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.
