RAJ KUMAR GOENKA,KOLKATA V. DCIT, CIRCLE 11(1), KOLKATA

ITA 815/KOL/2025

AI Insights

The case involves an appeal by Raj Kumar Goenka against the order of the Commissioner of Income Tax (Appeals) - NFAC, Delhi, which confirmed the addition of Rs. 89,61,886 to the assessee's income for the Assessment Year 2020-21. The addition was initially made by the AO on the grounds that the assessee had claimed excessive interest expenditure on loans. The Tribunal examined the details of the loans taken and given by the assessee, the interest rates applicable, and the financial statements provided. The Tribunal found that the AO had correctly disallowed the interest on loans given at lower rates compared to the rates at which the assessee had borrowed, but directed a re-evaluation of the disallowance concerning the interest-free funds.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 772436 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2020-2021
• Other Referred Cases: South Indian Bank Ltd. vs. CIT [2021] 10 SCC 153 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Set aside; Question of law; Salary income; Capital expenditure; Capital Gains; Principle of natural justice; Earning of tax free income; CHAPTER IV
• Section: 143(3); 142(1); 14A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘D’ BENCH, KOLKATA Before SHRI PRADIP KUMAR CHOUBEY, JUDICIAL MEMBER & SHRI RAKESH MISHRA, ACCOUNTANT MEMBER I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka Vs. DCIT, Circle-11(1), Kolkata (Appellant) (Respondent) PAN: AEAPG9489H Appearances: Assessee represented by : Ramesh Patodia, Adv. Department represented by : S.B. Chakraborty, Addl. CIT, Sr.DR. Date of concluding the hearing : 19-June-2025 Date of pronouncing the order : 26-August-2025 ORDER PER RAKESH MISHRA, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as Ld. 'CIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2020-21 dated 28.02.2025, which has been passed against the assessment order u/s 143(3) r.w.s. 144B of the Act, dated 06.09.2022. 2. The assessee is in appeal before the Tribunal raising the following grounds of appeal: “I. FOR THAT the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short, \"CIT(A)\") erred in dismissing the appeal filed by the appellant without giving any opportunity of hearing to the appellant and such purported action of the CIT(A) is arbitrary, unjustified, unwarranted and illegal. Printed from counselvise.com Page | 2 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. II. FOR THAT the purported action of the Learned CIT(A) in confirming the addition of Rs. 89,61,886/- on account of purported finding that the assessee had charged interest @4.79% on the loan given on the basis of method of calculation of average rate of interest which was absolutely arbitrary even though the appellant had given full details regarding the loans which were taken by the appellant and the loans which were given by the appellant including the rate of interest charged on such loans and as such the impugned order of the Learned CIT(A) is arbitrary, unjustified, unwarranted and illegal. III. FOR THAT the appellant having given loans out of his own funds available with him, the purported action of the Learned Assessment Unit as well as Learned CIT(A) in making addition of Rs. 89,61,886/- by disallowing the expenditure on account of purported interest expenditure is arbitrary, unjustified, unwarranted and illegal. IV. FOR THAT the Learned CIT(A) arbitrarily held that the doctrine of real income applies in a limited segment of cases where the realty of the situation prevents the accrual of real income and such observation of the Learned CIT(A) is without any basis and the purported action of the Learned CIT(A) in confirming the purported action of the Learned Assessment Unit on the basis of the aforesaid observation is arbitrary, unjustified, unwarranted and illegal. V. FOR THAT the Learned CIT(A) failed to decide the Ground No. 2 relating to error in charging interest under Section 234A of the Income Tax Act and such purported action of the Learned CIT(A) is arbitrary, unjustified, unwarranted and illegal. VI. FOR THAT the Learned Assessment Unit be directed to charge the interest under Section 234A of the Income Tax Act on the basis of extended due date of filing of return instead of original due date of filing of return as per the law. VII. FOR THAT in passing the impugned order the Learned CIT(A) has acted by an outright refusal to consider relevant matters, has misdirected itself in points of law, has taken into account irrelevant considerations and has failed to take into account relevant materials on record. The said impugned order is arbitrary to that core and perverse. VIII. FOR THAT the impugned order passed by Learned CIT(A) as well as the assessment order passed by the Assessment Unit are based on incorrect appreciation of the relevant statutory provisions and facts and materials on record and