No Addition for Notional Interest: ITAT Deletes ₹93 Lakh Addition Based Solely on Seized Working Sheet

Lalit C. Jobanputra Vs DCIT (ITAT Mumbai)

No Addition for Notional Interest: ITAT Deletes ₹93 Lakh Addition Based Solely on Seized Working Sheet

The Mumbai Bench of the Income Tax Appellate Tribunal deleted an addition of ₹93.06 lakh made towards alleged undisclosed interest income, holding that a mere seized calculation sheet showing interest at 24% cannot justify taxation unless the Revenue proves that such interest actually accrued or was received by the assessee.

In this case, the assessee had advanced ₹5.50 crore to one Rajeev Bhale. During a search, a seized document contained a detailed interest working at 24% per annum, based on which the Assessing Officer treated ₹93.06 lakh as undisclosed interest income. The assessee admitted advancing the loan but consistently maintained that no such interest was received, as the borrower was facing severe financial difficulties and was unable even to repay the principal amount in cash. Eventually, part of the loan was adjusted against the purchase of another property belonging to the borrower.

The Tribunal noted that despite a specific remand direction in the earlier round to verify from the borrower whether interest had actually been paid, the Assessing Officer failed to bring any evidence on record proving payment or receipt of interest. The borrower’s statement also did not establish actual payment of interest. The Tribunal observed that when the borrower was struggling to settle even the principal amount, the presumption that he paid interest at 24% was unrealistic. Mere calculations found in seized papers, without corroborative evidence of accrual or receipt, cannot result in taxable income.

Accordingly, the ITAT held that the addition was based on assumptions and surmises rather than evidence and directed deletion of the entire addition of ₹93.06 lakh. The assessee’s appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal is filed by the Assessee against the order of Ld. Commissioner of Income Tax (Appeals)-47, Mumbai (‘Ld. CIT(A)’ for short), dated 18/08/2025 for the Assessment Year 2011-12.

2. The Assessee has filed following grounds of Appeal:-

“The learned CIT(A) erred in upholding the order passed by the Ld DCIT u/s.143(3) rws 153A rws 254 of the Act, since it is passed without a proper consideration and appraisal of the facts of the case.

An incorrect and improper order has been passed without considering the appellants contentions. It is capricious in nature and has been made ignoring the genuine facts, and the submissions of the appellant with an intention to punish the appellant, and should be quashed and annulled.

GROUND NO.2:

Without prejudice to ground no. 1 above, the CIT(A) erred in upholding the additions made by the Ld. DCIT of Rs.93,06,477/- on account of undisclosed interest income, even though the same is contrary to the facts of the case and applicable provisions of the Act.

GROUND NO.3:

Without prejudice to ground no.1 and 2 above, the CIT(A) erred in passing the appellate order despite being duly informed that the Appellant was awaiting the response of the RTI application filed for obtaining the statement on oath of Mr. Rajiv Bhale, which was relied upon by the Ld. DCIT. The appellant had received the said statement only a few days prior to the passing of the impugned order, leaving no reasonable opportunity to rebut or make submissions thereon. The action of the Ld. CIT(A) in proceeding to decide the appeal without affording such effective opportunity amounts to a violation of the principles of natural justice.”

3. Brief facts of the case are that, the Assessee is an individual and had filed his original return of income u/s 139(1) of the Income Tax Act, 1961 (‘Act’ for short) dated24/10/2011 declaring total income at Rs. 81,47,98,450/-. Pursuant to a search and survey u/s 132 of the Act conducted by the Investigating Wing, Mumbai, in group concerns of Joban Putra on 19/08/2011, where the Assessee was also covered, notice u/s 153A of the Act was issued and served upon the Assessee. In response to the said notice, the Assessee filed his return of income dated 14/07/2012 declaring total income at Rs. 82,37,30,450/- for the year under consideration.

4. The Ld. A.O. based on certain incriminating documents seized during the course of survey proceeding at the residence of the Assessee wherein it was observed that the Assessee had given loan amount of Rs. 5.50 crores to Sh. Rajiv Bhale at an interest rate of 24% per annum, amounting to Rs. 93,06,477/- which according to the Ld. A.O. was not declared by the Assessee and hence an addition on undisclosed income was made by the Ld. A.O. The Assessee was in appeal before the first appellate authority who dismissed the said appeal on the ground that the Assessee’s contention was not supported by any substantial evidence.

