Introduction:

In the case of Sri Mukesh Gupta v. The Deputy Commissioner of Income Tax, ITA No. 283 of 2022, the Karnataka High Court comprising Justices D.K. Singh and Rajesh Rai K delivered a detailed ruling clarifying that interest paid on a loan raised by mortgaging personal property and subsequently advanced to a company cannot be claimed as a deductible business expenditure when the assessee’s income is assessed under the head “salary.” The dispute arose when the assessee, a Director in M/s Smile Electronics Limited, filed returns of income for assessment years 2013-14, 2014-15, and 2015-16, declaring ₹66,00,000 received from the company as professional or technical service income and simultaneously sought deduction of ₹45,26,956 as interest expenditure on funds borrowed by mortgaging his personal property and advanced to the company. The Assessing Officer (AO) rejected this claim on the ground that no documentary proof or explanation was provided to establish that the amount received was professional income or that the interest expenditure had any nexus with the assessee’s business or professional activities. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) both upheld the AO’s findings, observing that the assessee failed to demonstrate the rendering of any professional or technical services or any commercial expediency behind advancing the borrowed funds. The High Court examined whether the receipts could genuinely qualify as professional income and whether the claimed interest expenditure could be treated as an allowable deduction under the Income Tax Act.

Arguments:

The assessee argued that the amount of ₹66,00,000 received from M/s Smile Electronics Limited constituted professional remuneration for financial expertise allegedly provided to the company, contending that deduction of TDS under the category of professional charges supported this classification. He further submitted that the funds borrowed by mortgaging his personal property were advanced to the company for reasons linked to his professional role, thereby making the interest expenditure deductible as a business outgoing. The assessee claimed that the AO, CIT(A), and ITAT failed to appreciate the economic realities of his arrangement with the company and misunderstood the nature of his financial involvement. On the other hand, the Revenue, represented by Advocate Ravi Raj Y.V., countered that the assessee had failed at every stage to furnish even a single piece of evidence proving that any professional or technical services were rendered to the company. No reports, consultancy documents, minutes, agreements, or communication indicating a professional engagement were presented. The Revenue argued that merely being a Director does not transform payments into professional income, and that form-over-substance claims such as TDS categorization cannot override the factual character of the receipts. Regarding interest, the Revenue emphasized that advancing borrowed funds to the company was a voluntary financial act unrelated to any professional activity of the assessee, and that the law requires proof of commercial expediency and a direct nexus between expenditure and business activity — both of which were absent. The Revenue contended that the assessee’s claims were purely assertion-based and lacked evidentiary backing.

Judgment:

The Karnataka High Court held that the assessee failed to prove that the ₹66,00,000 received from the company constituted professional income, instead affirming that it rightly fell under the head “salary.” The Court emphasized that deducting TDS under the category of professional charges is not determinative of the true nature of income, and what matters is the underlying substance of the transaction rather than the form in which deductions are classified. The Court observed that the AO had given ample opportunity to the assessee to produce documents showing the nature of services allegedly rendered, but the assessee failed to produce a single document demonstrating any professional or technical engagement with the company. The Court further held that the interest expenditure of ₹45,26,956 could not be allowed as a deduction because there was no established nexus between the borrowed funds and any genuine business or professional activity of the assessee. Raising a loan by mortgaging personal property and advancing it to the company, without proof of business connection, does not constitute business expenditure under tax law. The Court also noted that the assessee had not demonstrated that he conducted any business or professional activity independently that would justify treating the interest as an allowable expense. The High Court concluded that all lower authorities—the AO, CIT(A), and ITAT—had correctly appreciated the law and facts, leaving no substantial question of law for consideration. The appeal was dismissed, and the findings that the assessee failed to establish the existence of professional services or business nexus were affirmed in their entirety.