ITAT Mumbai Clarifies Law on Unsecured Loans, Interest Disallowance and Section 14A in ACIT Vs Jayant Shamji Chheda

1. Overview of the Decision

The Mumbai Bench of the Income Tax Appellate Tribunal, in ACIT Vs Jayant Shamji Chheda (ITAT Mumbai), delivered a consolidated order covering Assessment Years (AY) 2017-18, 2018-19 and 2021-22. The appeals arose from three separate orders of the CIT(A)-50, Mumbai dated 08.05.2026, passed under Section 250 of the Income Tax Act 1961.

The matters involved:

  • Additions under Section 68 on account of unsecured loans
  • Disallowances of interest under Section 36(1)(iii)
  • Disallowances of borrowing-related expenses such as brokerage, commission and loan-processing charges
  • Disallowances under Section 14A read with Rule 8D
  • Treatment of interest on a bank loan used for repayment of a relative’s loan

The Tribunal largely upheld the relief granted by the CIT(A) on loan and interest-related issues, while directing a limited remand on the Section 14A computations.

2. Brief Facts and Procedural History

The assessee is an individual, a director in Prince Pipes & Fittings Pvt. Ltd., earning income from:

  • Salary
  • House property
  • Business/profession
  • Capital gains
  • Other sources

Returns for the relevant years were picked up for scrutiny under CASS, and assessments were completed under Section 143(3) with multiple additions and disallowances.

Key assessment and appellate outcomes (as per the Tribunal’s narration) were:

  • AY 2017-18

    • Return (revised) declaring income of Rs.1,41,50,690/-
    • Assessment under Section 143(3): total income determined at Rs.7,70,13,900/-
    • CIT(A) partly allowed the appeal

  • AY 2018-19

    • Return filed declaring income of Rs.1,56,77,510/-
    • Assessment under Section 143(3): total income determined at Rs.8,09,98,050/-
    • CIT(A) partly allowed the appeal

  • AY 2021-22

    • Return filed declaring income of Rs.6,32,47,970/-
    • Assessment under Section 143(3): total income determined at Rs.6,90,70,730/-
    • CIT(A) dismissed the assessee’s appeal

Before the Tribunal:

  • Revenue filed appeals for AYs 2017-18 and 2018-19.
  • The assessee filed an appeal for AY 2021-22.

The Tribunal decided all three appeals through a common order, while examining each issue year-wise.

3. AY 2017–18: Addition of Rs.1,30,00,000/- under Section 68

3.1 Background of the Disputed Loans

In this year, the assessee had unsecured loans totalling Rs.68,11,00,000/- from 38 lenders. The Assessing Officer (AO) issued notices under Section 133(6) to all of them.

  • 36 creditors responded
  • 2 creditors did not respond within the assessment stage:
    • Shri Jayesh K. Haria – loan of Rs.50,00,000/-, interest paid Rs.1,47,500/-
    • Shri Bharat T. Chheda – loan of Rs.80,00,000/-, interest paid Rs.5,89,666/-

On this basis, the AO treated the combined loans of Rs.1,30,00,000/- as unexplained cash credits under Section 68.

3.2 Findings of CIT(A)

The CIT(A) examined in detail:

  • Loan confirmations
  • Ledger accounts
  • Bank statements of both lenders
  • Return acknowledgement of Shri Jayesh K. Haria

Additional point: In the case of Shri Bharat T. Chheda, his response to Section 133(6) along with supporting documentation reached the department only after the assessment order had been passed.

The CIT(A) also noted:

  • Both loans were received and later repaid through normal banking channels.
  • No material indicated any suspicious cash deposit immediately prior to giving the loans.

On this basis, the CIT(A) concluded that the assessee had satisfactorily established:

  • Identity of the lenders
  • Capacity (creditworthiness) of the lenders
  • Genuineness of the loan transactions

The addition of Rs.1,30,00,000/- under Section 68 was deleted.

3.3 Tribunal’s Analysis and Decision

The Tribunal reiterated the settled principle under Section 68:

  • The primary onus is on the assessee to explain the nature and source of credits.
  • For loans, this generally means proving identity, creditworthiness and genuineness.

The Tribunal noted:

  • Confirmations, ledger accounts and bank statements of both lenders were on record.
  • Loans were routed entirely through banking channels.
  • Repayments were also made through bank accounts.
  • The AO had not highlighted any defects in the documents placed on record.
  • There was no material to show that the assessee’s own unaccounted funds were introduced in the guise of loans.
  • Importantly, the AO had not disallowed the interest payments of Rs.1,47,500/- and Rs.5,89,666/- to these lenders.

The Tribunal emphasised that:

Mere non-response or delayed response to a Section 133(6) notice, in the face of complete and consistent documentary evidence, cannot by itself justify an addition under Section 68.

The Tribunal held that the CIT(A) had examined each creditor-specific record and returned categorical findings in favour of the assessee, which remained uncontroverted. Accordingly, it upheld the deletion of the addition of Rs.1,30,00,000/- and rejected Revenue’s Ground No. 1.

4. AY 2017–18: Disallowance of Interest under Section 36(1)(iii) – Rs.4,58,53,641/-

4.1 AO’s Approach

The AO observed that the assessee had interest-bearing borrowings of Rs.128,42,07,342/-. According to the AO:

  • Rs.90,20,93,640/- had been utilised for providing interest-bearing loans.
  • Balance funds were alleged to have been diverted for:
    • Interest-free loans
    • Capital in partnership firms (not all yielding interest)
    • Personal investments / non-business assets

The AO claimed that:

  • No interest income was earned on advances of Rs.13.78 crore.
  • Only two out of six partnership firms generated interest receipts.
  • Funds aggregating Rs.13.26 crore were not proved to be used for business purposes.

From this, the AO inferred that interest-bearing funds of Rs.38,21,13,672/- were applied for non-business/interest-free purposes and applied a rate of 12%, disallowing Rs.4,58,53,641/- under Section 36(1)(iii).

4.2 CIT(A)’s Fund Position Analysis

The CIT(A) undertook a detailed source-and-application-of-funds exercise based on the balance sheet and schedules, and found:

  • Interest-free funds available:

    • Capital: Rs.16,71,73,835/-
    • Interest-free unsecured loans: Rs.1,10,00,000/-
    • Total interest-free funds: Rs.17,81,73,835/-

  • Funds applied for interest-free loans, equity investments, personal and other non-business assets:

    • Rs.17,03,36,594/-

Thus, interest-free funds exceeded this disputed deployment by Rs.78,37,241/-.

Further, the CIT(A) noted that:

  • Funds applied towards business assets and interest-bearing loans amounted to Rs.1,29,93,36,730/-, which itself exceeded the interest-bearing borrowings of Rs.128,42,07,342/- considered by the AO.

On these facts, and relying on CIT (LTU) v. Reliance Industries Ltd., [2019] 410 ITR 466 (Supreme Court), the CIT(A) held that: