34)
Dividend received from mutual funds	Rs.45,379/-	Section 10(35)

62. It was pointed out that the computation itself reflected the suo motu disallowance of Rs.1,66,741/- under section 14A. However, neither the assessment order nor the impugned order examined the basis on which this amount had been calculated or correlated it with the investments which had actually yielded the respective exempt receipts.

63. The learned AR submitted that the Assessing Officer had adopted an average investment value of Rs.2,69,43,937/- without identifying the investments which had yielded the exempt income disclosed in the computation. It was therefore contended that, if Rule 8D were to be applied, the investment base had to be determined separately with reference to the investments which actually yielded exempt income during the relevant previous year.

64. Per contra, the learned DR relied upon the order of the Assessing Officer.

65. We have considered the rival submissions and perused the material available on record. The assessee earned exempt dividend income of Rs.4,000/- and made a suo motu disallowance of Rs.1,66,741/- under section 14A. The Assessing Officer applied Rule 8D and computed the aggregate disallowance at Rs.2,69,439/- by adopting an average investment value of Rs.2,69,43,937/-. After granting credit for the suo motu disallowance, he made a further disallowance of Rs.1,02,698/-.

66. The learned CIT(A) deleted the further disallowance on the ground that the Assessing Officer had not recorded objective dissatisfaction with the correctness of the suo motu disallowance by having regard to the accounts of the assessee. For this purpose, the learned CIT(A) relied upon Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) and PCIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bom.).

67. The principle emerging from the aforesaid decisions is that Rule 8D cannot be applied automatically or merely because the disallowance offered by the assessee is not in accordance with the formula prescribed therein. The Assessing Officer must first examine the accounts and the basis of the assessee’s computation. If he is not satisfied with its correctness, such dissatisfaction must be supported by objective reasons emerging from the accounts.

68. In the present case, the Assessing Officer issued a show-cause notice and considered the reply dated 20.12.2019. However, the assessment order contains only a general discussion regarding the object of section 14A and the nature of expenditure which may be attributable to exempt income. The Assessing Officer has not examined the actual working by which the assessee arrived at the suo motu disallowance of Rs.1,66,741/- or identified any particular defect therein with reference to the accounts.

69. At the same time, we find that the learned CIT(A), after noticing the aforesaid deficiency, proceeded to delete the entire further disallowance without examining the basis on which the assessee had computed the suo motu disallowance of Rs.1,66,741/-. The impugned order does not record any finding regarding the nature of expenditure included in the assessee’s computation, the investment base adopted by the assessee or whether such computation was supported by the accounts.

70. The statutory satisfaction contemplated under section 14A(2) is required to be recorded by the Assessing Officer. Nevertheless, while adjudicating the correctness of the additional disallowance, the learned CIT(A) was required to examine whether the suo motu disallowance was founded upon a discernible and reasonable basis. The decisions in Maxopp Investment Ltd. and Bombay Stock Exchange Ltd. do not lay down that a suo motu disallowance must be accepted irrespective of its basis. They require the correctness of the assessee’s claim to be examined with reference to the accounts before Rule 8D is invoked.

71. Thus, the deletion of the further disallowance merely because the Assessing Officer did not adequately articulate his dissatisfaction leaves the substantive question of the correct disallowance unresolved. Neither the assessment order nor the impugned order contains a factual determination of the investments which actually yielded exempt income during the relevant previous year.

72. We also find merit in the without-prejudice contention of the learned AR that, if the disallowance is to be computed under Rule 8D, the average value of investments must be confined to those investments which actually yielded exempt income during the relevant previous year. In ACIT v. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi-Trib.) (SB), the Special Bench held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. The same principle was reiterated by the Hon’ble Delhi High Court in Cargo Motors (P.) Ltd. v. DCIT, ITA No. 7/2020, judgment dated 07.10.2022.

73. The computation made by the Assessing Officer proceeds on the average investment value of Rs.2,69,43,937/-. There is no finding that all the investments included in this amount actually yielded exempt income during the year. The correct investment base therefore requires verification from the accounts and the details of exempt income. In these circumstances, we consider it appropriate to set aside the findings of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer for a limited reconsideration.

74. The Assessing Officer shall:

i. examine the accounts of the assessee and the working forming the basis of the suo motu disallowance of Rs.1,66,741/-;

ii. record a clear finding as to whether the said disallowance correctly represents the expenditure incurred in relation to exempt income;

iii. if the assessee’s computation is not accepted, record objective reasons for such non-acceptance in conformity with section 14A(2) and the principles laid down in Maxopp Investment Ltd. and Bombay Stock Exchange Ltd.;

iv. if Rule 8D is thereafter invoked, recompute the disallowance by considering only those investments which actually yielded exempt income during the relevant previous year; and

v. grant credit for the suo motu disallowance of Rs.1,66,741/- already made by the assessee.

75. Since the assessee has not challenged the suo motu disallowance of Rs.1,66,741/- in the present proceedings, the said amount shall remain undisturbed. If the disallowance recomputed in accordance with the above directions does not exceed Rs.1,66,741/-, no further addition shall be made. The Assessing Officer shall afford the assessee a reasonable opportunity of furnishing the relevant computation and supporting details before deciding the issue. Ground No. 4 raised by the Revenue is accordingly allowed for statistical purposes.

ITA No. 8138/Mum/2026 – Assessment Year 2018-19 – Revenue’s Appeal

Ground No. 1: Addition under section 68 of Rs.5,00,00,000/-

76. During the relevant previous year, the assessee obtained a further loan of Rs.5,00,00,000/- from Blacksoil Capital Private Limited. According to the assessment order, an opening loan balance of Rs.20,00,00,000/- was already outstanding in the name of the said lender. On the basis of information appearing on the Insight/ITBA portal, the Assessing Officer formed a view that Blacksoil Capital Private Limited had been struck off by the Ministry of Corporate Affairs. The assessee was therefore called upon to explain why the loan of Rs.5,00,00,000/- should not be treated as unexplained. In response, the assessee submitted that the entire transaction had been carried out through banking channels. The assessee also furnished the ledger account, bank statement and the MCA master data of Blacksoil Capital Private Limited. It was specifically submitted that the MCA master data reflected the status of the lender-company as active and that the company had filed its annual returns and financial statements.

77. The Assessing Officer did not accept the explanation. In paragraphs 4.4 and 4.5 at pages 2 and 3 of the assessment order, he observed that the information available on the departmental portal indicated that Blacksoil Capital Private Limited had been struck off by the MCA. According to him, the lender was therefore no longer in existence and its identity, creditworthiness and the genuineness of the loan transaction remained unexplained or unverifiable.

78. The Assessing Officer further noticed that the assessee had received a loan of Rs.5,00,00,000/- during the year and had repaid loans aggregating to Rs.25,00,00,000/-, together with interest of Rs.1,47,20,547/-. Notwithstanding the documentary evidence furnished by the assessee, the Assessing Officer treated the loan of Rs.5,00,00,000/- as unexplained cash credit under section 68 and subjected it to tax under section 115BBE.

79. The learned CIT(A) found that the addition was made substantially on the premise that Blacksoil Capital Private Limited had been struck off by the MCA. On examination of the MCA master data furnished by the assessee, the learned CIT(A) found that the lender-company was shown as “Active-Compliant” and had not been struck off. The learned CIT(A) therefore held that the factual foundation on which the Assessing Officer had proceeded was incorrect. The learned CIT(A) also examined the financial statements of Blacksoil Capital Private Limited obtained from the MCA portal. The material financial particulars noticed by him were as follows:

80. On the basis of the MCA master data, financial statements, confirmation, ledger account and banking records, the learned CIT(A) held that the identity and creditworthiness of the lender and the genuineness of the transaction stood established. The learned CIT(A) further noticed that Blacksoil Capital Private Limited was an established Non-Banking Financial Company engaged in financing activities. The additional loan of Rs.5,00,00,000/- was received and the aggregate outstanding loan was repaid through banking channels during the year. It was also noticed that the loan outstanding at the beginning of the year had been received from the same lender in assessment year 2017-18. The assessment for that year was completed under section 143(3) on 30.12.2019 without making any addition in respect of the loan of Rs.20,00,00,000/- received from Blacksoil Capital Private Limited. The learned CIT(A) accordingly held that the assessee had satisfactorily explained the nature and source of the credit and directed the Assessing Officer to delete the addition of Rs.5,00,00,000/-.

81. Before us, the learned AR relied on the the impugned order. The learned AR referred to the assessee’s letter dated 09.04.2021 placed at pages 57 to 66 of the paper book. It was submitted that the relevant documentary evidence had been furnished before the Assessing Officer during the assessment proceedings. Specific reference was made to the loan confirmation placed at page 60 and the MCA master data placed at page 65 of the paper book. The learned AR submitted that the master data showed the lender- company as active and compliant. Therefore, the Assessing Officer’s finding that Blacksoil Capital Private Limited had been struck off was contrary to the official MCA record furnished before him. The learned AR submitted that Blacksoil Capital Private Limited was an established Non-Banking Financial Company whose ordinary business consisted of lending and making investments. Its identity and existence were thus beyond dispute. Referring to pages 57 to 66 of the paper book, the learned AR submitted that the assessee had discharged the initial onus under section 68 by furnishing the following documents:

• confirmation of the loan transaction;
• ledger account of the lender;
• bank statements evidencing receipt and repayment through banking channels;
• MCA master data establishing the active status of the lender; and
• financial particulars demonstrating the lender’s financial capacity.

82. The learned AR further submitted that the financial statements examined by the learned CIT(A) established that, as at 31.03.2018, Blacksoil Capital Private Limited had shareholders’ funds of Rs.71,67,72,356/-, cash and bank balances of Rs.22,65,12,319/-, revenue from operations of Rs.42,98,64,493/- and profit after tax of Rs.12,62,77,010/-. These figures adequately established the lender’s capacity to advance the loan of Rs.5,00,00,000/-.

83. It was further submitted that the loan had been received and repaid through banking channels. The entire outstanding loan, together with interest, was repaid during the relevant previous year. According to the learned AR, the repayment constituted an additional circumstance supporting the genuineness of the transaction. The learned AR pointed out that the opening loan balance received from the same lender had been accepted in the scrutiny assessment for assessment year 2017-18. Thus, when the identity and genuineness of the lender had been accepted in respect of the immediately preceding year, the further loan obtained from the same lender could not be treated as unexplained solely on the basis of factually incorrect information regarding its corporate status.

84. The learned AR also submitted that there was no allegation or material indicating that the transaction represented an accommodation entry. The Assessing Officer had not identified any cash deposit or other suspicious source in the lender’s bank account preceding the advancement of the loan. It was further submitted that the observations regarding sections 269SS and 269T were misconceived because the loan had been accepted and repaid through banking channels and not in cash. On these facts, the learned AR submitted that the learned CIT(A) had correctly deleted the addition of Rs.5,00,00,000/- made under section 68.

85. We have considered the rival submissions and perused the material available on record. The Assessing Officer made the addition of Rs.5,00,00,000/- principally on the basis of information appearing on the departmental portal that Blacksoil Capital Private Limited had been struck off by the Ministry of Corporate Affairs.

86. The assessee had furnished the MCA master data before the Assessing Officer, which showed the status of the lender-company as “Active-Compliant”. The learned CIT(A), after examining the MCA record, found that Blacksoil Capital Private Limited had not been struck off. Thus, the principal factual premise on which the addition was made was found to be incorrect. The assessee also furnished the confirmation, ledger account, bank statements and financial statements of the lender. The financial statements demonstrated that the lender possessed sufficient funds and financial capacity to advance the loan of Rs.5,00,00,000/-. The loan was received and repaid through banking channels.

87. We further notice that an opening loan balance of Rs.20,00,00,000/- from the same lender had been accepted in the scrutiny assessment for assessment year 2017-18. No material has been brought on record to indicate that the transaction constituted an accommodation entry or that the funds advanced by the lender originated from the assessee.

88. In these circumstances, we agree with the learned CIT(A) that the assessee had established the identity and creditworthiness of the lender and the genuineness of the transaction. The learned Departmental Representative has not brought any contrary material before us to dislodge the factual findings recorded by the learned CIT(A).

89. We therefore find no infirmity in the order of the learned CIT(A) deleting the addition of Rs.5,00,00,000/- made under section 68. Ground No. 1 raised by the Revenue is accordingly dismissed.

Ground No. 2: Disallowance of interest of Rs.1,47,20,547/- under section 69C

90. The Assessing Officer treated the interest of Rs.1,47,20,547/- paid to Blacksoil Capital Private Limited as unexplained expenditure under section 69C solely because the underlying loan of Rs.5,00,00,000/- had been treated as unexplained cash credit under section 68. The learned CIT(A), in paragraphs 7.2.1 and 7.2.2 of the impugned order, deleted the disallowance after holding that the loan transaction with Blacksoil Capital Private Limited was genuine.

91. Before us, the learned AR submitted that the disallowance was entirely consequential to the addition made under section 68 and could not survive once the underlying loan was accepted as genuine. Per contra, the learned DR relied upon the order of the Assessing Officer.

92. We have already upheld the decision of the learned CIT(A) deleting the addition of Rs.5,00,00,000/- made under section 68. The sole foundation for treating the corresponding interest payment of Rs.1,47,20,547/- as unexplained expenditure under section 69C therefore no longer survives.

93. Accordingly, we uphold the order of the learned CIT(A) deleting the disallowance of Rs.1,47,20,547/-. Ground No. 2 raised by the Revenue is dismissed.

Ground No. 3: Disallowance of legal and professional charges of Rs.5,90,000/- under section 69C

94. The Assessing Officer noticed that the assessee had incurred legal and professional charges of Rs.5,90,000/- for obtaining the loan from Blacksoil Capital Private Limited. Since the underlying loan was treated as unexplained cash credit under section 68, the Assessing Officer treated the related expenditure of Rs.5,90,000/- as unexplained expenditure under section 69C.

95. The learned CIT(A), in paragraphs 7.3.1 and 7.3.2 of the impugned order, observed that the disallowance was consequential to the addition made in respect of the underlying loan. Having held that the loan received from Blacksoil Capital Private Limited was genuine, the learned CIT(A) deleted the disallowance of Rs.5,90,000/-.

96. Before us, the learned AR submitted that this ground was consequential to Ground No. 1. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer.

97. We have already upheld the decision of the learned CIT(A) deleting the addition of Rs.5,00,00,000/- made under section 68. Therefore, the sole basis for treating the corresponding legal and professional charges of Rs.5,90,000/- as unexplained expenditure under section 69C does not survive.

98. We accordingly uphold the order of the learned CIT(A) deleting the disallowance of Rs.5,90,000/-. Ground No. 3 raised by the Revenue is dismissed.

Ground No. 4: Addition of Rs.3,00,000/- on account of alleged unreconciled receipts appearing in Form No. 26AS

99. During the assessment proceedings, the Assessing Officer called upon the assessee to reconcile the receipts appearing in Form No. 26AS with the receipts recorded in the books of account and offered in the return of income. After examining the reconciliation furnished by the assessee, the Assessing Officer observed that the following receipts had not been accounted for:

Name of the deductor	Amount
Shri Sachin Rajnikant Gandhi	Rs.1,44,000/-
Shri Vipul R. Gandhi	Rs.1,56,000/-
Total	Rs.3,00,000/-

100. The Assessing Officer held that the aforesaid receipts appearing in Form No. 26AS had not been offered to tax. He accordingly added Rs.3,00,000/- to the total income of the assessee.

101. The learned CIT(A) examined the reconciliation of interest receipts furnished by the assessee with reference to Form No. 26AS and the details of interest income recorded in the books and offered in the return of income. In paragraph 7.5.3 at page 27, the learned CIT(A) recorded a factual finding that there was no difference between the receipts appearing in Form No. 26AS and the receipts accounted for and offered by the assessee. The addition of Rs.3,00,000/- was accordingly deleted.

102. Before us, the learned AR referred to Form No. 26AS placed at pages 44 to 49 of the paper book and the details of interest received placed at page 22 of the paper book. The learned AR submitted that the receipts from Shri Sachin Rajnikant Gandhi (Prop. Nipa Enterprises) and Shri Vipul R. Gandhi (Prop. Ambuca Traders) had already been included in the interest income recorded in the books and offered in the return of income. Therefore, the addition resulted in taxing the same receipts for a second time.

103. The learned AR accordingly submitted that the learned CIT(A) had correctly deleted the addition of Rs.3,00,000/-. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer.

104. We have considered the rival submissions and perused the material available on record. The Assessing Officer made the addition of Rs.3,00,000/- on the premise that the related receipts appearing in Form No. 26AS had not been recorded in the books of account or offered to tax. The learned AR referred to Form No. 26AS placed at pages 44 to 49 of the paper book and Annexure II to Schedule D, containing the party-wise details of interest received, placed at page 22 of the paper book. The said schedule records business-related interest of Rs.1,44,000/- in the name of Nipa Enterprises and Rs.1,56,000/- in the name of Ambica Traders. Thus, the apparent difference arose because Form No. 26AS reflected the receipts in the names of the respective proprietors, whereas the books and the interest schedule recorded them in the names of their proprietary concerns. The receipts appearing under the two descriptions were not separate transactions. They represented the same interest income aggregating to Rs.3,00,000/-. The learned CIT(A), after examining the reconciliation, recorded a categorical finding in the impugned order that there was no difference between the receipts appearing in Form No. 26AS and the receipts accounted for and offered by the assessee. The Revenue has neither controverted the relationship between the proprietors and their respective proprietary concerns nor pointed out any defect in the reconciliation.

105. Since the interest of Rs.1,44,000/- received from Nipa Enterprises and Rs.1,56,000/- received from Ambica Traders had already been included under “business-related interest received” and offered to tax, a further addition of Rs.3,00,000/- would result in taxing the same income twice.

106. We therefore find no infirmity in the order of the learned CIT(A) deleting the addition of Rs.3,00,000/-. Ground No. 4 raised by the Revenue is accordingly dismissed.

Ground No. 5: Disallowance of interest under section 36(1)(iii) of Rs.1,62,86,836/-

107. The Assessing Officer observed that the assessee had made investments aggregating to Rs.25,83,94,862/- in equity shares, partnership firms and other assets. According to him, the assessee had substantial interest-bearing borrowings carrying interest at rates ranging between 12 per cent and 18 per cent, but had not established that the aforesaid investments were made from interest- free funds. The Assessing Officer further observed that the assessee had claimed exempt long-term capital gain of Rs.8,78,93,261/- on sale of shares and exempt share of profit under section 10(2A) from Prince Marketing. The assessee had also invested capital in other partnership firms, including Ellora Chemical Works and Nihar Investments. The Assessing Officer treated the entire investment of Rs.25,83,94,862/- as having been made from interest-bearing funds. Applying the minimum interest rate of 12 per cent, he computed the disallowance as follows:

Particulars	Amount
Investments considered by the Assessing Officer	Rs.25,83,94,862/-
Interest calculated at 12 per cent	Rs.3,10,07,383/-
Less: Interest paid to Blacksoil Capital Private Limited separately disallowed under section 69C	Rs.1,47,20,547/-
Net disallowance under section 36(1)(iii)	Rs.1,62,86,836/-

108. The Assessing Officer further observed that, if the assessee were granted relief in respect of the loan from Blacksoil Capital Private Limited, the corresponding interest of Rs.1,47,20,547/- would stand restored to the computation under section 36(1)(iii), resulting in a total possible disallowance of Rs.3,10,07,383/-.

109. On examination of the balance sheet and its schedules, the learned CIT(A) recorded the following fund position:

Particulars	Amount
Capital of the assessee	Rs.21,44,11,573/-
Interest-free unsecured loans	Rs.1,10,00,000/-
Total interest-free funds available	Rs.22,54,11,573/-
Interest-bearing funds	Rs.175,47,29,334/-
Funds deployed for business purposes and interest-bearing loans	Rs.179,37,78,172/-
Funds deployed in interest-free loans, equity investments, personal purposes and other non-business assets	Rs.18,03,67,114/-

110. The learned CIT(A) found that the funds deployed for business purposes and interest-bearing loans, amounting to Rs.179,37,78,172/-, exceeded the interest-bearing funds of Rs.175,47,29,334/-. He further found that the interest-free funds of Rs.22,54,11,573/- exceeded the amount of Rs.18,03,67,114/- deployed in interest-free loans, equity investments, personal purposes and other non-business assets.

111. The learned CIT(A) therefore held that the assessee had sufficient interest-free funds to cover the disputed investments and advances. Relying upon CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC), he directed the Assessing Officer to delete the disallowance of Rs.1,62,86,836/-.

112. Before us, the learned AR submitted that the assessee was engaged in the business of lending, trading in immovable properties and trading in shares and securities. In this regard, reference was made to the profit and loss accounts of the three businesses placed at page 8 of the paper book. The learned AR submitted that the assessee had paid interest of Rs.19,23,92,459/- and earned interest income of Rs.19,93,24,208/- during the year. A substantial part of the investment of Rs.25,83,94,862/- comprised capital invested in partnership firms from which the assessee had earned and disclosed interest income. The learned AR referred to the audited financial statements placed at pages 7 to 43 of the paper book and the assessee’s detailed submission placed at pages 69 to 81. Particular reliance was placed on the table at page 71 of the paper book showing the sources and application of funds. On the basis of the said table, the learned AR submitted that the interest- free funds available with the assessee amounted to Rs.22,54,11,573/-; the funds deployed in interest-free loans, equity investments and other non-business or personal assets amounted to Rs.18,03,67,114/-; the interest-free funds therefore exceeded the disputed deployment by Rs.4,50,44,459/-; the interest-bearing funds amounted to Rs.175,47,29,334/-; and the funds deployed for business purposes and advancing interest-bearing loans amounted to Rs.179,37,78,172/-, which exceeded the interest-bearing funds.

113. The learned AR submitted that the Assessing Officer had not established any direct nexus between the interest-bearing borrowings and the investments or interest-free advances. Instead, he had presumed that the entire investment of Rs.25,83,94,862/- was financed from borrowed funds and applied a notional rate of 12 per cent. The learned AR relied upon the decision of the Hon’ble Supreme Court in CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC).

114. The learned AR accordingly submitted that, since the interest- free funds were more than sufficient to cover the non-business or interest-free deployment, the learned CIT(A) had correctly deleted the disallowance of Rs.1,62,86,836/-.

115. Per contra, the learned Departmental Representative relied upon the order of the Assessing Officer.

116. We have considered the rival submissions and perused the material available on record. The Assessing Officer treated the investments of Rs.25,83,94,862/- as having been made from interest-bearing funds and computed a disallowance of Rs.3,10,07,383/- by applying an interest rate of 12 per cent. After reducing the interest of Rs.1,47,20,547/- paid to Blacksoil Capital Private Limited, which had been separately disallowed under section 69C, he made the net disallowance of Rs.1,62,86,836/- under section 36(1)(iii).

