Mukund Tulsidas Jariwala Vs DCIT (ITAT Surat)
Supplier Advance Is Not an Interest-Free Loan: ITAT Quashes Reopening and Rejects ₹16.99 Lakh Disallowance
Same Records, Different View and an Invalid Reopening
The Surat Tribunal granted relief on both jurisdiction and merits in a dispute concerning interest expenditure.
It held that reopening an assessment to reconsider amounts already examined during the original scrutiny amounted to a mere change of opinion, there being no fresh tangible material.
It also found that the amounts characterised by the Assessing Officer as interest-free loans were actually a supplier advance against raw-material purchases and remuneration receivable.
Accordingly, the reassessment was quashed, and the ₹16,99,534 interest disallowance was independently held unsustainable on merits.
Original Scrutiny Followed by Reassessment
The assessee derived income from salary and the business of art silk cloth manufacturing.
For AY 2013-14, he filed his return on 26 September 2013, declaring income of ₹2,26,09,180. The original scrutiny assessment was completed under section 143(3) on 30 December 2015, determining income of ₹2,27,40,800.
Subsequently, the Assessing Officer issued a notice under section 148 dated 27 March 2018.
The reopening concerned alleged diversion of funds to two parties without charging interest. The reassessment, completed on 28 November 2018, resulted in the disputed interest disallowance and assessed income of ₹2,44,40,330.
The CIT(A) rejected the assessee’s challenge to reopening as well as his explanation on merits.
Year-End Receivables Treated as Interest-Free Loans
The Assessing Officer noted that the assessee had debited interest expenditure of ₹1,16,32,877 and had unsecured loans of ₹10,37,04,081 as at 31 March 2013.
At the same time, two debit balances aggregating to ₹1,41,62,786 appeared against ITOCHU Corporation and D-3 Textiles Pvt. Ltd.
These comprised ₹1,20,67,736 against ITOCHU Corporation and ₹20,95,050 against D-3 Textiles Pvt. Ltd.
The Assessing Officer treated both amounts as interest-free loans. Applying 12% interest to the aggregate, he disallowed ₹16,99,534 from the interest expenditure claimed.
The assessee maintained that this classification overlooked the actual nature of the balances.
Specific Explanation Was Already Before the Original AO
The assessee produced a letter dated 12 October 2015, submitted during the original scrutiny proceedings.
That letter expressly explained that payments to ITOCHU Corporation were advances for purchase of raw materials, required under the business terms with the supplier.
It also explained that the amount receivable from D-3 Textiles Pvt. Ltd. represented remuneration. Ledger accounts of both parties had been furnished.
The original assessment was completed without making an adverse inference or interest disallowance concerning these amounts.
The Tribunal therefore found that the issue had been specifically examined, rather than merely disclosed somewhere in the financial statements.
CIT(A)’s “Untouched Issue” Finding Contradicted the Record
While sustaining reopening, the CIT(A) had observed that the issue remained “untouched” during the original assessment and that no opinion had therefore been formed.
The Tribunal found this inconsistent with the record.
The very letter containing the assessee’s explanation had been reproduced in the CIT(A)’s order, and the corresponding ledgers had also been furnished during scrutiny.
Neither the reassessment order, the appellate order nor the Revenue’s submissions identified fresh material received after completion of the original assessment.
The Assessing Officer had instead reconsidered the same balance-sheet information and supporting explanation. The Tribunal held this to be an impermissible change of opinion and quashed the reassessment.
Supplier Advance Followed by Actual Purchases
Although the jurisdictional finding disposed of the reassessment, the Tribunal separately examined the merits because both parties had addressed them and the relevant evidence was available.
The ITOCHU ledger showed that the advance was made on 14 March 2013, followed by actual raw-material purchases on 10 and 11 April 2013.
The transaction therefore represented a business advance to a supplier, adjusted against purchases within approximately one month.
The Tribunal held that it could not be treated as an interest-free loan merely because the balance remained outstanding at the financial year-end.
For D-3 Textiles Pvt. Ltd., the ledger reflected remuneration-related entries and contained no entry evidencing a loan advanced during the year. The explanation that the opening balance also represented remuneration receivable remained uncontroverted.