are contrary to law, untenable and unsustainable. The said Printed from counselvise.com Page | 3 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. orders have been passed ignoring the relevant materials on record and are thus non-reasoned and non-speaking and in violation of the principles of natural justice. The said orders are ex-facie illegal, invalid, untenable and unsustainable. IX. FOR THAT the impugned order passed by Learned CIT(A) as well as the assessment order passed by the Assessment Unit either on total non- application of mind or on the basis of closed and pre-determined mind, thereby rendering the said orders ex-facie contrary to law, untenable and unsustainable. X. FOR THAT the addition of Rs. 89,61,886/- under Section 57 of the Income Tax Act, 1961 is liable to be deleted. XI. FOR THAT the impugned order passed by Learned CIT(A) as well as the assessment order passed by the Assessment Unit are otherwise erroneous in law and/or on facts and are liable to be set aside. XII. FOR THAT the appellant craves indulgence to add, amend, alter and/or modify the Grounds of Appeal on or before the hearing of this appeal.” 3. Brief facts of the case are that the assessee filed the original return of income for AY 2020-21 showing total income of ₹1,18,92,300/-. The case was selected for scrutiny through Computer Assisted Scrutiny Selection (in short 'CASS') for the reasons of large deduction claimed u/s 57 of the Act. The Assessing Officer (hereinafter referred to as the Ld. 'AO') issued notice u/s 143(2) and 142(1) of the Act and also show cause notices and the assessee filed the response to the notices issued, at times partly and in response to the show cause notice dated 17.08.2022 due compliance was made. The assessee is an individual and had shown income from salary, capital gains and income from other sources. After examining the details filed, the Assessing Officer (hereinafter referred to as Ld. 'AO') made the addition of ₹89,61,886/- as the assessee had taken interest bearing loan of ₹15.27 Crore at the rate of interest of 10.67% and the same amount of loans were given at the rate of interest of 4.69% to the various parties as per the calculation done by the Ld. AO. It was seen that the assessee had taken loans at a Printed from counselvise.com Page | 4 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. higher rate of interest and given the loans at a lower rate of interest which any prudent person would not do and there was no rationale for taking the loans at high rate of interest for earning interest income and using the capital for providing loans. As per the provisions of the Act, the assessee was entitled to claim deduction of interest expenditure of ₹73,14,330/- u/s 57 of the Act and the excess interest expenditure of ₹89,61,886/- claimed by the assessee u/s 57 of the Act was disallowed and added to the total income of the assessee which was assessed at ₹2,08,54,186/-. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A) who has reproduced the assessment order and had given the finding as under: “7. I have carefully considered the facts of the case, contention of the appellant relied/ cases mentioned and order passed by the LAO against which appeal has been preferred. The brief facts of the case are that the appellant is an individual and had filed his ITR for AY 2020-21 on 22.12.2020 declaring total income of Rs.1,18,92,300/-The case of appellant was selected for scrutiny through CASS and notices u/s. 143(2) and thereafter u/s. 142(1) were issued and served upon the appellant from time to time as recorded in the body of assessment order. During the course of assessment proceedings, it was noted that the appellant has taken total loans of Rs. 82.37 Crore from various party out of which an amount of Rs. 15.27 Crore were the interest-bearing loans on which interest @ 10.67% was paid and the balance of Rs. 67.10 Crore were the interest free loan. Further it was noted that the assessee has given total loans of Rs. 108.96 Crores to various party out of which an amount of loans Rs. 46.34 Crores was given on interest @ 4.79%. The AO noted that the assessee has claimed deduction for interest expenditure of Rs. 1,62,76,216/- whereas as per the provisions of section 57 of the Act the assessee entitled to claim the expenses @ 4.79% on the interest-bearing fund Rs. 15.27 Crores inter-alia on which an interest income of Rs. 73.14 lakh was earned by the appellant. The appellant submitted that he has substantial own fund of Rs. 38.36 crore as on 31.03.2020 and the average cost of borrowing during FY 2019-20 was much lower than 12%. However, the AO not satisfied with the submission of the appellant completed the assessment by making an addition of Rs. 89,61,886/- on account of excess interest expenditure claimed by the Printed from counselvise.com Page | 5 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. appellant as expense on the interest-bearing loans. Aggrieved by the addition, the appellant has filed this appeal. 