No Nexus with Employment: Karnataka HC Rules Interest on Loan Advanced to Company Not Deductible From Salary Income [Read Order]
Karnataka HC held that interest paid on a loan borrowed and advanced to a company cannot be deducted against salary income where the assessee failed to prove any business nexus or professional services rendered.
The Karnataka High Court ruled that interest paid on a loan borrowed by an assessee and advanced to a company in which he was a Director cannot be deducted against salary income.
Sri Mukesh Gupta, the appellant, had received Rs. 66,00,000 from Smile Electronics Limited. He claimed the amount as professional fees and further claimed deduction of Rs. 45,26,956 towards interest on a loan he had borrowed and advanced to the company.
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During the scrutiny, the Assessing Officer treated the receipt as salary after observing that the assessee had not produced any details showing the nature of professional or technical services rendered. The Officer also held that there was no nexus between the interest expenditure and any business or professional activity of the assessee. Both claims were disallowed.
On appeal, the Commissioner of Income Tax(Appeals) upheld the assessment order. Aggrieved, the assessee approached the Income Tax Appellate Tribunal (ITAT). The tribunal held that the assessee had not produced any document showing that he had performed professional services for the company.
It also held that the interest expenditure had no connection with the assessee’s business and could not be allowed as a deduction. The assessee then filed an appeal before the High Court under Section 260-A of the Income Tax Act.
The appellant’s counsel argued that proceedings under Section 206 treated the amount as professional charges and that service tax had been paid under the reverse charge mechanism, which showed that the payment was not salary.
The counsel argued that there was no material to show that the assessee was an employee and submitted that helping the company by advancing funds amounted to commercial expediency. They also argued that even if the payment was treated as salary, the interest should be allowed as a loss or as income from another source.
The revenue counsel supported the findings of the tribunal. They argued that the assessee did not produce any details of the nature of services rendered to the company and did not prove any commercial expediency in borrowing funds and advancing them to the company. He submitted that the Tribunal was justified in treating the amount as salary and in disallowing the interest deduction.
The bench comprising Justice D. K. Singh and Justice Rajesh Rai K examined the record. The Court observed that the assessee had been given sufficient opportunity before the Assessing Officer to produce documents showing the nature of professional or technical services, but he failed to do so. The court pointed out that without such evidence, the assessee’s claim that the amount was professional income could not be accepted.
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The court explained that TDS deduction under Section 194J or service tax treatment could not decide the character of income in the assessee’s hands unless supported by proof of services.
The court further observed that the assessee had not shown any nexus between the borrowed funds and any business carried on by him. It pointed out that merely borrowing money and advancing it to the company did not establish commercial expediency. The court explained that interest expenditure could be allowed only when it was incurred wholly and exclusively for the purpose of business, which was not proved in this case.
The court held that the tribunal had taken a correct view in treating the receipt as salary and in disallowing the interest deduction. All substantial questions of law were answered against the assessee, and the appeal was dismissed.
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