Oswal Transformers Private Limited Vs ITO (ITAT Jaipur)
The Income Tax Appellate Tribunal (ITAT) heard the assessee’s appeal against the order dated 10.12.2025 passed by the Commissioner of Income Tax (Appeals)/Addl. JCIT(A)-1, Bengaluru under Section 250 of the Income-tax Act, 1961. At the outset, the assessee confined its arguments to Grounds Nos. 2 to 5, treating the remaining grounds as general or consequential.
The first issue concerned the disallowance of Rs.6,56,987 relating to interest transactions with M/s. Power Technocrats, a related party covered under Section 40A(2)(b). The Assessing Officer noted that the assessee had borrowed Rs.25 lakh from the related party and paid interest at 15%, amounting to Rs.3,75,000. The Assessing Officer further observed that the assessee had business transactions with the same party and that the peak debit balance arising from sales transactions was Rs.69,25,911. On this basis, the Assessing Officer held that the assessee ought to have earned interest instead of paying interest, disallowed the interest expenditure of Rs.3,75,000, and further added Rs.2,81,987 as interest which, according to the Assessing Officer, should have been earned, resulting in a total addition of Rs.6,56,987. The CIT(A) confirmed the addition.
The Tribunal found that the Assessing Officer had not held that the interest paid exceeded the fair market value or the arm’s length rate, which is the basis contemplated under Section 40A(2)(b). It held that the provision permits only disallowance of excessive expenditure and does not authorise adjustment of notional income from related parties. The Tribunal further observed that the addition of interest that the assessee “ought to have earned” represented notional income, whereas only real income is liable to tax. It also accepted the assessee’s explanation that the unsecured loan account and the current account recording purchase and sale transactions were separate and distinct, and that the Assessing Officer had no basis to consolidate them. The Tribunal therefore held that the addition of Rs.6,56,987 was unsustainable and directed its deletion.
The second issue related to the disallowance of Rs.35,357 towards delayed payment of employees’ contribution to PF and ESI under Section 36(1)(va). During the hearing, the assessee fairly conceded that the issue stood covered against it by the Supreme Court judgment in Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax-I. Following the said decision, the Tribunal upheld the disallowance and dismissed this ground of appeal.
The third issue concerned the disallowance of Rs.1,00,000 towards software services and maintenance expenses paid to M/s. Sysquare, a proprietary concern of the son of the company’s director and therefore a related party under Section 40A(2)(b). The Assessing Officer had found that the assessee owned only one computer with a written down value of Rs.274, and that the invoice merely described the payment as “software services and maintenance” without specifying the nature of the services. The Tribunal examined the invoice and noted that no supporting evidence had been produced to establish either the nature of the software services or the business necessity for incurring the expenditure. Holding that the assessee had failed to discharge the burden of proving the genuineness of the expenditure, the Tribunal upheld the disallowance of Rs.1,00,000.
The final issue related to the disallowance of Rs.1,11,224 towards brokerage paid to Ms. Renu Tater, a related party under Section 40A(2)(b), for arranging unsecured loans. The Assessing Officer had observed that the brokerage paid was disproportionately high in relation to the loans procured and that the assessee had failed to furnish the basis for the payment or establish its genuineness. Before the Tribunal, the assessee produced details of unsecured loans and the brokerage ledger. The Tribunal found that the brokerage paid during August exceeded what would be expected based on the assessee’s stated commission rate of 0.01% of the loans arranged. Apart from furnishing a list of parties from whom loans had allegedly been procured, no further supporting evidence was produced. The Tribunal therefore agreed with the lower authorities that the assessee had failed to establish the genuineness of the brokerage expenditure and upheld the disallowance of Rs.1,11,224.
Accordingly, the Tribunal deleted the addition of Rs.6,56,987 relating to interest under Section 40A(2)(b), upheld the disallowances relating to delayed PF/ESI contribution, software expenses and brokerage, and partly allowed the appeal.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
The present appeal has been filed by the assessee against the order passed by the Office of the Commissioner of Income Tax, Appeal Addl./JCIT(A)-1, Bengaluru (hereinafter referred to as “Ld. CIT(A)”), dated 10.12.2025, under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. At the outset itself, ld. Counsel for the assessee pointed out that, the relevant grounds for adjudication were ground Nos.2 to 5, the remaining grounds are general in nature, or the issue raised therein being consequential to the passing of the assessment order, and therefore not to be adjudicated at this stage.Therefore only Ground No.2-5 is being adjudicated by me.