7.1 Ground No. 1 of the appeal is respect of addition of Rs. 89,61,886/- on account of excess interest expenditure claimed by the appellant as expense on the interest-bearing loans. At the outset, it is mentioned that the doctrine of real income applies in a limited segment of cases where the realty of the situation prevents the accrual of real income. The appellant following the mercantile system of accounting and has given interest-bearing loans to several parties by charging an overall average rate of interest @ 4.79%, whereas while claiming the expenditure the appellant has sought to claim the same @ 10.67% i.e. the rate of interest paid by him on the interest- bearing loans. From the facts narrated above, it is evident that the appellant has taken loans at an overall average rate of interest of @ 10.67% which have been used to earned interest income by giving out loans at a much lower overall average rate of interest @ 4.79%. Such transactions do not make any business sense wherein someone is obtaining interest-bearing funds at a higher rate and extending those funds to others at a much lower rate. Such transaction defies logic. Accordingly, in view of the facts discussed and position of law, I see no infirmity in the decision of AO and ground No. 1 of the appeal is dismissed.” 4. Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before this Tribunal. 5. Rival contentions were heard and the submissions made and the documents/paper book filed have been examined. During the course of appeal before us the assessee has filed a paper book running into 481 pages and has also filed a convenience paper book on the basis of which the oral submission was made. The Ld. AR drew our attention to para 7.1 of the order of the Ld. CIT(A) which has been reproduced above and has mentioned the working of average rate of interest by the Ld. AO which was done as mentioned in para 3. 6. It was submitted by the Ld. AR that the assessee had taken loans at the rate of 10.76% and the interest on the closing balance was worked Printed from counselvise.com Page | 6 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. out by the Ld. AO to 4.79%. The closing balance of interest-bearing loan given was ₹46.34 Crore and the total interest of ₹2.22 Crore was charged at the average rate of interest of 4.79% while according to the assessee the rate of interest varied from 5% to 15% on the total funds given by way of loans on interest. The figure of interest-free loans as on 31.03.2020 was ₹60.62 Crore as per page 440 of the paper book and interest-bearing loans was ₹46.34 Crore. The total funds received by the assessee by way of loans were a sum of ₹64.10 Crore as interest-free loans and another sum of ₹15.27 Crore as interest-bearing loans on which interest of ₹1.63 Crore was paid which was @ 12%. Since the assessee had given loans at the average rate of 4.79%, the Ld. AO allowed interest at the rate of 4.79% on the interest-bearing loans and disallowed a sum of ₹89,61,886/-. The assessee had capital of ₹38.36 Crore as at the end of the year according to the assessee, he had a sum of ₹31.05 Crore available for lending out of own capital fund as interest- free loan as per the following table: Particulars Amount (in ₹) Amount (in ₹) Capital 38.36 Taken 67.10 Total: 105.46 Given (-) 62.62 Available 42.84 Used 11.79 24.10 0.43 0.01 Total: 24.54 (-) 12.75 11.79 Available for lending 31.05 7. Our attention was drawn to pages 14 and 15 of the convenience paper book which give details of all the parties from whom loans were taken during the year and the list includes both interest-bearing as well Printed from counselvise.com Page | 7 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. as interest-free loans as also the interest debited. A perusal of the same shows that a sum of ₹67.10 Crore was taken from friends and relatives at NIL interest while another sum of ₹15.27 Crore was taken at the rate of 12%, most of which appeared to be from unrelated parties. Further, our attention was also drawn to page 16 of the convenience paper book in which a sum of ₹62,62,41,326/- being the balance of loans as at the end of the year is shown which was given to 34 parties, apparently related to the assessee, as non-interest-bearing loans while to 7 parties a sum of ₹46,33,53,338/-, 4 of which happened to be companies, was given at the rate of 5% while in case of only 2 entities loans were given at the rate of 15%. Thus, while the assessee had himself charged interest at the rate of 15% to unrelated parties, however, in the case of the entities which were related to the assessee, either no interest was charged or NIL interest was charged. It was submitted by the Ld. AR that in view of the decision of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT [2021] 10 SCC 153 (SC), where the funds come out of a mixed bag bearing interest free as well interest bearing funds, the