Isabella Mariam

The High Court of Karnataka Division Bench of Justice D K Singh and Justice Rajesh Rai K held that the amounts received by the assessee from the company where he served as a director were taxable as salary and not as professional fees, and that the interest paid on a loan secured by mortgaging his property could not be treated as a business-related expense. The Court noted that advancing borrowed funds to the company did not transform the borrowing into a business expenditure and that such interest could not be deducted from salary income. It further observed that a deduction arises only when the spending is shown to be tied to business or professional activity, a requirement the assessee had failed to meet.

The appeal was filed under Section 260-A of the Income Tax Act by an assessee who had received ₹66,00,000 from a company in which he was a director. He had declared the amount as professional or technical fees. The returns for the relevant assessment years were taken up for scrutiny, during which the Assessing Officer determined that the payment constituted salary income. The Officer noted that the assessee did not submit details of the nature of services allegedly rendered to the company and concluded that the amount could not be treated as business or professional income.

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The assessee had also claimed deduction of interest expenditure amounting to ₹45,26,956 on a loan taken in his own name and advanced to the company. The Assessing Officer held that there was no evidence to show that the borrowing was connected to any business activity of the assessee and disallowed the interest deduction.

The Commissioner of Income Tax (Appeals) upheld these findings, stating that even during appellate proceedings the assessee had not provided material regarding the nature of services or any nexus between the loan and business income.

Before the Appellate Tribunal, the assessee again failed to substantiate his claims. The Tribunal held that the amount received was salary and that the interest expenditure had no demonstrable business connection. The assessee contended before the High Court that the revenue had incorrectly treated the payments as salary and ignored service-tax records, and that the loan was advanced for commercial expediency. The revenue maintained that the assessee had not produced evidence to support these assertions.

The Court observed 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.”

It further recorded that “the assessee had also been failed to prove the nexus of providing the loan to the Company which was taken in his own name.”

Referring to the Tribunal’s findings, the Court noted the statement that “the assessee has not submitted the details of nature of professional and technical services rendered to the company. Even before the Tribunal, no efforts were made… to substantiate the claim that the amount received by the assessee from the company are professional charges.”

The Court also cited the Tribunal’s reasoning that “the burden is on him to prove the same… the assessee has not furnished any evidence to prove that the services rendered by him to the company are of professional in nature.”

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With respect to the interest deduction, the Court reproduced the Tribunal’s observation that “interest expenditure cannot be deducted from the amount received from the company because there is no nexus between them… Advancing interest free loans to the employer company cannot be a ground for claiming deduction of interest expenditure from the salary income received from it.”

The Court recorded the Tribunal’s view that “the assessee has not proved that there was commercial expediency in advancing money to SML and was for the purpose of business of the assessee.” The Court stated that “there is no reason to differ from the view taken by the Appellate Tribunal.”

The Court directed: : “In view of the preceding analysis, the substantia lquestions of law are answered against the assessee and in favour of the Revenue. Accordingly, the appeal is dismissed”

Advocates Representing the Parties

For the Appellant: Sri. Chandrasekhar V., Advocate
For the Respondent: Sri. Ravi Raj Y.V., Advocate

Case Title: Mukesh Gupta v. The Deputy Commissioner of Income Tax
Case Number: ITA No. 283 of 2022
Bench: Justice D K Singh, Justice Rajesh Rai K