117. The Assessing Officer proceeded on the premise that the assessee had not established the source of the investments made in equity shares, partnership firms and other assets. He did not, however, identify any specific borrowing which was directly utilised for making a particular investment or interest-free advance. The disallowance was made by applying a uniform rate of 12 per cent to the entire investment of Rs.25,83,94,862/-. The financial position recorded by the learned CIT(A), with reference to the balance sheet and the details placed at pages 69 to 81, particularly the table at page 71 of the paper book, is as follows:

Particulars	Amount
Capital of the assessee	Rs.21,44,11,573/-
Interest-free unsecured loans	Rs.1,10,00,000/-
Total interest-free funds available	Rs.22,54,11,573/-
Funds deployed in interest-free loans, equity investments, personal purposes and other non-business assets	Rs.18,03,67,114/-
Excess interest-free funds available	Rs.4,50,44,459/-
Interest-bearing funds	Rs.175,47,29,334/-
Funds deployed for business purposes and advancing interest-bearing loans	Rs.179,37,78,172/-
Excess business deployment over interest-bearing funds	Rs.3,90,48,838/-

118. The above figures demonstrate that the interest-free funds of Rs.22,54,11,573/- exceeded the aggregate amount of Rs.18,03,67,114/- deployed in interest-free loans, equity investments, personal purposes and other non-business assets. The assessee thus had surplus interest-free funds of Rs.4,50,44,459/- after covering the entire disputed non-business or interest-free deployment.

119. The figures further demonstrate that the assessee had deployed Rs.179,37,78,172/- for business purposes and for advancing interest-bearing loans, whereas the aggregate interest- bearing funds amounted to Rs.175,47,29,334/-. Thus, the deployment for business and income-earning purposes exceeded the interest-bearing funds by Rs.3,90,48,838/-. We also notice that the assessee earned interest income of Rs.19,93,24,208/- against interest expenditure of Rs.19,23,92,459/-. Further, the investment of Rs.25,83,94,862/- considered by the Assessing Officer included capital invested in partnership firms from which the assessee had earned and disclosed interest income. The Assessing Officer was therefore not justified in treating the entire investment of Rs.25,83,94,862/- as a non-business deployment yielding no taxable income.

120. At this stage, it is apposite to refer to the decision of the Hon’ble Supreme Court in CIT v. Reliance Industries Ltd. (supra).

The relevant paragraphs 7 and 8 of the decision, as contained in the copy placed before us, read as under:

“7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03.

8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.”

121. The ratio of the aforesaid decision is that where the interest- free funds available with the assessee are sufficient to meet the investments, a presumption arises that the investments were made from such interest-free funds. The issue is essentially factual and requires comparison of the interest-free funds available with the investments or advances alleged to have been made for non- business purposes.

122. In the present case, the interest-free funds of Rs.22,54,11,573/- were sufficient to cover the disputed deployment of Rs.18,03,67,114/-. The factual foundation necessary for applying the presumption recognised by the Hon’ble Supreme Court in Reliance Industries Ltd. is therefore established.

123. The Assessing Officer has not demonstrated any direct nexus between a particular interest-bearing borrowing and any specific interest-free advance, equity investment, personal asset or other non-business application of funds. In the absence of such nexus, the presumption arising from the availability of sufficient interest- free funds cannot be displaced merely by applying a notional interest rate to the entire investment portfolio.

124. We have also upheld the deletion of the addition relating to the loan from Blacksoil Capital Private Limited and the corresponding disallowance of interest of Rs.1,47,20,547/- under section 69C. However, even after considering the complete fund position, the Revenue has not established that the interest paid on any borrowed fund was attributable to a non-business deployment. Consequently, the Assessing Officer’s alternative observation regarding an enhancement of the disallowance to Rs.3,10,07,383/- does not survive.

125. The learned Departmental Representative has neither controverted the figures recorded by the learned CIT(A) nor brought any material before us to establish a direct nexus between the borrowed funds and the disputed investments or advances.

126. In view of the foregoing, the principle laid down by the Hon’ble Supreme Court in Reliance Industries Ltd. (supra) squarely applies. We therefore find no infirmity in the conclusion of the learned CIT(A), recorded in the impugned order, deleting the disallowance of Rs.1,62,86,836/- under section 36(1)(iii). Ground No. 5 raised by the Revenue is accordingly dismissed.

Ground No. 6: Disallowance under section 14A of Rs.1,95,517/-

127. The Assessing Officer observed that the assessee had earned dividend income from shares of Rs.1,68,341/-, dividend income from mutual funds of Rs.40,497/-, long-term capital gain on sale of shares of Rs.8,78,93,261/- and profit on redemption of mutual funds of Rs.4,59,012/-, which were claimed as exempt. The assessee had made a suo motu disallowance of Rs.1,90,432/- under section 14A. The Assessing Officer rejected the assessee’s computation on the ground that it was not in accordance with the amended rule 8D. He computed the disallowance at Rs.3,85,949/-, comprising demat charges of Rs.16,449/- under rule 8D(2)(i) and Rs.3,69,500/- under rule 8D(2)(ii). After taking into account the suo motu disallowance of Rs.1,90,432/-, the resultant addition was Rs.1,95,517/-.

128. In appeal, the learned CIT(A) held that the Assessing Officer had not recorded the satisfaction contemplated under section 14A(2), having regard to the accounts of the assessee, before rejecting the suo motu disallowance and invoking rule 8D. Relying upon the decisions in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) and PCIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bom.), the learned CIT(A) deleted the additional disallowance of Rs.1,95,517/-.

129. Before us, the learned Departmental Representative relied upon the assessment order and submitted that the assessee’s computation was not in accordance with the amended rule 8D. It was submitted that the Assessing Officer had considered the assessee’s working before computing the disallowance in accordance with the prescribed statutory method.

130. Per contra, the learned AR submitted that the Assessing Officer had mechanically rejected the suo motu disallowance merely because its computation did not conform to rule 8D. The Assessing Officer had neither examined the assessee’s accounts nor recorded any objective dissatisfaction with the correctness of the assessee’s claim, as mandated by section 14A(2).

131. The learned AR relied upon paragraph 41 of the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. (supra), wherein it was held that, before applying the prescribed method of apportionment, the Assessing Officer must record satisfaction that, having regard to the accounts of the assessee, the suo motu disallowance made by the assessee was not correct.

132. The learned AR also relied upon paragraphs 11 to 13 of the decision of the Hon’ble jurisdictional High Court in Bombay Stock Exchange Ltd. (supra), wherein it was held that dissatisfaction with the assessee’s disallowance must be arrived at on the basis of the accounts submitted by the assessee, and that rule 8D can be applied only after the Assessing Officer records objective dissatisfaction in the context of those accounts. He, therefore, supported the deletion made by the learned CIT(A).

133. We have considered the rival submissions and perused the material available on record. The assessee had made a suo motu disallowance of Rs.1,90,432/- under section 14A. The Assessing Officer recomputed the disallowance at Rs.3,85,949/-, comprising direct expenditure of Rs.16,449/- and an amount of Rs.3,69,500/- computed under rule 8D(2)(ii), and consequently made an additional disallowance of Rs.1,95,517/-.

134. It is settled that the Assessing Officer can resort to the prescribed method under rule 8D only after examining the accounts of the assessee and recording an objective dissatisfaction regarding the correctness of the assessee’s claim. The dissatisfaction contemplated under section 14A(2) cannot be founded merely upon the circumstance that the assessee’s computation is not in conformity with rule 8D. Rule 8D provides the prescribed method of computation after the statutory condition under section 14A(2) has been satisfied. It cannot itself constitute the reason for rejecting the assessee’s claim.

135. In the present case, the Assessing Officer stated at paragraph 8.2 of the assessment order that the working furnished by the assessee had been considered but was not in accordance with the amended provisions of rule 8D. Although the Assessing Officer thereafter referred to the different categories of exempt income and computed the disallowance with reference to the investment in Vikas Ecotech Ltd., he did not examine the constituent elements of the suo motu disallowance of Rs.1,90,432/- or demonstrate, having regard to the accounts, why such disallowance was incorrect. Thus, the mandatory exercise contemplated under section 14A(2) was not carried out in the manner required by law.

136. At the same time, we find that the learned CIT(A) deleted the additional disallowance solely on the ground that the Assessing Officer had failed to record the requisite satisfaction. The learned CIT(A) did not examine the basis on which the assessee had computed the suo motu disallowance of Rs.1,90,432/-. In the absence of such examination, the correctness of the assessee’s claim cannot be accepted merely because the satisfaction recorded by the Assessing Officer was found deficient.

