ORDER
1. The present appeal has been filed by the assessee against the order passed by the Office of the Commissioner of Income Tax, Appeal Addl./JCIT(A)-1, Bengaluru (hereinafter referred to as “Ld. CIT(A)”), dated 10.12.2025, under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. At the outset itself, ld. Counsel for the assessee pointed out that, the relevant grounds for adjudication were ground Nos.2 to 5, the remaining grounds are general in nature, or the issue raised therein being consequential to the passing of the assessment order, and therefore not to be adjudicated at this stage.Therefore only Ground No.2-5 is being adjudicated by me.
3. Taking up ground No.2 for hearing, the said ground reads as under:-
Ground2. Rs.6,56,987/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs.6,56,987/- made by the Ld. AO on account of disallowance of interest expenses covered u/s 40A(2)(b) the assesse, however no provisions has been invoked while making the disallowance, hence also the Id. AO grossly erred in making the disallowance, the Id. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the Id. AO and confirmed by the Id. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
4. The issue raised in theabove grounds relates to disallowance of Rs.6,56,987/- being interest expenses u/s 40A(2)(b) of the Act. The facts relating to the issue being that, the assessee was noted to have paid interest to a party M/s Power Technocrats ,covered under the definition of related person as per Section 40A(2)(b) of the Act, amounting to Rs.3,75,000/- at the rate of 15% on a loan of Rs.25 lakhs. The AO noted that, the assessee had made sales to the said party also during the year, and there was peak advance made to the firm on account of its sales transactions amounting to Rs.69,25,911/- on 24.03.2014.He therefore, held that instead of making interest payment of Rs.3,75,000/-, the assessee ought to have earned interest of Rs.2,81,987/-. Accordingly, he disallowed the interest paid by the assessee of Rs.3,75,000/-, and added interest which theassessee ought to have earned on the alleged advance made to M/s Power Technocrats of Rs.2,81,987/-, resulting in an addition of Rs.6,56,987/- being made to the income of the assessee. The said addition was confirmed by the Ld.CIT(A).
5. I have perused the assessment order, and the order of Ld. CIT(A) also. It is not denied that, the assessee had taken unsecured loan from M/s Power Technocrats of Rs.25 lakhs and paid interest thereon at the rate of 15% amounting to Rs.3,75,000/-. It is not the case of the AO that the interest paid was not in excess of the fair market value, or that it exceeded the interest, which would ordinarily have paid at arms length. His only case is that, the assessee had also entered into transaction of purchase and sales with the said party, resulting in peak debit/advance of Rs.69.25 lakhs, which ought to have nullified the unsecured loan taken from the party, and no interest, ought to have been paid by the assessee. That ,on the contrary the assessee ought to have charged interest from the said party. Therefore he has disallowed both the interest paid and has added back the interest which the assessee ought to have earned on the peak advance made to the said party.
6. As far as the, interest paid to the said parties is concerned, I do not find the basis with the AO to disallow the same to be in accordance with law. As per Section 40A(2)(b) of the Act, only if the expenses incurred by the assessee with a related party is found to be in excess of its fair market value, that the excess can be disallowed. This is not the case ofthe Revenue in the facts of the present case. They have not stated the interest paid by the assessee on the unsecured loan taken from M/s Power Technocrats of Rs.25 lakhs at the rate of 15% to be greater than the fair market value. Therefore, by applying provisions of Section 40A(2)(b) of the Act, the AO could not have disallowed the interest paid on the unsecured loan taken by the assessee from M/s Power Technocrats.
7. As far the charging of interest on the alleged advance given by the assessee to the said party, amounting to Rs.2,81,000/-, the AO could not have done the same by invoking the provisions of Section 40A(2)(b) of the Act, since Section 40A(2)(b) of the Act entitles only disallowance of expenses to be made and no adjustment to be made on account of income earned from related parties.
8. Further, the charging of interest on alleged interest from advance made by the assessee to M/s Power Technocrats by the AO is nothing but notional income added by the AO, which is not allowed as per law,since it is only the real income of the assessee, which is liable to be brought to tax.
9. The assessee has brought to my notice the fact that the loan account of the assessee from M/s Power Technocrats was separate from its current account, wherein all transactions of purchase and sale with the said entity, including transaction of money in the process were recorded. The two set of transactions are completely different, and the AO could not have held that merely because there was a debit balance in the current account, the unsecured loan transaction was neutralized by the same, and there was no need for the assessee to pay any interest on the said loan. The two transactions being completely different, the AO had no power to consolidate the same, and hold that the assessee in sum and substance was entitled to earn interest rather than pay interest on the transaction.
10. In view of the same, I hold that the addition made to the income of the assessee on account of interest to M/s Power Technocrats of Rs.6,56,987/- is not sustainable, and I direct deletion of the same.