5. The assessee filed the second appeal before the Tribunal and the Tribunal, vide order dated 17.02.2021, set aside the issue to the Ld. AO with the direction to verify with Shri Rajeev Bhale whether the assessee had received interest as per the seized documents. The Ld. AO, during the set aside proceedings, issued summons to Shri Rajeev Bhale and statement was duly recorded where he had confirmed receiving Rs.5.50 crores from the assessee and also admitted that there was no formal agreement entered into between him and the assessee and that the loan was repaid back to the assessee by adjusting Rs.4.50 crores against purchase of his properties mortgaged with the State Bank of India in the year 2017. The Ld. AO observed that there was contradiction in the assessee’s statement where he had claimed that he had recovered the principal amount fully, but, whereas record show that only Rs.4.50 crore were adjusted. Further, the Ld. AO, on the basis of the seized documents, the statement of Shri Rajeev Bhale along with the admission before the Tribunal that he had received Rs.39,37,500/- as interest basis which the Ld. AO made an addition of Rs.93,06,477/- as interest, received by the assessee, but, not declared in his return of income as being undisclosed income for the impugned year thereby determining the total income at Rs.83,30,36,930/- and passed the assessment order dated 27.12.2022 under Section 143(3) r.w.s. 153A r.w.s. 254 of the Act. Further aggrieved, the assessee was in appeal before the first appellate authority, who vide order dated 18.08.2025 upheld the addition made by the Ld. AO on the ground that adverse inference is drawn where the assessee himself has accepted that he has given loan for which the assessee must have charged interest amounting to Rs.93,06,477/- as per the seized documents.

6. The assessee is in appeal before us challenging the order of the Ld. CIT(A) .

7. We have heard the rival submissions and perused the material available on record. The moot issue that requires adjudication is whether the assessee has received interest on the loan given to Shri Rajeev Bhale which, according to the Department, was not declared in his return of income and the assessee’s contention is that he had not received any interest income towards the loan extended by the assessee to Shri Rajeev Bhale. It is observed that during the search proceedings certain incriminating documents marked as page 7-10 Annexure-A was seized from the residence of the assessee where the details of loan of Rs.5.50 crore was given to Shri Rajeev Bhale charging an interest @ 24% per annum, was found which revealed an interest amount of Rs.93,06,477/-. The assessee though had accepted that he had given a loan of Rs.5.50 crore to Shri Rajeev Bhale for purchase of a floor at an under constructed property at Pune, but denied the fact that interest @ 24% was received by him. The assessee further stated that since the property was not constructed, the assessee had demanded the money from Shri Rajeev Bhale along with the interest @ 24%, but, alleges that only the principal amount was recovered from the said party. Based on the direction of the Tribunal, the Ld. AO was directed to conduct investigation/verify with Shri Rajeev Bhale whether he had paid interest to the assessee as per the seized paper where it had mentioned that interest was receivable by the assessee. The Ld. AO issued notice under Section 142(1) of the Act calling for details along with documentary evidences. The Ld. AO also issued summons under Section 131 of the Act to Shri Rajeev Bale, who, then, appeared before the Ld. AO for cross-examination and a statement was duly recorded on oath. On perusal of the said statement, it is evident that the assessee has advanced Rs.5.50 crore which was for clearing the litigation for property which the assessee was intending to purchase a building which was to be constructed at Pune. He further stated that no formal agreement was signed. The statement further clarified that since Shri Rajeev Bhale was unable to repay the assessee the advance of Rs.5.50 crore, another property of Shri Rajeev Bhale which was taken in possession by the State Bank of India against the dealership loan was decided to be purchased by the assessee from SBI and the assessee had adjusted the advance amount against purchase of the said property. Pertinently, with regard to the interest payment alleged to have been received by the assessee, there was no other details other than the seized documents named Annexure A-3 in which the assessee is said to have computed the interest for the advance receivable at 24%, brought about by the Ld. AO. The assessee has been reiterating that he had received only the principal amount, that too with great difficulty, and that all the transactions with Shri Rajeev Bhale were made through banking channels only. The ld. AO proceeded to make an addition towards the interest received on the basis that the assesseee has submitted before the Tribunal that he had received interest to the tune of Rs.39,37,500 @ 9% towards the loan advance to Shri Rajeev Bhale and had declared the same in his return of income. The Ld. AO made an addition on the ground that the assessee has contradicted his statement that he had not received any interest income and, subsequently, has admitted that he had received only 9% of income which was declared in his ROI. The ld. AO also found contradictions in the assessee’s statement where he is said to have been not disclosed the fact that Shri Rajeev Bhale, instead of repaying the said advance amount, had settled the same against another immovable property owned by him and also that the assessee has stated that he had received the principal amount of Rs.5.50 crore, but, on perusal of the sale deed dated 27.12.2017 towards purchase of immovable property, it was noted that only Rs.4.50 crore were adjusted by the assessee towards the loan advanced. The ld. AO further held that the seized material pertaining to the working of the interest was very meticulously prepared according to day-wise calculations which, again, is said to be negating the assessee’s contention. The Ld. AO rejected the assesseee’s alternative contention that the interest addition can be made after reducing the 9% interest which was already declared by the assessee in its ROI for the reason that no supporting documents were filed by the assessee towards his claim that the interest income of Rs.39,37,500/- shown in the balance sheet filed by the assessee as interest received on unsecured loan was not proved to have been received from Shri Rajeev Bhale. The Ld. AO made an addition on the entire interest of Rs.93.06 lakhs as per the seized material. The Ld. CIT(A) upheld the addition made by the Ld. AO relying on the finding of the AO.