right of appropriation is to the assessee and the copy of the order was also enclosed in which it has been held as under: “The proportionate disallowance of interest is not warranted under S. 14-A for investments made in tax-free bonds/securities which yield tax-free dividend and interest to assessee Banks in those situations where, interest- free own funds available with the assessee, exceeded their investments This is because in present case nexus has not been established between expenditure disallowed and earning of exempt income and the Revenue failed to substantiate their argument that assessee was required to maintain separate/accounts” 8. However, the case related to disallowance u/s 14A of the Act and the only question of law raised in this case was \"Whether proportionate disallowance of interest paid by the banks is called for under Section Printed from counselvise.com Page | 8 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. 14-A of the Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to assessee Banks when assessee had sufficient interest-free own funds which were more than the investments made\" and the Hon'ble Supreme Court has held as under: “Chapter IV of the 1961 Act provides for the heads of income for computation of total income. In Section 14, the various incomes are classified under salaries, income from house property, profit and gains of business or profession, capital gains and income from other sources. Section 14-A relates to expenditure incurred in relation to income which are not includable in total income and which are exempted from tax. No taxes are therefore levied on such exempted income. Section 14-A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the assessee concerned. (Para 5) The question to be answered is whether Section 14-A enables the Department to make disallowance on expenditure incurred for earning tax- free income in cases where assessees like the present appellants, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income. (Para 13) In a situation where the assessee has mixed fund (made up partly of interest-free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest-free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. (For 17) The disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest-free funds, under Section 14-A of the Act. In other words, if investments in securities are made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under Section 14-A cannot be made. The High Court herein endorsed the proportionate disallowance made by the assessing officer under Section 14-A of the Income Tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by the assessee. On this aspect we wanted to know about the Printed from counselvise.com Page | 9 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. law which obligates the assessee to maintain separate accounts. An assessee definitely has the obligation to provide full material disclosures at the time of filing of income tax return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. (Paragraphs 20 to 22) The aforesaid discussion and the cited judgments advise the Supreme Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14-A of the Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to assessee Banks in those situations where, interest-free own funds available with the assessee, exceeded their investments. With this conclusion, the view taken by the ITAT favouring the assessees, is affirmed. (For 31) The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that the assessee was required to maintain separate accounts. The learned counsel for the Revenue has failed to refer to any statutory provision which obligates the assessee to maintain separate accounts which might justify proportionate disallowance. (Para 32) 9. The assessee submitted that the right of appropriation is with the assessee. The Ld. DR countered this argument by stating that the decision related to a scheduled bank and the assessee is an individual and since the decision related to section 14A of the Act, it is not applicable to the facts of utilization of borrowed capital for the purpose of business of the assessee. The banking business is different in which the funds cannot be segregated and the Ld. AO had taken interest attributable to the outflow where income has been earned, weighed the arguments of the assessee and since there was no matching, therefore, the disallowance was made by the Ld. AO checking the loss of revenue. The Ld. AR rebutted by stating that the decision may be relating to a private bank but the principles relating to the use of mixed funds and the right of uses apply and the disallowance cannot be made. It was further stated that as regards the grounds related to charging of interest Printed from counselvise.com Page | 10 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. u/s 234A of the Act, the due date was extended and the interest should not be charged up to the due