Income Tax Act | Interest On Loan Advanced To Company Not Deductible Against Salary Income: Karnataka High Court

The bench opined that unless expenditure is incurred in the course of the business or professional service, the assessee is not entitled to a deduction, merely due to it being incurred on the amount borrowed and advanced to the company.

Justices D K Singh and Rajesh Rai K stated that merely raising a loan by mortgaging the assessee's property and advancing it to the company itself would not be considered as the expenditure incurred for the purpose of business/profession, added the bench.

In this case, the assessee/appellant filed returns of income for the assessment years 2013-14, 2014-15 and 2015-16. The returns of income were selected for scrutiny.

The receipt of Rs. 66,00,000/- from M/s. Smile Electronics Limited, in which the assessee was a Director, was treated as a salary, rejecting the claim of a professional/technical service fee.

The Assessing Officer held that in the absence of details regarding the nature of professional/technical services rendered to the company, the receipt of the same cannot be considered as income from profession/business.

Insofar as the interest of Rs. 45,26,956/- claimed as expenditure against the receipt of Rs. 66,00,000/-, the Assessing Officer held that there is no nexus of incurring interest expenditure for rendering professional service/business to M/s. Smile Electronics Limited.

The Assessing Officer further held that unless expenditure is incurred in the course of the business or professional service, the assessee is not entitled to a deduction, merely due to it being incurred on the amount borrowed and advanced to M/s. Smile Electronics Limited.

Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) (CIT(A) which was rejected.

The assessee filed an appeal before the Appellate Tribunal. The Tribunal found that the amount of Rs. 66,00,000/- was in the nature of salary by the Company and in the absence of any services rendered, such receipt cannot be considered as income from profession/business.

The Tribunal further held that interest expenditure of Rs. 45,26,956/- is not an allowable expenditure in the absence of a nexus of such expenditure to the business/profession carried on by the assessee.

The revenue argued that since the assessee has failed to produce the details of the nature of professional and technical services rendered to the company and failed to prove that there was commercial expediency in advancing money to the company, and it was for the purpose of the business of the assessee, the Tribunal has rightly passed the impugned order.

The bench opined that even though the Assessing Officer granted sufficient opportunity to the assessee to place the details/materials and nature of professional and technical services rendered by the assessee to the company, the assessee has failed to produce the same. Without placing any document, the assessee cannot claim that he has rendered the services as a financial expert to the Company, and he has received the professional fee and not the salary.

The bench agreed with the Tribunal that the Appellate Tribunal has rightly held that in the absence of proof of services rendered to the company, the receipt cannot be considered as income from a profession/business.

The Appellate Tribunal has rightly held that receipt of Rs. 66,00,000/- is salaried income. The deduction of tax at source as professional charges is not the determinative factor for taxation under the heads of income, added the bench.

The bench agreed with the Appellate Tribunal that interest expenditure of Rs. 45,26,956/- has no nexus with the business carried on by the assessee to claim as expenditure against the business/professional income.

In view of the above, the bench dismissed the appeal.

Case Title: Sri Mukesh Gupta v. The Deputy Commissioner of Income Tax

Case Number: ITA NO 283 OF 2022

Citation No: 2025 LiveLaw (Kar) 384

Counsel for Appellant/Assessee: Chandrasekhar V

Counsel for Respondent/Department: Ravi Raj Y.V