3. Taking up ground No.2 for hearing, the said ground reads as under:-
Ground2. Rs.6,56,987/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs.6,56,987/- made by the Ld. AO on account of disallowance of interest expenses covered u/s 40A(2)(b) the assesse, however no provisions has been invoked while making the disallowance, hence also the Id. AO grossly erred in making the disallowance, the Id. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the Id. AO and confirmed by the Id. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
4. The issue raised in the above grounds relates to disallowance of Rs.6,56,987/- being interest expenses u/s 40A(2)(b) of the Act. The facts relating to the issue being that, the assessee was noted to have paid interest to a party M/s Power Technocrats ,covered under the definition of related person as per Section 40A(2)(b) of the Act, amounting to Rs.3,75,000/- at the rate of 15% on a loan of Rs.25 lakhs. The AO noted that, the assessee had made sales to the said party also during the year, and there was peak advance made to the firm on account of its sales transactions amounting to Rs.69,25,911/- on 24.03.2014.He therefore, held that instead of making interest payment of Rs.3,75,000/-, the assessee ought to have earned interest of Rs.2,81,987/-. Accordingly, he disallowed the interest paid by the assessee of Rs.3,75,000/-, and added interest which the assessee ought to have earned on the alleged advance made to M/s Power Technocrats of Rs.2,81,987/-, resulting in an addition of Rs.6,56,987/- being made to the income of the assessee. The said addition was confirmed by the Ld.CIT(A).
5. I have perused the assessment order, and the order of Ld. CIT(A) also. It is not denied that, the assessee had taken unsecured loan from M/s Power Technocrats of Rs.25 lakhs and paid interest thereon at the rate of 15% amounting to Rs.3,75,000/-. It is not the case of the AO that the interest paid was not in excess of the fair market value, or that it exceeded the interest, which would ordinarily have paid at arms length. His only case is that, the assessee had also entered into transaction of purchase and sales with the said party, resulting in peak debit/advance of Rs.69.25 lakhs, which ought to have nullified the unsecured loan taken from the party, and no interest, ought to have been paid by the assessee. That ,on the contrary the assessee ought to have charged interest from the said party. Therefore he has disallowed both the interest paid and has added back the interest which the assessee ought to have earned on the peak advance made to the said party.
6. As far as the, interest paid to the said parties is concerned, I do not find the basis with the AO to disallow the same to be in accordance with law. As per Section 40A(2)(b) of the Act, only if the expenses incurred by the assessee with a related party is found to be in excess of its fair market value, that the excess can be disallowed. This is not the case of the Revenue in the facts of the present case. They have not stated the interest paid by the assessee on the unsecured loan taken from M/s Power Technocrats of Rs.25 lakhs at the rate of 15% to be greater than the fair market value. Therefore, by applying provisions of Section 40A(2)(b) of the Act, the AO could not have disallowed the interest paid on the unsecured loan taken by the assessee from M/s Power Technocrats.
7. As far the charging of interest on the alleged advance given by the assessee to the said party, amounting to Rs.2,81,000/-, the AO could not have done the same by invoking the provisions of Section 40A(2)(b) of the Act, since Section 40A(2)(b) of the Act entitles only disallowance of expenses to be made and no adjustment to be made on account of income earned from related parties.
8. Further, the charging of interest on alleged interest from advance made by the assessee to M/s Power Technocrats by the AO is nothing but notional income added by the AO, which is not allowed as per law, since it is only the real income of the assessee, which is liable to be brought to tax.
9. The assessee has brought to my notice the fact that the loan account of the assessee from M/s Power Technocrats was separate from its current account, wherein all transactions of purchase and sale with the said entity, including transaction of money in the process were recorded. The two set of transactions are completely different, and the AO could not have held that merely because there was a debit balance in the current account, the unsecured loan transaction was neutralized by the same, and there was no need for the assessee to pay any interest on the said loan. The two transactions being completely different, the AO had no power to consolidate the same, and hold that the assessee in sum and substance was entitled to earn interest rather than pay interest on the transaction.
10. In view of the same, I hold that the addition made to the income of the assessee on account of interest to M/s Power Technocrats of Rs.6,56,987/- is not sustainable, and I direct deletion of the same.
11. Ground of appeal No.2 is accordingly, allowed.
12. Ground of appeal No.3 reads as under:-
Ground3. Rs.35,357/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs.35,357/- made by ld. AO on account of Disallowance of late payment of employee contribution towards of PF/ESI u/s 36(1)(va). the ld. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the ld. AO and confirmed by the ld. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
13. The issue raised in the above ground relates to disallowance of employees contribution towards ESI and PF, on account of delayed payment of the same. The disallowance being made by invoking provisions of Section 36(1)(v)(a) of the Act. Ld. Counsel for the assessee fairly conceded before me, that the issue stood covered against the assessee by the decision of Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax-I reported in [2022] 143 com 178 (SC). In view of the same, I see no reason to disagree with the Ld. CIT(A) in confirming the disallowance of Rs.35,375/- u/s 36(1)(v)(a) of the Act.