137. There is, however, one material distinction from the facts considered by us for A.Y. 2017-18. For the year under consideration, the Assessing Officer has stated at paragraphs 8.9 and 8.10 of the assessment order that the investment component was computed with reference to the investment in Vikas Ecotech Ltd., from which the assessee had earned exempt dividend income of Rs.1,59,850/- and exempt long-term capital gain of Rs.8,78,93,261/-. Thus, the record prima facie indicates that the Assessing Officer considered an investment which had actually yielded exempt income. The amended rule applicable to the year prescribed one per cent of the annual average of the monthly averages, subject to the statutory conditions.

138. In these circumstances, consistent with our findings for A.Y. 2017-18, we set aside the order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer for a limited reconsideration. The Assessing Officer shall examine the accounts and the basis of the suo motu disallowance of Rs.1,90,432/- made by the assessee. If he is not satisfied with its correctness, he shall record proper satisfaction as required under section 14A(2) and thereafter recompute the disallowance in accordance with the version of rule 8D applicable to A.Y. 2018-19. While doing so, only those investments which actually yielded exempt income during the relevant previous year shall be taken into consideration. The Assessing Officer shall verify the monthly balances of the relevant investments and the direct expenditure attributable to the exempt income and shall grant credit for the disallowance of Rs.1,90,432/- already made by the assessee. The assessee shall be afforded a reasonable opportunity of being heard. Accordingly, Ground No. 6 raised by the Revenue is allowed for statistical purposes.

Ground No. 7: Disallowance of interest expenditure of Rs.6,34,500/-

139. The Assessing Officer observed that the corresponding loan amounts had been treated as unexplained cash credits under section 68 in the respective earlier assessment years. The particulars of the disallowance are as under:

Name of lender	A . Y. ear in which the loan was added under section 68	Interest disallowed
B.K. Trading	2016-17	Rs.60,417/-
Bharat T. Chheda	2017-18	Rs.4,05,333/-
Jayesh K. Haria	2017-18	Rs.1,68,750/-
Total		Rs.6,34,500/-

140. According to the Assessing Officer, once the underlying loans had been treated as non-genuine in the earlier assessment years, the interest claimed to have been paid on those loans could not be allowed as business expenditure. The Assessing Officer accordingly disallowed the entire amount of Rs.6,34,500/-.

141. In appeal, the learned CIT(A) observed that the sole basis of the disallowance was the addition made under section 68 in the earlier assessment years. The addition relating to B.K. Trading for A.Y. 2016-17 had been deleted by the learned CIT(A) by order dated 23.01.2026. Similarly, the additions relating to Bharat T. Chheda and Jayesh K. Haria for A.Y. 2017-18 had been deleted by the learned CIT(A) by order dated 08.05.2026. The learned CIT(A), therefore, held that the foundation of the consequential disallowance no longer survived and directed its deletion.

142. Before us, the learned Departmental Representative relied upon the assessment order. Per contra, the learned AR submitted that the addition made under section 68 in respect of the loan obtained from B.K. Trading for A.Y. 2016-17 had already been deleted in the assessee’s own case in DCIT v. Jayant Shamji Chheda, ITA No.3548/Mum/2026, vide order dated 19.08.2026. As regards the interest of Rs.4,05,333/- paid to Bharat T. Chheda and Rs.1,68,750/- paid to Jayesh K. Haria, the learned AR referred to the findings rendered hereinabove while disposing of the Revenue’s appeal for A.Y. 2017-18. He submitted that the additions of Rs.80,00,000/- and Rs.50,00,000/-, respectively, made under section 68 in respect of those lenders had been deleted by the learned CIT(A), and the Revenue’s challenge to such deletion is pending before us.

143. The learned AR further submitted that the Assessing Officer had not independently disputed the payment of interest or its business character. The disallowance was made solely as a consequence of the additions under section 68 in the earlier assessment years. Since those additions no longer survived, the corresponding disallowance of interest of Rs.6,34,500/- also could not be sustained. He accordingly supported the order passed by the learned CIT(A).

144. We have considered the rival submissions and perused the material available on record. The undisputed position is that the Assessing Officer disallowed interest of Rs.6,34,500/- solely because the corresponding loans had been treated as unexplained cash credits under section 68 in the respective earlier assessment years. The Assessing Officer did not record any independent adverse finding regarding the actual payment of interest, its business purpose or its allowability otherwise under the Act.

145. In respect of B.K. Trading, the underlying loan of Rs.50,00,000/- was added under section 68 in A.Y. 2016-17. The addition was deleted by the learned CIT(A), and the Revenue’s appeal against such deletion was dismissed by the coordinate Bench in the assessee’s own case in DCIT v. Jayant Shamji Chheda, ITA No.3548/Mum/2026, vide order dated 19.08.2026. The relevant finding contained in paragraph 28 of the said order reads as under:

“28. On careful perusal of the learned CIT(A)’s order and also since the assessee had furnished all the relevant documents to prove the genuineness, creditworthiness and identity of the parties, we are of the view that the learned CIT(A) has rightly deleted the addition made u/s 68 of the Act in respect of unsecured loans. These grounds of the Revenue are rejected.”

146. Thus, the addition made under section 68 in respect of the loan obtained from B.K. Trading no longer survives. Once the loan transaction has been accepted as genuine, the disallowance of the corresponding interest of Rs.60,417/-, made solely on the premise that the loan was non-genuine, cannot be sustained.

147. As regards Bharat T. Chheda and Jayesh K. Haria, the corresponding loans of Rs.80,00,000/- and Rs.50,00,000/-, respectively, were added under section 68 in A.Y. 2017-18. While disposing of the Revenue’s appeal for A.Y. 2017-18 hereinabove, we have upheld the decision of the learned CIT(A) deleting those additions. Consequently, the foundation for disallowing the corresponding interest of Rs.4,05,333/- and Rs.1,68,750/-, respectively, also ceases to exist.

148. The interest disallowance is entirely consequential to the additions made under section 68 in the preceding assessment years. No independent material has been brought on record by the Assessing Officer to demonstrate that the interest was not paid, that it was not incurred for the purposes of the assessee’s business, or that it was otherwise inadmissible under any provision of the Act. In the absence of any such independent basis, the interest expenditure cannot be disallowed merely by relying upon additions under section 68 which have subsequently been deleted.

149. In view of the above, we find no infirmity in the decision of the learned CIT(A) deleting the disallowance of interest expenditure of Rs.6,34,500/-. Accordingly, Ground No. 7 raised by the Revenue is dismissed.

Ground No. 8: Disallowance of brokerage, commission and legal/professional expenditure of Rs.30,96,979/-

150. The Assessing Officer observed that the assessee had claimed brokerage and commission expenditure of Rs.44,48,855/- and legal and professional expenditure of Rs.1,27,56,585/-. He further observed that the assessee had incremental interest-bearing borrowings of Rs.59,15,21,992/- and incremental loans and advances of Rs.48,51,11,336/- during the year.

151. On the basis of the above figures, the Assessing Officer concluded that 82 per cent of the incremental borrowings had been utilised for making interest-bearing loans and advances, whereas the remaining 18 per cent had been utilised for purposes which were not related to the assessee’s business. Applying the ratio of 18 per cent to the expenditure claimed, he worked out the disallowance as under:

152. The Assessing Officer had separately disallowed legal and professional charges of Rs.5,90,000/- under section 69C in connection with the loan obtained from Blacksoil Capital Private Limited. To avoid duplication, he reduced the said amount from the gross disallowance of Rs.30,96,979/- and stated that the net disallowance under this head worked out to Rs.25,06,979/-. However, in the concluding sentence of paragraph 10.2 and in the computation of assessed income, the addition was stated at Rs.25,06,976/-. Thus, there is an apparent arithmetical difference of Rs.3/- in the assessment order. The Revenue’s ground, nevertheless, challenges the deletion of the gross disallowance of Rs.30,96,979/-.,

153. In appeal before CIT(A), the assessee submitted that no part of the interest-bearing borrowings had been diverted for personal or non-business purposes. It was contended that the assessee had sufficient own and other interest-free funds to cover the investments and interest-free advances. Therefore, the premise adopted by the Assessing Officer for attributing 18 per cent of the brokerage, commission and professional expenditure to non- business purposes was factually incorrect.

154. The learned CIT(A) accepted the assessee’s contention. Referring to his findings concerning the disallowance under section 36(1)(iii), he held that the assessee possessed sufficient interest-free funds to cover the investments in personal or non-business assets. He consequently held that no part of the borrowed funds could be regarded as having been diverted for non-business purposes. Treating the allocation made by the Assessing Officer as an ad hoc disallowance, the learned CIT(A) directed deletion of Rs.30,96,979/-

155. Before us, the learned Departmental Representative relied upon the assessment order. Per contra, the learned AR submitted that the disallowance was entirely founded upon the same assumption of diversion of borrowed funds which formed the basis of the disallowance under section 36(1)(iii). Referring to the balance sheet and the fund position already considered while adjudicating Ground No. 5, he submitted that the assessee’s interest-free funds were sufficient to cover the interest-free advances, investments and alleged non-business applications.

156. The learned AR further submitted that the Assessing Officer had not identified any particular item of brokerage, commission or professional expenditure as having been incurred for a personal or non-business purpose. No defect had been pointed out in the supporting documents, nor had the genuineness of the expenditure been independently disputed. The Assessing Officer had merely applied the estimated percentage of 18 per cent to two broad classes of expenditure.

157. The learned AR contended that the comparison between incremental borrowings and incremental loans and advances did not establish any direct or proximate nexus between the expenditure and a non-business purpose. Since the substantive finding of diversion of borrowed funds had already been rejected while dealing with the disallowance under section 36(1)(iii), the consequential and proportionate disallowance of Rs.30,96,979/- also could not survive. He accordingly supported the decision of the learned CIT(A).

158. We have considered the rival submissions and perused the material available on record.

159. While dealing with Ground No. 5, we have upheld the finding of the learned CIT(A) that the assessee possessed sufficient interest- free funds to cover the interest-free advances, investments and alleged non-business applications. The Assessing Officer has also not identified any particular item of expenditure as having been incurred for a personal or non-business purpose. The mechanical application of 18 per cent to the aggregate expenditure, without establishing any specific nexus, is therefore unsustainable.

160. Consequently, we find no infirmity in the decision of the learned CIT(A) deleting the disallowance. The deletion shall operate in respect of the amount actually added by the Assessing Officer under this head, after considering the separate treatment of legal and professional charges of Rs.5,90,000/-.

161. Accordingly, Ground No. 8 raised by the Revenue is dismissed.

ITA No.6062/Mum/2026 – Assessee’s appeal for A.Y. 2021-22

Ground No. 1: Disallowance under section 14A of Rs.49,27,979/-

162. The Assessing Officer noticed that the assessee had earned the following income which did not form part of the total income:

Particulars	Amount
Share of profit from Arena Enterprises	Rs.34,72,196/-
Share of profit from Ellora Chemical Works	Rs.41,12,928/-
Interest on Public Provident Fund	Rs.1,77,372/-
Total	Rs.77,62,496/-

163. In response to the notice issued under section 142(1), the assessee submitted that the investments in the partnership firms had been made out of his own funds and, therefore, no disallowance under section 14A was warranted. Without prejudice to this contention, the assessee furnished a computation under rule 8D in compliance with the direction of the Assessing Officer.

164. The Assessing Officer rejected the contention that the investments had been made exclusively out of interest-free funds. He observed that the assessee had failed to establish, by supporting documentary evidence, that his own funds had been specifically deployed in making the investments which yielded or were capable of yielding exempt income. At paragraph 5.7, the Assessing Officer stated that he was not satisfied with the correctness of the assessee’s claim and proceeded to apply rule 8D.

165. The Assessing Officer considered the annual average of the monthly averages of the investments in all the partnership firms at Rs.49,02,91,249/- and the corresponding average investment in the Public Provident Fund at Rs.25,06,622/-. The disallowance was computed as under:

Particulars	Amount
Annual average of monthly averages of investments in partnership firms	Rs.49,02,91,249/-
Annual average of monthly averages of investment in PPF	Rs.25,06,622/-
Aggregate average investment	Rs.49,27,97,871/-
One per cent under rule 8D	Rs.49,27,979/-

166. The Assessing Officer accordingly disallowed Rs.49,27,979/- under section 14A read with rule 8D.

167. Before the learned CIT(A), the assessee contended that the net exempt income earned during the year amounted only to Rs.4,96,832/-, computed as under:

Particulars	Amount
Share of profit from Arena Enterprises	Rs.34,72,196/-
Share of profit from Ellora Chemical Works	Rs.41,12,928/-
Less: Share of loss from Prince Marketing	Rs.72,65,664/-
Net share of profit from partnership firms	Rs.3,19,460/-
Interest on PPF	Rs.1,77,372/-
Net exempt income, as claimed by the assessee	Rs.4,96,832/-

168. The learned CIT(A) rejected the assessee’s contention. He held that the share of loss from Prince Marketing could not be adjusted against the exempt share of profit from the other partnership firms for determining the amount of exempt income under section 14A. According to the learned CIT(A), the assessee had actually earned gross exempt income of Rs.77,62,496/-. Since the disallowance of Rs.49,27,979/- did not exceed such gross exempt income, the learned CIT(A) upheld the disallowance.

169. Before us, the learned AR submitted that the assessee had earned a positive share of profit only from Arena Enterprises and Ellora Chemical Works. Therefore, for computing the disallowance under rule 8D, the Assessing Officer ought to have considered only the capital invested in these two firms, apart from separately examining the investment in the PPF, and not the aggregate capital balances in all the partnership firms.

170. The learned AR relied upon the decision of the Special Bench of the Tribunal in ACIT v. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi-Trib.)(SB) in support of the proposition that the computation under rule 8D must be confined to investments which actually yielded exempt income during the relevant previous year.

171. The learned AR further submitted that the capital balances appearing in the accounts of the partnership firms included the assessee’s accumulated shares of profit for the current and earlier years. Such credited profits could not be regarded as fresh investments made out of borrowed funds. According to him, only the amount actually introduced by the assessee as capital could be considered as an “investment” for the purpose of applying rule 8D.

172. It was further submitted that the assessee’s own capital exceeded the capital invested in Arena Enterprises and Ellora Chemical Works. Therefore, a presumption arose that the relevant investments had been made out of the assessee’s own interest-free funds. Consequently, no interest expenditure could be attributed to the earning of the exempt share of profit.

173. The learned AR also submitted, without prejudice, that the net exempt income for the year was Rs.4,96,832/-, comprising the net share of profit from the partnership firms of Rs.3,19,460/- and PPF interest of Rs.1,77,372/-. He contended that the share of loss from Prince Marketing could not be ignored while determining the real income exempt under section 10(2A). Accordingly, the disallowance under section 14A could not, in any event, exceed Rs.4,96,832/-. In support of the principle that section 14A operates with reference to exempt income actually received or receivable during the relevant previous year, the learned AR relied upon Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi), wherein the Hon’ble Delhi High Court held:

“Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

174. The learned AR further contended that the working of Rs.49,27,979/- furnished during the assessment proceedings was submitted only in compliance with the direction contained in the notice under section 142(1). It was an alternative mechanical computation under rule 8D and could not be regarded as a voluntary or admitted disallowance by the assessee.

175. Lastly, the learned AR submitted that the purported dissatisfaction recorded at paragraph 5.7 of the assessment order was general and formulaic. The Assessing Officer had neither examined the constituent elements of the assessee’s claim with reference to the accounts nor identified any expenditure having a proximate connection with the exempt income. He relied upon PCIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bom.) for the proposition that the dissatisfaction contemplated under section 14A(2) must be arrived at objectively, having regard to the accounts of the assessee, before invoking rule 8D.

176. The learned Departmental Representative, on the other hand, relied upon the assessment order and the impugned order. He submitted that the Assessing Officer had examined the assessee’s explanation, expressly recorded his dissatisfaction at paragraph 5.7 and thereafter computed the disallowance by applying the method prescribed under rule 8D.

