2025 (8) TMI 1672 - AT - Income Tax

s.251(2) enhancement invalid; notional interest added on alleged borrowed funds deleted; s.245D settlement info confidential

Assistant Commissioner of Income-tax, Central Circle-1 (3), Ahmedabad Versus Ashish P. Patel

ITAT AHMEDABAD held the additions unsupported and directed deletion. The tribunal found the AO failed to prove borrowed funds were utilized, so notional ... Addition on account of interest income on loan given and shown as asset - HELD THAT:- AO has not proved that borrowed funds have been utilized. It is not the case wherein the AO has disallowed any interest paid u/s 36(1)(iii) - AO held that the assessee had to invariably earn money on the loans given, even though there was no claim of interest debited. Keeping in view the facts mentioned above, we hold that the addition made on account of notional interest cannot be held to be sustainable in the eyes of law. Powers of the Commissioner (Appeals) u/s 251 for enhancement - HELD THAT:- We find that Section 251(2) mandates reasonable opportunity to the assessee which the Ld. CIT(A) defaulted. Further, we also find that the seized material mentions year 1998 & 1997; and there was no proof that the assessee had indeed received any amount during this year. Further, the direction of the ld. CIT(A) to set off this amount against the income offered before the Settlement Commission, if given effect, result in a negative balance of Rs. 6,46,250/- which is beyond any acceptable rationale. Hence, we hold that the action of the Ld. CIT(A) enhancing the addition cannot be sustained. Application before the Settlement Commission u/s 245D - The fact that the disclosure made u/s 245D(1) of the Act even if constructed as if no order u/s 245D(4) has been passed, it will not give a license to the Assessing Officer to use the confidential information disclosed in an annexure to the application of the Settlement Commission. If the application is treated as not admitted under 245D(1) of the Act, then the provisions are clear that confidential information can never be passed on to the AO nor can it be used in evidence against the assessee. Section 245D(4) has clearly held that admission of assessee's application under section 245(1) was incorrect. In the instant case also the AO has not brought any evidence or made any inquiry that assessee has earned additional income of Rs. 15,00,000/-. AO had not made any inquiry and not examined the material which was before him that how this income was declared by the assessee and addition has been made simply relying upon the declaration made in the application before the Settlement Commission under section 245D. Hence, we hold that the addition made by the Assessing Officer, as confirmed by the Ld. CIT(A), cannot be upheld. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessing officer can make an addition of notional interest on loans/advances in assessments under section 153A where (a) no interest was claimed or offered as income by the assessee, (b) there is no evidence that borrowed funds were utilised to earn such interest, and (c) no documentary proof shows receipt of interest. 2. Whether a Commissioner (Appeals) may enhance an assessment (or direct an assessing officer to make an enhanced addition) without providing the assessee a reasonable opportunity of being heard as mandated by section 251(2) of the Act. 3. Whether an ad hoc disclosure made by an assessee before the Settlement Commission (ITSC), when the settlement application is ultimately rejected or treated as invalid, can be the sole basis for making additions in a section 153A assessment in the absence of corroborative incriminating material seized during search. 4. Whether a disallowance under section 14A (relating to expenditure incurred to earn exempt income) can be pursued when the Revenue chooses not to press the ground before the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of adding notional interest on loans/advances in 153A proceedings Legal framework: Assessments under section 153A require determination or re-determination of total income for the relevant assessment years after search; additions must be supported by material/evidence establishing income. General principles of income recognition and burden of proof on AO to establish undisclosed income apply. Precedent treatment: The Tribunal relied on established practice that mere existence of book entries for loans/advances does not ipso facto establish taxable interest income unless there is credible evidence of accrual/receipt or that funds were employed so as to generate interest income. The decision referenced coordinate-bench reasoning (Anantnadh Constructions & Farms (P.) Ltd. v. DCIT) on use of disclosures before ITSC (discussed at Issue 3). Interpretation and reasoning: The Tribunal examined the AO's rationale - imputation of interest @12% on aggregate loans/advances (approx. Rs. 30.92 crore) because interest expenses were debited while interest income in proportion to loans was not offered. The Tribunal found material deficiencies: AO did not show that borrowed funds were utilised to generate interest income; there was no disallowance under section 36(1)(iii) to justify an inference; no documentary evidence established receipt or accrual of interest; and the AO proceeded on a notional computation despite lack of proof. On these facts, the Tribunal held that imputing notional interest was unsustainable. Ratio vs. Obiter: Ratio - Where an AO adduces no evidence of receipt/accrual, utilization of borrowed funds, or other corroborative material, a notional interest addition in section 153A proceedings cannot be sustained. Obiter - The finding that mere presence of interest expenses without corroboration does not warrant imputation is a general statement of principle supporting the ratio. Conclusion: The addition of notional interest (Rs. 3.71 crore for AY 2001-02; comparable amount for AY 2002-03) was held unsustainable and the Revenue's appeal on this issue was dismissed. Issue 2 - Enhancement by Commissioner (Appeals) without affording opportunity (section 251(2)) Legal framework: Section 251(1) confers power on the Commissioner (Appeals) to confirm, reduce, enhance or annul assessments; section 251(2) mandates that enhancement of assessment cannot be made unless the appellant has had a reasonable opportunity of showing cause against such enhancement. Precedent treatment: The statutory mandate of section 251(2) is authoritative and binding on appellate authorities; established law requires that enhancement process afford reasonable opportunity to the assessee. Interpretation and reasoning: The Tribunal analysed the CIT(A)'s direction to make an addition based on seized loose paper (alleged accrued interest of Rs. 21,46,250) and found no record of an opportunity being afforded to the assessee before enhancing the assessment. The Tribunal noted that the seized paper referenced years 1997-1998 and that there was no proof of actual receipt of the amounts. Moreover, allowing set-off against income offered before the Settlement Commission would produce an illogical negative balance. Given section 251(2)'s clear requirement, the CIT(A)'s enhancement without affording a reasonable opportunity was procedurally infirm. Ratio vs. Obiter: Ratio - Enhancement by an appellate authority in assessment proceedings must comply with section 251(2); failure to provide reasonable opportunity renders the enhancement unsustainable. Obiter - Comments on the impracticality of the set-off ordered by the CIT(A) reinforce the procedural defect. Conclusion: The enhancement directed by the Commissioner (Appeals) was set aside for non-compliance with section 251(2); the cross-objection on this point was allowed. Issue 3 - Use of disclosures before the Settlement Commission as basis for additions in 153A proceedings Legal framework: Statements made or disclosures before the Settlement Commission are governed by the Settlement provisions (including confidentiality and provisions on admissibility). Section 132(4) permits use of statements recorded during search in evidence; CBDT instructions caution against relying on confessions in absence of credible evidence. Precedent treatment: The Tribunal relied on coordinate-bench authority (Anantnadh Constructions) and CBDT instruction (F. No. 286/2/2003-IT (Inv.), dated 10-3-2003) which discourage reliance solely on confessional statements/disclosures and emphasise the need for corroborative seized material or credible evidence. The Tribunal treated the settled principle that confidential information disclosed in a settlement application, if the application is not admitted or the settlement is invalid, cannot be used as a license for the AO to make additions without independent evidence. Interpretation and reasoning: The AO relied on an ad hoc disclosure (Rs. 15,00,000 for AY 2001-02 and Rs. 15,50,000 for AY 2002-03) made in the Settlement Application which was ultimately rejected/declared invalid. The Tribunal found that the AO did not produce any incriminating seized material or other corroborative evidence to justify the addition; reliance on the assessee's ad hoc disclosure to the ITSC, in absence of such material, is impermissible. The CBDT instruction and the cited coordinate judgment show that self-serving or uncorroborated disclosures in settlement proceedings cannot be treated as conclusive evidence for section 153A assessments. Ratio vs. Obiter: Ratio - An addition in section 153A proceedings cannot be based solely on an ad hoc disclosure before the Settlement Commission where the settlement application has been rejected/declared invalid and there is no corroborative seized material; independent credible evidence is required. Obiter - Observations reiterating CBDT guidance on avoiding confessional reliance and the need to collect evidence. Conclusion: The additions based solely on the ad hoc Settlement Commission disclosure were disallowed; the cross-objections on this point were allowed. Issue 4 - Disallowance under section 14A Legal framework: Section 14A addresses disallowance of expenditure in relation to income exempt from tax; its applicability depends upon factual matrix and evidence. Precedent treatment and reasoning: The Revenue elected not to press the ground relating to section 14A before the Tribunal (low quantum). The Tribunal recorded that the Revenue did not press the issue and accordingly allowed the ground. Ratio vs. Obiter: Procedural - where a party does not press a ground before the Tribunal, the ground stands dismissed/allowed as not pressed; no substantive ratio on section 14A applicability was formed. Conclusion: The ground relating to section 14A disallowance was not pressed by Revenue and was thereby allowed/dismissed accordingly. Overall Disposition The Tribunal partly allowed the Revenue's appeals (limited to issues pressed and sustained) and allowed the assessee's cross-objections: (a) notional interest additions in section 153A were unsustainable without evidence and were set aside; (b) the CIT(A)'s enhancement without affording reasonable opportunity (section 251(2)) was quashed; and (c) additions based solely on ad hoc Settlement Commission disclosures without corroborative seized material were disallowed. The section 14A ground was not pressed by the Revenue.