11. Ground of appeal No.2 is accordingly,allowed.
12. Ground of appeal No.3 reads as under:-
Ground3. Rs.35,357/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs.35,357/- made by ld. AO on account of Disallowance of late payment of employee contribution towards of PF/ESI u/s 36(1)(va). the ld. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the ld. AO and confirmed by the ld. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
13. The issue raised in theabove ground relates to disallowance of employees contribution towards ESI and PF, on account of delayed payment of the same. The disallowance being made by invoking provisions of Section 36(1)(v)(a) of the Act. Ld. Counsel for the assessee fairly conceded before me, that the issue stood covered against the assessee by the decision of Hon’ble Apex Court in the case of Checkmate Services (P.) Ltd. v. CIT 448 ITR 518 (SC). In view of the same, I see no reason to disagree with the Ld. CIT(A) in confirming the disallowance of Rs.35,375/- u/s 36(1)(v)(a) of the Act.
14. Ground of Appeal No.3 is accordingly, dismissed.
15. Ground of appeal No.4 raised by the assessee reads as under:-
Ground4. Rs.1,00,000/- The Ld. CIT(A) has grosslyerred in law as well as on the facts of the case in confirming the addition of Rs. 1,00,000/- made by the Id. AO on account of disallowance of Software and services and maintenance expenses paid covered u/s 40A(2)(b). However no provisions has been invoked while making the disallowance, hence also the Id. AO grossly erred in 4 making the disallowance, the Id. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the ld. AO and confirmed by the Id. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
16. The issue relates to disallowance of software expenses of Rs.1 lakh, and the said claim was disallowed for the reason that the assessee had not proved the genuineness of the same nor the business exigency for incurring the said expenses.
17. The facts relating to the issue are that the assesseehad paid a sum of Rs.1 lakh to Sh. Kanishk Choradia proprietor of M/s Sysquare for Software Services and Maintenance. Sh. Kanishk Choradia is son of the Director, and a party covered u/s 40A(2)(b) of the Act. The AO noted, that assessee owned only one computer with WDV of Rs.274/- only. He found that the assessee failed to prove the genuineness of the expenses, since he failed to file any documentary evidences to show software services provided by the firm. The AO, further, noted if any software services was provided than the expenditure ought to be capitalized.
18. I have gone through the copy of the bill submitted by the assessee proving the purchase of software placed before me at paper book Page No.16 and I have found that the bill contains no details of the nature of software purchase, but merely, mentions software services and maintenance for a cost of Rs. 1 lakh. No other evidence has been filed by the assessee, nor I find, the assessee to have explained, the nature of software services availed by it, especially when the computer with the assessee was of miniscule value of Rs.274/- only. I agree with the lower authorities that the assessee has failed to discharge the onus to prove the genuineness of the expense so incurred. I therefore, see no reason to interfere in the order of Ld. CIT(A), disallowing the software expenses of Rs.1 lakh.
19. Ground of appeal No.4 is accordingly, disallowed.
20. Ground of appeal No.5 reads as under:-
Ground5. Rs. 1,11,224/- The Ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the addition of Rs. 1,11,224/- made by the ld. AO on account of disallowance of Brokerage paid covered u/s 40A(2)(b). however no provisions has been invoked while making the disallowance, hence also the ld. AO grossly erred in making the disallowance, the ld. AO and CIT(A) have also grossly erred in not considering the material and evidence available on record in their true perspective and sense. Hence the addition/disallowance so made by the ld. AO and confirmed by the ld. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence the same may kindly be deleted in full.
21. The assessee in the above ground has challenged the disallowance of brokerage claimed by it amounting to Rs.1,11,224/-. The said brokerage was paid to one Ms. Renu Tater, who is a related party covered u/s 40A(2)(b) of the Act. The assessee claimed to have paid commission on account of unsecuredloan takenthrough Ms. Renu Tater. The assessee was asked to file basis on which brokerage was paid, but the assessee failed to file any working and failed to prove genuineness of expenses paid. The AO noted that the brokerage paid was higher in percentage to loans taken, and accordingly he held the, brokerage paid to be non-genuine and disallowed the same.
22. Before me, the Ld. Counsel for the assessee furnished the copy of the details of unsecured loan taken through Ms. Renu Tater, placed before me at paper book page No.82 to 85 and copy of ledger account of Brokerage placed before me at paper book page No. 77 to 81.
23. I have perused the contents of the same, and I have find the findings of the AO of the brokerage paid being quite huge in relation to loans taken to be correct. I have noted from the details of unsecured loan allegedly facilitated by Ms. Renu Tater, that she facilitated loan of Rs.5 lakhs in the month of August on 12th August 2013, however, from the copy of the ledger account of commission paid to Ms. Renu Tater, I find that she was paid commission on 5 occasions in the month of August amounting to Rs.6,700/-, Rs.1,000/-, Rs.1,000/-, Rs.450/-, Rs.800/- and Rs.800/-, which adds up to more than Rs.11,000/-. Ld. Counsel for the assessee stated that, the rate of commission was 0.01% of the loan granted. And considering the same, the commission paid by the assessee on the loan taken in the month of August, was far in excess. Further, except for providing list of parties from whom loan had been procured by Ms. Renu Tater for the assessee, no other evidence has been filed by the assessee.
24. In view of the same, I see no reason to disagree with the Lower Authorities that the assessee has failed to prove the genuineness of the brokerage expenses incurred by it. Accordingly confirmation of the disallowance of the same by theLd.CIT(A) is upheld.
25. Ground of appeal No.5 is dismissed.
26. In effect, the appeal of the assessee is partly allowed.