8. On the above factual matrix of the case, it can be inferred that there is no iota of doubt that the loan which was advanced by the assessee to Shri Rajeev Bhale could not be recovered due to the financial condition of Shri Rajeev Bhale, who, in turn, had settled the same by selling another property belonging to him to the assessee for a total consideration of Rs.10,20,39,427/- where Rs.4.50 crore was adjusted towards the loan given to Shri Rajeev Bhale and a balance payment of Rs.5,70,39,427/- was paid by the assessee and the sale deed was registered on 27.12.2014. This fact was also not controverted by the lower authorities. Though the assessee had claimed that he had declared 9% of the interest received in his return of income, the Ld. AO failed to consider that this was received from Shri Rajeev Bhale and made the entire addition towards the interest worked out in the seized documents. It is not the case of the Revenue that the interest was paid by cash to the assessee and in the absence of the same, we can infer that all the transactions had taken place through banking channels only. In such circumstances, the lower authorities have not brought anything on record to show that the assessee has received interest out of this loan when the fact remains that Shri Rajeev Bale was in a financial crunch even to settle the principal amount, which circumstances also support this fact. There can be presumably no interest received by the assessee from the said party. It also supports the assessee’s argument that Shri Rajeev Bhale could not have paid the assessee interest @ 24%. Though the Tribunal in the first round of appeal has remanded this issue to the AO, that addition cannot be made merely on certain statement or calculations done by the assesseee without the Ld. AO substantiating the findings that interest had actually accrued and received by the assesseee followed by confirmation from the other party which would ensure certainty of receipt of income in the hands of the assessee when the Tribunal had categorically given a finding that the ld. AO should cross verify with Shri Rajeev Bhale that the assessee had received interest, the AO has failed to examine or investigate into the issue which was the very purpose of the remand and, rather, had gone by the presumption and surmises that the assessee as per his workings must have received interest from Shri Rajeev Bhale. This finding of the lower authorities is not supported by any substantial evidence and, hence, we deem it fit to hold that the addition towards interest income made in the hands of the assesseee is without merits and is liable to be deleted. We, therefore, allow ground No.2 raised by the assessee.

9. Ground Nos.1 and 3 are legal grounds which requires no further adjudication and are hereby rendered academic in nature.

10. In the result, the appeal filed by the assessee is hereby allowed.

The following order is pronounced on 02/ 06/2026 as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.