date but can be charged after the due date. 10. We have considered the submissions made. The assessee had advanced interest free as well as interest-bearing loans. He also had interest-free as well as interest-bearing loans which were taken from several parties and on which interest was debited. The direction had been claimed under section 57 of the Act and as per the provision of clause (iii) to section 57 of the Act, any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is allowed. However, the fact remains that the assessee had received loans from individuals and others and had also advanced loans to individuals and others and only the expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income is allowed, thereby implying that in case no income is earned, the expenditure, being interest in this case, cannot be allowed. This is not a case where common funds were available as the loans taken and the loans given are identifiable and even the dates of receipt of loans and issuance of loans can be ascertained. The assessee did not file any cash flow statement so as to explain whether all the loans were given out of interest-free funds or were also out of interest-bearing funds. In case the assessee had given loans out of interest-free funds, there was no occasion for the Ld. AO to disallow the interest relating to such advances having no interest liability. However, where the loans were given out of the borrowed funds, which prima facie appears to be the case as in the case of 4 entities which appeared to be investor companies and prima facie relatable to the assessee, lower interest of Printed from counselvise.com Page | 11 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. 5% interest has been charged. The assessee has given details of only the loans at the end of the year but the details of loans squared off has not been filed, some of which may also be interest-free loans. Thus, out of the interest-bearing advances in respect of the following 5 entities, there was no justification to charge interest at the rate of 5% when the assessee had taken loans at the rate of 12% from (i) TMT Viniyogan Ltd., (ii) Midkot Intestments Pvt. Ltd., (iii) Bhanu Vyapaar Pvt. Ltd., (iv) Suraj Viniyog Pvt. Ltd. and (v) Raviraj Viniyog Pvt. Ltd. Since the assessee had borrowed funds at the rate of 12% and given interest-bearing loans at the rate of 5%, therefore, disallowance of 7% of the interest on this amount was liable to be worked out and such disallowance should be worked out by the Ld. AO and the same is upheld. 11. As regards the other interest-free funds, the assessee had taken a sum of ₹67.10 Crore as interest-free funds and had advanced a sum of ₹62.62 Crore as interest-free funds. Prima facie, the interest-free funds advanced match the interest-free funds received; however, the assessee is also required to furnish the details of loans squared off during the year and the interest in respect of loans received as well as loans given if any and the Ld. AO is required to work out the disallowance only in respect of interest bearing funds received which were advanced as interest-free loans. The assessee is also directed to give a cash flow statement of the interest-free loans received which have been advanced as interest-free advances. Prima facie since loans were received from relatives and were also advanced to some of the related parties, there was no reason why the assessee should have routed the interest-free funds through its books of account to advance to the set of related parties. The assessee shall furnish the required details and the Ld. AO Printed from counselvise.com Page | 12 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. shall recompute the disallowance in respect of the balance amount and only to the extent of interest-bearing funds/loans received which were advanced as interest-free advances. In view of the above, the Ground nos. II, III, IV and X raised by the assessee are partly allowed. 12. As regards Ground Nos. V and VI, the Ld. AO is directed to examine the extended due date of filing the return of income and charge the interest from the due date so extended only. Hence these Grounds are also partly allowed. 13. The other grounds of appeal being general in nature do not require any separate adjudication. 14. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open Court on 26th August, 2025. Sd/- Sd/- [Pradip Kumar Choubey] [Rakesh Mishra] Judicial Member Accountant Member Dated: 26.08.2025 Bidhan (Sr. P.S.) Printed from counselvise.com Page | 13 I.T.A. No.: 815/KOL/2025 Assessment Year: 2020-21 Raj Kumar Goenka. Copy of the order forwarded to: 1. Raj Kumar Goenka, EKYA, 1, Queens Park, Kolkata, West Bengal, 700019. 2. Commissioner of Income Tax (Appeals), Kolkata. 3. CIT(A)-NFAC, Delhi. 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. 6. Guard File. //True copy // By order Assistant Registrar ITAT, Kolkata Benches Kolkata Printed from counselvise.com "