14. Ground of Appeal No.3 is accordingly, dismissed.
15. Ground of appeal No.4 raised by the assessee reads as under:-
Ground4. Rs.1,00,000/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs. 1,00,000/- made by the Id. AO on account of disallowance of Software and services and maintenance expenses paid covered u/s 40A(2)(b). However no provisions has been invoked while making the disallowance, hence also the Id. AO grossly erred in 4 making the disallowance, the Id. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the ld. AO and confirmed by the Id. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
16. The issue relates to disallowance of software expenses of Rs.1 lakh, and the said claim was disallowed for the reason that the assessee had not proved the genuineness of the same nor the business exigency for incurring the said expenses.
17. The facts relating to the issue are that the assessee had paid a sum of Rs.1 lakh to Sh. Kanishk Choradia proprietor of M/s Sysquare for Software Services and Maintenance. Sh. Kanishk Choradia is son of the Director, and a party covered u/s 40A(2)(b) of the Act. The AO noted, that assessee owned only one computer with WDV of Rs.274/- only. He found that the assessee failed to prove the genuineness of the expenses, since he failed to file any documentary evidences to show software services provided by the firm. The AO, further, noted if any software services was provided than the expenditure ought to be capitalized.
18. I have gone through the copy of the bill submitted by the assessee proving the purchase of software placed before me at paper book Page No.16 and I have found that the bill contains no details of the nature of software purchase, but merely, mentions software services and maintenance for a cost of Rs.1 lakh. No other evidence has been filed by the assessee, nor I find, the assessee to have explained, the nature of software services availed by it, especially when the computer with the assessee was of miniscule value of Rs.274/- only. I agree with the lower authorities that the assessee has failed to discharge the onus to prove the genuineness of the expense so incurred. I therefore, see no reason to interfere in the order of Ld. CIT(A), disallowing the software expenses of Rs.1 lakh.
19. Ground of appeal No.4 is accordingly, disallowed.
20. Ground of appeal No.5 reads as under:-
Ground5. Rs. 1,11,224/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs. 1,11,224/- made by the ld. AO on account of disallowance of Brokerage paid covered u/s 40A(2)(b). however no provisions has been invoked while making the disallowance, hence also the ld. AO grossly erred in making the disallowance, the ld. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the ld. AO and confirmed by the ld. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
21. The assessee in the above ground has challenged the disallowance of brokerage claimed by it amounting to Rs.1,11,224/-. The said brokerage was paid to one Ms. Renu Tater, who is a related party covered u/s 40A(2)(b) of the Act. The assessee claimed to have paid commission on account of unsecuredloan takenthrough Ms. Renu Tater. The assessee was asked to file basis on which brokerage was paid, but the assessee failed to file any working and failed to prove genuineness of expenses paid. The AO noted that the brokerage paid was higher in percentage to loans taken, and accordingly he held the, brokerage paid to be non-genuine and disallowed the same.
22. Before me, the Ld. Counsel for the assessee furnished the copy of the details of unsecured loan taken through Ms. Renu Tater, placed before me at paper book page No.82 to 85 and copy of ledger account of Brokerage placed before me at paper book page No. 77 to 81.
23. I have perused the contents of the same, and I have find the findings of the AO of the brokerage paid being quite huge in relation to loans taken to be correct. I have noted from the details of unsecured loan allegedly facilitated by Ms. Renu Tater, that she facilitated loan of Rs.5 lakhs in the month of August on 12th August 2013, however, from the copy of the ledger account of commission paid to Ms. Renu Tater, I find that she was paid commission on 5 occasions in the month of August amounting to Rs.6,700/-, Rs.1,000/-, Rs.1,000/-, Rs.450/-, Rs.800/- and Rs.800/-, which adds up to more than Rs.11,000/-. Ld. Counsel for the assessee stated that, the rate of commission was 0.01% of the loan granted. And considering the same, the commission paid by the assessee on the loan taken in the month of August, was far in excess. Further, except for providing list of parties from whom loan had been procured by Ms. Renu Tater for the assessee, no other evidence has been filed by the assessee.
24. In view of the same, I see no reason to disagree with the Lower Authorities that the assessee has failed to prove the genuineness of the brokerage expenses incurred by it. Accordingly confirmation of the disallowance of the same by the Ld. CIT(A) is upheld.
25. Ground of appeal No.5 is dismissed.
26. In effect, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 30.06.2026.
