2025 (8) TMI 1101 - AT - Income Tax

Matter remitted to Assessing Officer to reassess evidence showing only principal received, provide hearing and pass speaking order

Ganapati Technology Services Pvt. Ltd. Versus Income Tax Officer, Ward-6 (3), Kolkata

Ganapati Technology Services Pvt. Ltd. Versus Income Tax Officer, Ward-6 (3), Kolkata - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer correctly treated and added Rs. 21,08,296 as interest income in the year under consideration where the assessee contends no interest was received and recovery of principal was doubtful. 2. Whether, for the purpose of taxation, interest on loans accrues under the mercantile system as on the accounting year-end (31.03.2016), and whether the absence of contemporaneous board minutes recording 'interest forgone' is determinative on accrual/recognition. 3. Whether absence of TDS reflected in Form 26AS and absence of interest expense in the borrowers' books is admissible evidence to rebut addition of interest income by the revenue. 4. Whether classification of loans as doubtful debts and related disclosures in audited financial statements/Notes on Accounts (AS-9 and Accounting Standard-1) is material to non-recognition of interest income for tax purposes. 5. Whether evidence of borrowers' insolvency/CIRP, dishonoured cheques and subsequent recovery of principal without interest are relevant and sufficient to rebut the revenue's addition. 6. Whether the assessing authorities erred in procedure and evaluation of documents such that the matter requires remand for a fresh, speaking order after opportunity of hearing. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition of interest income (Rs. 21,08,296) where assessee claims no interest received Legal framework: Income under the head 'income from other sources'/interest is taxable when earned/assessed under the relevant assessment year; assessment completed u/s 143(3) on available material. AO empowered to examine accounts and make additions where income is concealed or not properly offered. Precedent Treatment: No judicial precedent was cited or applied by the Tribunal in this judgment. Interpretation and reasoning: The Tribunal noted that the AO made the addition by reference to the prior year's interest figure without adducing independent evidence that interest was actually received in the year under consideration. The assessee had placed before the AO and appellate authority ledger copies, bank statements, Form 26AS, audited accounts and paper books showing non-receipt of interest; the borrowers had not shown interest expense nor deducted TDS (Form 26AS negative), supporting the assessee's position. The Tribunal found the AO's addition to be based on conjecture and surmise rather than demonstrable evidence rebutting the assessee's material. Ratio vs. Obiter: Ratio - An assessing officer must base additions on material/evidence and may not simply import a prior year figure to the current year without evidence; where assessee files documents showing non-receipt and revenue has no contrary evidence, the matter requires fresh, reasoned examination. (This is the operative reasoning applied to remit the matter.) Conclusion: The addition is not sustained in the appellate forum; matter remitted to AO for fresh examination of the documents and to pass a speaking order after hearing the assessee. Issue 2 - Accrual under mercantile system and requirement of board minutes recording 'interest forgone' Legal framework: Accounting recognition under the mercantile system ordinarily recognises income when earned; however taxation depends on facts, accounting treatment, and evidence of actual accrual or forgoing of entitlement. Accounting standards and accounting entries (including board minutes) are evidentiary material but not necessarily conclusive of tax treatment. Precedent Treatment: No authority was relied on or applied by the Tribunal. Interpretation and reasoning: The appellate authority below held that in absence of evidence that interest was forgone before 31.03.2016 (e.g., minutes of board meeting), interest must be treated as accrued as on that date under mercantile accounting. The Tribunal, after reviewing the material produced, observed that the assessee did furnish audited accounts, notes on accounts, ledger entries and other contemporaneous documents purporting to classify loans as doubtful and to disclose non-recognition of interest, and that the lower authorities failed to examine those materials on merits. The Tribunal did not lay down a categorical rule that minutes are mandatory; instead it directed fresh scrutiny of the documentary record by the AO and a speaking order. Ratio vs. Obiter: Obiter - The Tribunal did not decide a definitive legal rule requiring board minutes to evidence interest forgone; it confined itself to procedural sufficiency and correctness of AO's treatment in light of the documents filed. Conclusion: Absence of board minutes is not an automatic