Thus, the basic premise underlying the disallowance failed on the evidence.
Appeal Allowed on Both Grounds
The Tribunal held the reopening invalid and the interest disallowance unsustainable on merits.
The assessee’s grounds were allowed, and the appeal was allowed in full. This was final relief on the issues adjudicated, rather than a remand for further verification.
Author’s Comments
The decision demonstrates the importance of examining what a debit balance represents before treating it as diversion of borrowed funds. A purchase advance and unpaid remuneration cannot be classified as loans solely because they appear as amounts receivable.
The contemporaneous records were decisive: the scrutiny-stage explanation, supplier ledger and subsequent purchases established the character of the transactions.
On reopening, the case also shows the value of preserving earlier submissions and acknowledgements. Those records disproved the assertion that the issue had escaped examination.
The ruling rests on specific evidence and prior scrutiny. It does not grant blanket protection to every interest-free advance; it rejects a disallowance founded on incorrect classification of the actual transactions.
FULL TEXT OF THE ORDER OF ITAT SURAT
Feeling aggrieved by order of first appeal dated 18.06.2025 passed by the office of learned Commissioner of Income-tax (Appeal)-Addl./JCIT(A)-1 Nashik [“Ld. CIT(A)”], which in turn arises out of the assessment-order dated 28.11.2018 passed by learned Deputy Commissioner of Income-Tax, Circle-1(1)(1), Surat [“Ld. AO”] u/s 143(3) r.w.s. 147 of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2013-14, the assessee has filed this appeal.
2. The background facts leading to present appeal are as under:
(i) The assessee is an individual deriving income from salary and business of art silk cloth manufacturing.
(ii) For AY 2013-14 under consideration, the assessee filed return of income on 26.09.2013 declaring total income of Rs. 2,26,09,180/-.
(iii) Originally, the case of assessee was selected for scrutiny and the assessment was completed u/s 143(3) on 30.12.2015 determining total income at Rs. 2,27,40,800/-.
(iv) Subsequently, the Ld. AO reopened assessment through a notice u/s 148 dated 27.03.2018 which culminated into passing of the aforesaid assessment-order dated 28.11.2018 u/s 143(3) r.w.s. 147. The Ld. AO noted that the assessee had debited interest expenses of Rs. 1,16,32,877/- in P&L A/c and had taken unsecured loans of Rs. 10,37,04,081/- as on 31.03.2013, while the assessee had given two loans aggregating to Rs. 1,41,62,786/- [Rs. 1,20,67,736/- to ITOCHU Corporation (+) Rs. 20,95,050/- to D-3 Textiles Pvt. Ltd.] without interest. The Ld. AO computed interest @ 12% on Rs. 1,41,62,786/- and made disallowance of Rs. 16,99,534/-, accordingly re-assessed total income at Rs. 2,44,40,330/-.
(v) Aggrieved, the assessee carried matter in first-appeal and raised grievances challenging the legality of re-opening as well as the merits of the disallowance. The Ld. CIT(A), however, rejected assessee’s submissions and did not grant any relief. Still aggrieved, the assessee has come in present appeal before us.
3. The assessee has raised following grounds:
1. “On the facts and in the circumstances of the case, as well as law on the subject, the notice issued u/s.148 of the Act is bad in law and without jurisdiction.”
2. “On the facts and in the circumstances of the case, as well as law on the subject, the Ld. ADDL/JCIT(A)- Nashik erred in confirming the disallowance of interest expense amounting to Rs. 16,99,534/- made by the Ld. Dy. Commissioner of Income Tax, Circle-1(1)(1), Surat without appreciating the facts of the case.”
4. Ground No. 1 challenges the legality of re-assessment proceeding done by Ld. AO whereas Ground No. 2 challenges the merits of the disallowance of Rs. 16,99,534/- made by Ld. AO. Since the underlying facts for both grounds are same, they are being adjudicated together.
5. The Ld. AR for assessee made following submissions:
(i) That, the original assessment was completed u/s 143(3) after scrutiny of assessee’s case, wherein the Ld. AO had examined the relevant aspects and made only an addition on account of interest income and an ad hoc disallowance out of certain expenses.
(ii) That, the Ld. AO reopened the assessment purportedly for making disallowance of estimated interest expenditure of Rs. 16,99,534/- @ 12% on the amounts aggregating to Rs. 1,41,62,786/- allegedly given as loans to (a) ITOCHU Corporation amounting to Rs. 1,20,67,736/- and (b) D-3 Textiles Pvt. Ltd. amounting to Rs. 20,95,050/-. The Ld. AR drew our attention to the reasons recorded by the Ld. AO available in Paper-Book.
(iii) That, a perusal of the reasons recorded by the Ld. AO clearly shows that the details of the aforesaid amounts were picked up from the Schedule to the Balance-Sheet of assessee, which was already available in the departmental record during the course of original scrutiny assessment. Thus, there was no new or tangible material available with the Ld. AO for reopening the assessment.
(iv) That, the very same issue was examined by the Ld. AO during the original scrutiny assessment and the assessee had made a specific submission vide letter dated 12.10.2015 [Page 100 of Paper-Book], as under:
“[8] The assessee is importing raw material from M/s. Itocho Corporation since last many years and as per the business terms, the assessee has to pay the amount in advance for purchase of raw material. Thus, the amount paid to M/s. Itocho Corporation is advance against purchase of raw material goods. The ledger copy of account of M/s. Itocho Corporation from the books of the assessee is submitted. (Refer Annexure – O) The assessee during the year has received remuneration of Rs.27,75,000/- from one of the companies viz. M/s. D3 Textile Pvt Ltd. The same is shown as receivable from the said company. The ledger copy of account of M/s. D3 Textile Pvt Ltd. from the books of the assessee is submitted. [Refer Annexure – P]”.
The Ld. AO accepted the aforesaid explanation and did not make any disallowance in respect thereof while completing the original assessment.
(v) That, in respect of ITOCHU Corporation, the amount represented an advance against purchase of raw material. The Ledger A/c for financial years 2012-13 and 2013-14 was furnished before the Ld. AO and is also available at Pages 68-75 of Paper-Book. The said Ledger A/c shows a debit entry of Rs. 1,20,91,805/- on 14.03.2013, resulting in the outstanding balance of Rs. 1,20,67,736/-. The corresponding purchases were made on 10.04.2013 and 11.04.2013, i.e. within one month. Therefore, the amount could not be regarded as an interest-free loan.
(vi) That, in respect of D-3 Textiles Pvt. Ltd., the amount represented remuneration receivable by assessee. The Ledger A/c available at Pages 85-86 of Paper-Book reflects only remuneration entries and contains no entry evidencing any loan given by assessee during the year. The opening balance was also on account of remuneration receivable.
(vii) That, the reopening was therefore based on the same material which was available during the original scrutiny assessment and amounted to a mere change of opinion, apart from being based on surmise and conjecture.
6. With the above submissions, the Ld. AR contended that the reopening itself was invalid and, in any event, the impugned disallowance was not sustainable on merits. He accordingly prayed for appropriate relief.
7. Per contra, Ld. DR for revenue relied upon the orders of lower authorities. He submitted that the material available on record showed that the assessee had incurred substantial interest expenditure on loans taken by him, whereas, on the other hand, the assessee had given the aforesaid amounts without charging interest. Therefore, according to the Ld. DR, the reopening as well as consequential disallowance made by the Ld. AO were justified. He accordingly prayed for upholding the orders of lower authorities.
8. We have heard rival submissions of both sides and perused the orders of lower authorities as well as the material on record to which our attention has been drawn. The controversy before us lies in the following two aspects:
(i) Whether the reopening of assessment u/s 147 is valid when the issue forming the basis thereof had already been examined during the original scrutiny assessment?
(ii) Whether the disallowance of Rs. 16,99,534/- made by the Ld. AO by computing interest @ 12% on the amounts standing against ITOCHU Corporation and D-3 Textiles Pvt. Ltd. is sustainable on merits?
9. We first take up the validity of reopening. It is not in dispute that the original assessment was framed u/s 143(3) after scrutiny and that the present reopening has been made for disallowing estimated interest on the two amounts, the particulars of which were available in the Schedule to the Balance-Sheet forming part of the record of original assessment.
