Facilitator in Loan Arrangement Cannot Be Taxed on Gross Interest — Only TDS Component Taxable: ITAT Bangalore

Case Reference

Bharath Bail Vs DCIT (ITAT Bangalore)
Assessment Year: 2010-11
Order Date: 17th April, 2026

Background and Key Facts

The assessee in this case was an individual serving as the Managing Director of Dustven Private Limited. The company required external financing, and the assessee stepped in to facilitate borrowings aggregating to ₹1.77 crore from multiple third-party lenders. Crucially, the funds were never routed through the assessee's hands — the lenders credited the borrowed amounts directly into the company's bank account, and similarly, the company discharged its interest obligations directly to those lenders, bypassing the assessee entirely.

Despite this pass-through arrangement, the company deducted TDS on the interest amount of ₹20,49,500/- in the assessee's name, resulting in a TDS deduction of ₹2,04,950/-. Armed with the TDS certificate issued in his name, the assessee reported the gross interest of ₹20,49,500/- as income under the head "Income from Other Sources" in his return, and simultaneously claimed an equivalent deduction of ₹20,49,500/- under Section 57 of the Income Tax Act, 1961, on the ground that he had paid out the same amount as interest to the underlying lenders.

Assessment and First Round of Litigation

Assessing Officer's Action

The Assessing Officer (AO) scrutinised the claim and found it unconvincing. The AO observed that the assessee had failed to produce any substantive proof demonstrating that he had actually paid interest of ₹20,49,500/- to the lenders from whom funds were arranged. In the absence of such evidence, the AO, vide assessment order dated 27-02-2013, disallowed the deduction claimed under Section 57 and added the full amount of ₹20,49,500/- to the assessee's total income.

CIT(A) — First Round

The assessee challenged the disallowance before the Commissioner of Income Tax (Appeals), who upheld the AO's findings and confirmed the addition in its entirety.

ITAT — First Round (ITA No. 1198/Bang/2018)

Not satisfied with the CIT(A)'s order, the assessee approached the Tribunal. In its order dated 21-02-2018, the ITAT did not settle the matter conclusively but instead set aside the CIT(A)'s order and restored the issue to the AO for fresh examination. The Tribunal made the following critical observations:

"If the assessee received the TDS certificate on deduction on interest payment and claimed the benefit of the same, then he should have offered the corresponding income accrued on account of deduction of TDS. If the income is accrued to the assessee, the onus is upon the assessee to establish as to how he has made the payment to the lender."

The Tribunal expressed its inability to reconcile the assessee's claim of being a mere facilitator with the fact that TDS was deducted and the credit was claimed in his own name. It directed the AO to examine the mode of payment to lenders and seek documentary evidence.

Set-Aside Proceedings — Second Round

Fresh Examination by the AO

Acting on the Tribunal's directions, the AO issued a notice under Section 142(1) of the Income Tax Act, 1961, requiring the assessee to explain: