The ITAT Mumbai in Lalit C. Jobanputra vs. DCIT deleted an addition of ₹93,06,477 made as undisclosed interest income, holding that mere seized papers containing calculations of interest cannot establish taxable income unless there is evidence that such interest actually accrued to or was received by the assessee. The assessee had advanced a loan of ₹5.50 crore to an individual for a proposed real estate transaction that ultimately failed. Although documents seized during a search showed detailed interest calculations at 24% per annum, the assessee consistently maintained that no such interest was received due to the borrower’s severe financial difficulties. The Tribunal noted that the borrower was unable even to repay the principal amount and ultimately settled part of the liability through adjustment against another immovable property. No evidence was produced by the Revenue to prove actual payment or receipt of interest. Emphasizing the doctrine of real income, the Tribunal held that calculations or expectations of income cannot substitute for proof of accrual or receipt and therefore deleted the entire addition.
Core Issue: Whether addition of alleged undisclosed interest income could be sustained merely on the basis of seized papers containing a calculation of interest at 24% on a loan advanced by the assessee, when there was no evidence that such interest had actually accrued to or been received by the assessee and the borrower was facing financial difficulties even in repaying the principal amount.
Facts: The assessee, an individual, originally filed his return of income on 24.10.2011 declaring total income of ₹81.48 crore. Pursuant to a search under section 132 conducted on 19.08.2011 in the Jobanputra Group, notice under section 153A was issued and the assessee filed a return declaring total income of ₹82.37 crore. During the search, certain documents marked as Annexure A-3 (Pages 7 to 10) were seized from the assessee’s residence. The documents contained detailed calculations showing that a loan of ₹5.50 crore had been advanced by the assessee to Shri Rajeev Bhale and interest had been computed thereon at 24% per annum, resulting in interest of ₹93,06,477.
The assessee admitted advancing the loan but consistently denied having received any interest at 24%. According to him, the loan had been advanced for acquisition of a floor in an under-construction project at Pune. Since the project did not materialize and Shri Rajeev Bhale was unable to repay the loan due to financial difficulties, the assessee could recover only the principal amount through adjustment against another immovable property owned by Shri Rajeev Bhale. The assessee contended that no interest was actually received except a small amount of interest already disclosed in the return.
AO’s Findings: The AO relied heavily upon the seized papers containing day-wise calculations of interest at 24% and held that such detailed workings could not have been prepared unless interest was actually receivable. During the set-aside proceedings pursuant to an earlier Tribunal order, summons under section 131 were issued to Shri Rajeev Bhale. He confirmed receiving ₹5.50 crore from the assessee and stated that there was no formal written agreement. He also admitted that the loan was eventually settled by adjusting ₹4.50 crore against the sale of another property to the assessee because he was unable to repay the amount.
The AO observed that the assessee’s statements contained contradictions regarding recovery of the loan and receipt of interest. According to the AO, the assessee had admitted before the Tribunal that interest of ₹39,37,500 had been received and disclosed in the return. The AO further held that the detailed seized workings clearly established entitlement to interest at 24%. Consequently, the AO treated ₹93,06,477 as undisclosed interest income and added the entire amount to the assessee’s income under section 143(3) read with sections 153A and 254.
CIT(A)’s Findings: The CIT(A) affirmed the addition. It was held that once the assessee admitted advancing the loan and the seized documents contained precise calculations of interest at 24%, an adverse inference was justified. The CIT(A) accepted the AO’s view that the assessee must have earned interest in accordance with the seized workings and upheld the addition of ₹93,06,477 as undisclosed interest income.
ITAT Findings: The Tribunal deleted the addition. It observed that the existence of the loan transaction was undisputed and that the seized documents indeed contained calculations of interest. However, the crucial issue was not whether interest was calculated but whether such interest had actually accrued to and been received by the assessee.
The Tribunal noted that the record clearly established the severe financial difficulties faced by Shri Rajeev Bhale. He was unable even to repay the principal amount and ultimately settled part of the liability through transfer of another immovable property. The sale deed itself reflected adjustment of only ₹4.50 crore against the outstanding loan, demonstrating the borrower’s financial constraints. These circumstances strongly supported the assessee’s contention that receipt of interest at 24% was highly improbable.
The Tribunal further observed that in the first round of litigation it had specifically directed the AO to verify from Shri Rajeev Bhale whether any interest had actually been paid to the assessee. Although Shri Rajeev Bhale’s statement was recorded, no material was brought on record to establish actual payment of interest. There was no evidence of interest having been paid either through banking channels or in cash. The Revenue also failed to produce any confirmation from the borrower showing payment of interest to the assessee.
According to the Tribunal, the lower authorities had proceeded merely on the basis of assumptions arising from the seized calculations. A calculation of interest or a working sheet may indicate a claim or expectation of interest, but it does not establish that income has actually accrued or been received. The concept of real income requires evidence that the income has in fact arisen to the assessee. In the absence of such evidence, no addition could be sustained merely on presumptions and surmises.
The Tribunal held that the AO failed to carry out the verification contemplated in the remand directions and failed to establish actual receipt or accrual of interest. Since the addition rested solely on seized calculations and not on substantive evidence of real income, the addition of ₹93,06,477 was unsustainable and liable to be deleted.
Relevant Para: Para 8.
Held: Mere existence of seized papers showing a calculation of interest at 24% on a loan advanced by the assessee does not justify addition of undisclosed interest income unless the Revenue establishes that such interest actually accrued to or was received by the assessee. Since the borrower was facing financial difficulties, the principal itself was settled through adjustment against another property, and no evidence of actual payment of interest was produced, the addition of ₹93,06,477 was deleted. The appeal of the assessee was allowed
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