10. More importantly, the material on record demonstrates that the very issue was examined during the original scrutiny assessment. The assessee had, vide letter dated 12.10.2015, specifically explained that the amount paid to ITOCHU Corporation represented an advance against purchase of raw material, whereas the amount shown as receivable from D-3 Textiles Pvt. Ltd. represented remuneration receivable. The assessee had also furnished the respective ledger accounts before the Ld. AO. Thereafter, the original assessment was completed u/s 143(3), without making any adverse inference or disallowance in respect of either of these amounts.
11. The Ld. CIT(A), while rejecting the assessee’s challenge to reopening, observed that the issue had “remained untouched” during the original assessment and, therefore, no opinion had been formed by the Ld. AO. However, the aforesaid observation does not accord with the material available on record. The assessee’s letter dated 12.10.2015, containing the specific explanation in respect of both amounts, has itself been reproduced by the Ld. CIT(A) in the impugned order. The corresponding ledger accounts were also stated to have been furnished before the Ld. AO.
12. Thus, the material placed before us clearly establishes that the basis for reopening was not any fresh or tangible material coming to the notice of the Ld. AO subsequent to completion of the original assessment. Rather, the Ld. AO proceeded on the basis of the very same material which was already available during the original scrutiny assessment and in respect of which the assessee had furnished a specific explanation supported by ledger accounts. Neither the assessment-order nor the order of Ld. CIT(A), nor the submissions of Ld. DR before us, point out any fresh material which came into the possession of Ld. AO subsequent to the original assessment.
13. In these circumstances, the reopening of an assessment completed u/s 143(3), on the very same material which was available and examined during the original assessment proceedings, amounts to a mere change of opinion. Such reopening cannot be sustained in law. We, therefore, hold that the notice u/s 148 dated 27.03.2018 and the consequent reassessment proceedings are invalid. Accordingly, the reassessment-order dated 28.11.2018 passed u/s 143(3) r.w.s. 147 is hereby quashed.
14. Since we have quashed the reassessment proceedings on the jurisdictional issue itself, the addition/disallowance made in consequence thereof would not survive. Nevertheless, since the parties have also addressed us on the merits and the relevant material is available on record, we deem it appropriate to record our findings thereon.
15. On merits, the Ld. AO proceeded on the premise that the assessee had given interest-free loans of Rs. 1,20,67,736/- to ITOCHU Corporation and Rs. 20,95,050/- to D-3 Textiles Pvt. Ltd. However, the material placed before us does not support such characterization.
16. As regards ITOCHU Corporation, the Ledger A/c for financial years 2012-13 and 2013-14, available at Pages 68-75 of Paper-Book, shows that the amount was advanced on 14.03.2013 against purchases of raw material, which were subsequently made on 10.04.2013 and 11.04.2013. Thus, the amount represented a business advance to a supplier and was followed by actual purchases within a short period of about one month. In such circumstances, the amount cannot be treated as an interest-free loan merely because it was outstanding as at the year-end.
17. As regards D-3 Textiles Pvt. Ltd., the Ledger A/c available at Pages 85-86 of Paper-Book, as demonstrated by the Ld. AR, reflects remuneration-related entries and does not contain any entry showing that a loan was advanced by the assessee to the said party during the year. The Ld. AR has further submitted that the opening balance also represented remuneration receivable. This factual explanation has not been controverted by the Revenue.
18. Thus, even on merits, the foundational premise adopted by the Ld. AO for making the impugned disallowance, namely, that the assessee had advanced interest-free loans to the aforesaid parties, is not borne out from the material on record. Consequently, the disallowance of Rs. 16,99,534/- is not sustainable on merits also.
19. In view of the foregoing discussion, we hold that the reopening of assessment is invalid and the reassessment-order passed by the Ld. AO u/s 143(3) r.w.s. 147 is liable to be quashed. The impugned disallowance of Rs. 16,99,534/- is also unsustainable on merits. Accordingly, the grounds raised by assessee are allowed.
20. Resultantly, this appeal of assessee is allowed.
Order pronounced in open court on 06/10/2026