bar; the AO must consider audited accounts, notes and other contemporaneous documents and determine accrual/forgone status on evidence, issuing a speaking order after hearing the assessee. Issue 3 - Evidentiary weight of Form 26AS and absence of TDS/interest expense in borrowers' books Legal framework: Form 26AS and TDS records may serve as corroborative evidence of payments made by third parties; absence of TDS entries can be treated as probative on whether interest payments were made/declared by payers. Precedent Treatment: None cited. Interpretation and reasoning: The Tribunal accepted that the assessee relied on Form 26AS showing no TDS claimed by the borrowers and on the borrowers' books lacking any interest expense, as material corroboration of non-payment of interest. The Tribunal found that the AO did not rebut these facts with independent evidence to the contrary and therefore should reassess the claim in light of these documents. Ratio vs. Obiter: Ratio - Form 26AS/absence of TDS is admissible and relevant evidence which the AO must consider and cannot ignore when determining whether interest was actually paid or accrued. Conclusion: The AO is directed on remand to examine Form 26AS, borrowers' records (if necessary via s.133(6) notice), and other documents and to record reasons if he disbelieves the absence of TDS/interest entries. Issue 4 - Relevance of classification as doubtful debts and disclosure under AS-9/Accounting Standard-1 Legal framework: Accounting Standards govern recognition and disclosure in financial statements; classification as doubtful debts and related notes indicate management's view on recoverability and recognition of income. Precedent Treatment: None cited. Interpretation and reasoning: The assessee's audited financial statements recorded the loans as doubtful and disclosed non-recognition of interest in notes. The Tribunal regarded these disclosures as material which the assessing authorities failed to evaluate properly. The Tribunal did not convert accounting classification into a categorical tax result but required the AO to consider such disclosures and provide reasoned conclusions. Ratio vs. Obiter: Ratio - Audited accounts and AS disclosures are relevant evidence; AO must examine and give reasons if he rejects such accounting treatment for tax purposes. Conclusion: The matter must be reconsidered by the AO who shall take the accounting treatment and disclosures into account and pass a speaking order after hearing the assessee. Issue 5 - Relevance of insolvency/CIRP, dishonoured cheques and subsequent recovery without interest Legal framework: Events and evidence showing borrower insolvency, dishonoured instruments and subsequent recovery without interest are relevant to assessee's claim of non-receipt and doubtful recoverability. Precedent Treatment: None cited. Interpretation and reasoning: The assessee produced evidence of CIRP (for one borrower), dishonoured cheques and later recovery of principal without interest (for the other). The Tribunal found that these facts, if accepted, support the assessee's position that interest was neither received nor recoverable. As the lower authorities did not properly consider these materials, the Tribunal remitted the matter for fresh consideration. Ratio vs. Obiter: Ratio - Post-transaction events and documentary evidence of borrower insolvency/dishonour and recovery without interest are relevant to ascertain whether interest was accrued/received and must be evaluated by the AO. Conclusion: AO to examine insolvency/dishonour/recovery evidence on remand, issue notices to borrowers if necessary (e.g., s.133(6)), and pass a reasoned order. Issue 6 - Procedural correctness, admissibility of paper books and remedial direction Legal framework: Assessing Officer must examine evidence placed on record, provide opportunity of hearing, and pass speaking orders; appellate tribunal may remand where lower authorities did not consider material facts or evidence. Precedent Treatment: None cited. Interpretation and reasoning: The Tribunal concluded that the AO and the first appellate authority failed to address the documentary evidence filed by the assessee (ledger, balance sheet, Form 26AS, paper books, insolvency documentation). Given that the AO's addition rested on an unexplained carry-over from prior year figures, the Tribunal found remand appropriate to enable fresh evaluation and to protect the assessee's right to be heard. Ratio vs. Obiter: Ratio - Where assessing authorities have not considered material documents, the matter should be remitted for fresh consideration with directions to afford hearing and to pass a speaking order; the assessee must cooperate or face adverse consequences. Conclusion: The Tribunal remitted the matter to the AO for fresh examination of documents, directed that the AO pass a speaking order after providing opportunity of hearing, cautioned the assessee to cooperate, and allowed the appeal for statistical purposes.