177. We have considered the rival submissions and perused the material available on record. It is relevant to note at the outset that the assessee had not made any suo motu disallowance under section 14A in the computation of income. The assessee’s case before the Assessing Officer was that no expenditure had been incurred in relation to the exempt income and that the investments in the partnership firms had been made out of his own funds. The computation of Rs.49,27,979/- under rule 8D was furnished only in response to the notice issued under section 142(1) and cannot be treated as a voluntary disallowance made by the assessee.

178. Where an assessee claims that no expenditure has been incurred in relation to exempt income, section 14A(3) makes the procedure prescribed in section 14A(2) applicable. The Assessing Officer is therefore required to examine the accounts and record his dissatisfaction with the correctness of the assessee’s claim before determining the disallowance under rule 8D. The Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC), at paragraph 41, held:

“Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct.”

179. In the present case, however, the facts are materially different from those obtaining in A.Ys. 2017-18 and 2018-19. The Assessing Officer noticed from the accounts that the assessee had claimed interest expenditure of Rs.87,40,221/- and had investments in partnership firms and in the PPF. He issued a specific show-cause notice, considered the assessee’s explanation that the investments had been made from his own funds and recorded at paragraphs 5.4 and 5.7 why he was not satisfied with the claim that no expenditure had been incurred in relation to the exempt income. The dissatisfaction was followed by a computation based upon the monthly balances of the investments.

180. Therefore, it cannot be held that the Assessing Officer invoked rule 8D without examining the assessee’s claim or without recording the satisfaction contemplated under section 14A(2) read with section 14A(3). The assessee’s contention challenging the invocation of rule 8D for want of satisfaction is accordingly rejected.

181. The contention regarding the availability of sufficient own funds also does not dispose of the controversy. For A.Y. 2021-22, the applicable rule 8D did not provide for a separate proportionate disallowance of interest expenditure. The Assessing Officer has not made any interest disallowance under rule 8D. He has computed one per cent of the annual average of the monthly averages of the value of investments. Consequently, the source from which the investments were made, though relevant to an attribution of interest expenditure, does not by itself exclude the application of the prescribed formula for indirect expenditure.

182. We also do not accept the contention that only the amounts originally introduced as capital in the partnership firms can be regarded as investments and that the accumulated shares of profit credited to the capital accounts must necessarily be excluded. Rule 8D refers to the “value of investment” and not merely to the amount initially contributed by an assessee. The monthly value of the qualifying investment, as reflected in the relevant accounts, has to be considered. The question whether a part of such balance originated from the assessee’s own funds or from accumulated profits does not alter its character as the value of the investment for the limited purpose of the prescribed computation.

183. Nevertheless, we find merit in the contention that the Assessing Officer erred in including the capital balances of all the partnership firms without determining which investments had actually yielded exempt income during the relevant previous year. The Special Bench in ACIT v. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi-Trib.)(SB), at paragraph 11.16, held:

“We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.”

184. Although the Special Bench considered the corresponding clause of rule 8D as it then stood, the principle remains applicable because the computation continues to operate upon the value of investments having a relation to income which does not form part of the total income.

185. In the present case, the record shows that the assessee earned a positive share of profit of Rs.34,72,196/- from Arena Enterprises and Rs.41,12,928/- from Ellora Chemical Works. The investment in the PPF also yielded exempt interest of Rs.1,77,372/-. The Assessing Officer was therefore justified in considering the investment in the PPF. However, the capital balances in partnership firms which did not yield any positive exempt income during the year could not have been included indiscriminately in the rule 8D computation.

186. We are unable to accept the further contention that the disallowance should be restricted to Rs.4,96,832/-. The figure of Rs.4,96,832/- was arrived at by setting off the share of loss of Rs.72,65,664/- from Prince Marketing against the positive shares of profit from Arena Enterprises and Ellora Chemical Works. A share of loss from one partnership firm does not constitute negative exempt income capable of being adjusted against the positive exempt income received from other firms for fixing the ceiling of disallowance under section 14A. The positive shares of profit aggregating to Rs.75,85,124/- and PPF interest of Rs.1,77,372/- constituted the exempt income earned during the year. Thus, the gross exempt income relevant for the present purpose was Rs.77,62,496/-.

187. The decision in Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi) does not support the proposed restriction to Rs.4,96,832/-. The conclusion in that decision was:

“Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” (para 23)

188. In the present case, the assessee admittedly earned positive exempt income of Rs.77,62,496/-. Therefore, the ratio concerning the absence of exempt income has no application. Since the disallowance of Rs.49,27,979/- is below the gross exempt income of Rs.77,62,496/-, the plea for restricting it to Rs.4,96,832/- is rejected.

189. In view of the above, we set aside the impugned order on this issue and restore the matter to the file of the Assessing Officer for the limited purpose of recomputing the disallowance under rule 8D. The Assessing Officer shall include only the monthly value of investments which actually yielded exempt income during the relevant previous year, including the qualifying capital balances in Arena Enterprises and Ellora Chemical Works and the investment in the PPF. The investments in partnership firms which did not yield any positive exempt income during the year shall be excluded. The Assessing Officer shall verify the relevant monthly balances from the accounts and afford the assessee a reasonable opportunity of being heard. The applicability of section 14A and the validity of the satisfaction recorded by the Assessing Officer shall not be reopened in the remand proceedings. Accordingly, Ground No. 1 raised by the assessee is partly allowed for statistical purposes.

Ground No. 2: Disallowance of interest under section 36(1)(iii) of Rs.2,89,380/-

190. The Assessing Officer observed that the assessee had borrowed funds aggregating to Rs.242.80 crore and had advanced loans of Rs.165.28 crore, besides making investments of Rs.182.32 crore in shares, partnership firms and other assets. The assessee had debited interest expenditure of Rs.87,40,221/- against the interest income earned from the business of advancing loans.

191. In response to the notice issued under section 142(1), the assessee submitted that he had been regularly engaged in the business of advancing loans on interest and had earned interest income of Rs.7,35,69,625/- during the year. The interest expenditure of Rs.87,40,221/- had been incurred in the course of that business and was, therefore, allowable under section 36(1)(iii).

192. The assessee further submitted before the Assessing Officer that he possessed interest-free funds comprising his own capital of Rs.146.49 crore and interest-free loans from family members of Rs.230.41 crore, aggregating to Rs.376.90 crore. The only interest- bearing borrowing outstanding as on 31.03.2021 was the borrowing of Rs.12.38 crore from Kotak Mahindra Bank.

193. The Assessing Officer observed that a sum of Rs.4,40,00,000/- borrowed from Kotak Mahindra Bank had been utilised for a non-business purpose. He consequently disallowed the corresponding interest component of Rs.2,89,380/- under section 36(1)(iii).

194. In appeal, the assessee explained that the loan of Rs.4,40,00,000/- from Kotak Mahindra Bank had been utilised to repay an earlier loan obtained from Smt. Tarla Chheda. It was submitted that the earlier borrowing had been utilised for the assessee’s business of advancing loans and, therefore, the subsequent borrowing used to discharge that liability retained the same business character.

195. The learned CIT(A) observed that the loan obtained from Kotak Mahindra Bank had been utilised to repay a loan earlier obtained from a relative. According to the learned CIT(A), the assessee had not produced sufficient material to establish that the earlier loan had been utilised for business purposes. He therefore treated the borrowing as having been utilised for personal or non-business purposes and upheld the disallowance of Rs.2,89,380/-.

196. Before us, the learned AR referred to the profit and loss account placed at page 19 of the paper book and submitted that interest expenditure of Rs.87,40,221/- had been debited therein. He further referred to the relevant ledger accounts placed at pages 22 to 24 of the paper book to demonstrate that the interest-bearing borrowing was from Kotak Mahindra Bank.

197. The learned AR referred to the balance sheet placed at page 11 of the paper book and submitted that the secured loan represented the interest-bearing borrowing. He furnished the following comparative financial position:

Particulars	Amount
Assessee’s capital	Rs.146.49 crore
Interest-free unsecured loans	Rs.230.41 crore
Total interest-free funds	Rs.376.90 crore
Total loans and advances	Rs.165.28 crore
Interest-free loans and advances	Rs.86.66 crore
Interest-bearing loans and advances	Rs.78.61 crore

198. On the basis of the above figures, the learned AR submitted that the interest-free funds of Rs.376.90 crore were substantially more than the interest-free loans and advances of Rs.86.66 crore and the amounts allegedly deployed for non-business purposes. Consequently, a presumption arose that the interest-free advances and investments had been made out of the assessee’s own and other interest-free funds. The learned AR relied upon the decision of the Hon’ble Supreme Court in CIT (LTU) v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC). The learned AR submitted that the assessee had interest-free funds far exceeding the interest-free advances. Therefore, even if a direct nexus between the earlier borrowing and a particular business advance was not demonstrated, the presumption recognised in Reliance Industries Ltd. (supra) operated in favour of the assessee.

199. The learned AR also contended that the Assessing Officer had separately made a disallowance of Rs.49,27,979/- under section 14A by applying rule 8D. According to him, the interest expenditure of Rs.2,89,380/- could not again be disallowed under section 36(1)(iii) if the same expenditure had already entered the computation under section 14A. He accordingly sought deletion of the disallowance.

200. The learned Departmental Representative relied upon the assessment order and the impugned order.

201. We have considered the rival submissions and perused the material available on record. The assessee is engaged in the business of advancing loans on interest and earned interest income of Rs.7,35,69,625/- during the relevant previous year. Against such income, the assessee claimed interest expenditure of Rs.87,40,221/-. Out of this amount, the Assessing Officer disallowed interest of Rs.2,89,380/- attributable to the loan of Rs.4,40,00,000/- obtained from Kotak Mahindra Bank.

202. The Assessing Officer has proceeded on the basis that the loan of Rs.4,40,00,000/- was utilised for a non-business purpose. The learned CIT(A) sustained the disallowance principally because the borrowing from Kotak Mahindra Bank was utilised to repay an earlier loan obtained from Smt. Tarla Chheda, who was a relative of the assessee.

203. In our considered view, repayment of a loan obtained from a relative cannot, by itself, lead to the conclusion that the subsequent borrowing was utilised for a personal or non-business purpose. The character of the subsequent borrowing must be determined with reference to the purpose for which the original borrowing was obtained and utilised. If a fresh borrowing is utilised to discharge an existing business liability, the fresh borrowing ordinarily assumes the same business character. The mere relationship between the assessee and the earlier lender is not determinative of the purpose of the loan.

204. The assessment order does not contain any examination of the utilisation of the original loan obtained from Smt. Tarla Chheda. No personal expenditure or non-business asset acquired out of the original borrowing has been identified. The Assessing Officer merely stated that the Kotak Mahindra Bank loan had been utilised for a non-business purpose, without bringing any supporting material on record. The learned CIT(A) also proceeded upon the circumstance that the earlier lender was a relative, without recording any finding based upon the accounts that the original borrowing was utilised for a personal purpose.

205. The financial position placed before us further shows that the assessee had the following interest-free funds:

Particulars	Amount
Assessee’s own capital	Rs.146.49 crore
Interest-free unsecured loans	Rs.230.41 crore
Total interest-free funds	Rs.376.90 crore

206. As against the above, the total loans and advances amounted to Rs.165.28 crore, comprising interest-free loans and advances of Rs.86.66 crore and interest-bearing loans and advances of Rs.78.61 crore. Thus, the interest-free funds available with the assessee were substantially more than the interest-free loans and advances and the amounts alleged to have been utilised for non-business purposes.

207. Applying the principle, as decided by the Hon’ble Supreme Court in CIT (LTU) v. Reliance Industries Ltd., where mixed funds are available and the assessee’s own and other interest-free funds are sufficient to cover the interest-free advances or alleged non- business deployment, a presumption arises that such deployment was made out of the interest-free funds. In the present case, the Revenue has neither rebutted this presumption nor established a direct nexus between the interest-bearing borrowing and any identified personal expenditure or non-business asset.

208. The fact that the Kotak Mahindra Bank loan was applied towards repayment of an earlier liability does not establish diversion of borrowed funds. The Revenue was required to demonstrate either that the original borrowing from Smt. Tarla Chheda had been utilised for a personal purpose or that the refinancing transaction was unrelated to the assessee’s financing business. No such finding is discernible from the assessment order or the impugned order.

209. We are, however, unable to accept the alternative contention that the interest has been disallowed twice, once under section 14A and again under section 36(1)(iii). For the year under consideration, the disallowance under rule 8D was computed at one per cent of the annual average of the monthly averages of the qualifying investments. There was no separate interest component in the applicable rule 8D computation. Therefore, the disallowance of Rs.2,89,380/- cannot be deleted merely on the ground of duplication with the disallowance under section 14A.

210. Nevertheless, for the reasons stated above, the primary basis adopted by the Assessing Officer for treating the borrowing as having been utilised for a non-business purpose is unsupported by the material on record. Considering the nature of the assessee’s financing business, the repayment of an existing loan liability and the availability of interest-free funds far exceeding the alleged non- business deployment, the disallowance of interest of Rs.2,89,380/- cannot be sustained.

211. We accordingly set aside the impugned order on this issue and direct the Assessing Officer to delete the disallowance of Rs.2,89,380/- made under section 36(1)(iii). Ground No. 2 raised by the assessee is allowed.

Ground No. 3: Disallowance of loan-processing charges of Rs.5,21,400/-

212. The Assessing Officer observed at paragraph 3.4 of the assessment order that the loan obtained from Kotak Mahindra Bank had been utilised for a non-business purpose. Since the corresponding interest of Rs.2,89,380/- was disallowed under section 36(1)(iii), the Assessing Officer also disallowed the loan- processing charges of Rs.5,21,400/- incurred for obtaining the same loan.

213. The learned CIT(A) upheld the disallowance. He held that, since the underlying borrowing had been utilised for a non- business purpose, the expenditure incurred for obtaining that borrowing was also inadmissible.

214. Before us, the learned AR submitted that the disallowance was entirely consequential to the finding regarding the utilisation of the loan of Rs.4,40,00,000/-. The loan-processing charges represented expenditure incurred for obtaining the Kotak Mahindra Bank loan. Since the borrowing was utilised to discharge an existing loan liability connected with the assessee’s financing business, the processing charges were also incurred wholly and exclusively for the purposes of business and were allowable as revenue expenditure.

215. The learned AR further submitted that once the interest disallowance relating to the same borrowing was deleted, the consequential disallowance of the loan-processing charges could not survive.

216. The learned Departmental Representative relied upon the assessment order and the impugned order.

217. We have considered the rival submissions and perused the material available on record. While adjudicating Ground No. 2, we have held that the Revenue failed to establish that the borrowing from Kotak Mahindra Bank was diverted for any personal or non- business purpose. We have accordingly directed the deletion of the corresponding interest disallowance of Rs.2,89,380/-.

218. The loan-processing charges were incurred for obtaining the same borrowing. No capital asset or enduring advantage came into existence merely because the assessee incurred expenditure for raising the loan. Once the borrowing is held to be connected with the assessee’s financing business, the expenditure incurred for obtaining such borrowing is also allowable as business expenditure. The sole basis adopted by the Assessing Officer for disallowing the processing charges, therefore, no longer survives.

219. We accordingly set aside the impugned order on this issue and direct the Assessing Officer to delete the disallowance of loan- processing charges of Rs.5,21,400/-. Ground No. 3 raised by the assessee is allowed.

220. In the result, both appeals filed by the Revenue for A.Ys. 2017- 18 and 2018-19 are partly allowed for statistical purposes. The appeal filed by the assessee for A.Y. 2021-22 is partly allowed and partly allowed for statistical purposes.

Order pronounced in the open court on 28.09.2026.