2025 (11) TMI 91 - AT - Income Tax

Assessee's net interest held as other income and allowable under s.57; s.36(1)(iii) addition unjustified; s.68 credits deleted

ITAT, Mumbai - AT dismissed the revenue's appeal and upheld CIT(A)'s order. The tribunal held the assessee validly treated net interest as income from ... Addition made on account of interest income and interest expenses under the head income from Business - disallowance u/s. 36(1)(iii) - assessee has been claimed as expenses u/s. 57 against interest income which has been shown under the head ‘Income from other sources’ - As contended by the assessee that AO had violated the Principle of consistency and ignored past history of the case, AO exceeded the scope of limited scrutiny by changing the head of the income and assessee own funds and personal capital was much more then the loans taken - HELD THAT:- Admittedly, the assessee has been declaring the interest income under the head ‘Income from other sources’ in earlier years and the same had been accepted by the Revenue Assessee has been declaring net interest as ‘Income from other sources’ in earlier as well as subsequent years and the revenue has also accepted the same after complete scrutiny. Hence, there was no justification for making the impugned addition in the year under consideration. We do not find any infirmity in the order of CIT(A) in allowing relief to the assessee on this issue and accordingly the revenue’s ground of appeal challenging allowance of interest paid u/s. 57 is hereby dismissed. Unexplained cash credits u/s. 68 - Onus to prove - HELD THAT:- Admittedly, the requisite evidences were not filed by the assessee during the assessment proceedings, resulting in the impugned addition u/s. 68 of the Act. However, before ld. CIT(A), the assessee duly filed an application for admission of additional evidences which was accepted. Accordingly, CIT(A) after detailed examination of evidences furnished in respect of each of the loans, came to the conclusion that the assessee has discharged his onus u/s. 68 with regard to proving the identity and creditworthiness of the lenders as well as genuineness of the transactions and allowed relief to the assessee. We also note that ld. AO did not object to the admission of additional evidence nor submitted any remand report despite reminders to him and his superior authorities as mentioned in the order of ld. CIT(A). Even before us, no specific ground against admission of addition evidence by ld. CIT(A) has been raised by the revenue. Addition u/s. 68 has been rightly deleted by ld. CIT(A) as the onus has been successfully discharged by the assessee. Revenue’s appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 36(1)(iii) (by treating lending activity as business and disallowing differential interest) was justified when interest income was declared under 'Income from other sources' and interest outgo was claimed under section 57. 2. Whether the principles of consistency and prior acceptance by revenue of classification of income under 'Income from other sources' bar reopening the head-of-income classification in the limited-scrutiny assessment. 3. Whether unexplained credits under section 68 could be sustained where lender identity, creditworthiness and genuineness of loans were not established during assessment but additional documentary evidence was produced and admitted at the appellate stage. 4. Whether the Commissioner (Appeals)/Appellate authority was required to remit admitted additional evidence to the Assessing Officer for verification/remand, and whether failure or absence of remand report vitiates appellate admission and acceptance of evidence. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of disallowance under section 36(1)(iii) vis-à-vis claim under section 57 Legal framework: Section 36(1)(iii) permits disallowance of interest attributable to borrowed funds where an assessee has used borrowed funds for business/investment; section 57 governs deduction of interest expenses against income from other sources. Limited-scrutiny scope is governed by CBDT Circular No.20/2015 which allows examination of connected issues flagged by tax audit. Precedent treatment: The Tribunal relied on principles recognising that where funds are of mixed source, presumption is that own (interest-free) funds are utilized first; consistency in treatment in earlier years is relevant though res judicata does not strictly apply in tax proceedings. Interpretation and reasoning: The Tribunal examined factual ledger balances and prior-year assessments showing repeated declaration and acceptance by revenue of interest as 'Income from other sources.' The appellate authority found substantial interest-free capital in the proprietor's capital account which, on accepted mixed-funds principles, would be utilized first for advancing loans. Applying the AO's assumed interest rates to the assessed portion of interest-bearing funds showed that the transaction was net positive and that the AO's broad-brush differential-interest disallowance lacked factual foundation. The Tribunal also noted that the AO did not record adverse findings under section 57 during the limited scope scrutiny and that the historical records supported the deduction as IFOS. Ratio vs. Obiter: Ratio - where (a) interest income has been consistently declared and accepted as income from other sources in prior and subsequent assessments, and (b) ledger evidence shows substantial interest-free capital so that only a small portion of investment is attributable to interest-bearing borrowed funds, a differential-rate disallowance under section 36(1)(iii) cannot be sustained absent specific factual findings to the contrary. Obiter - observations on commercial wisdom of business decisions and broader comments on permutations and combinations of the assessee's activities. Conclusions: The Tribunal upheld deletion of the section 36(1)(iii) addition and dismissed revenue's ground challenging allowance of interest paid under section 57. Issue 2 - Role of consistency and scope of limited scrutiny in classification of income Legal framework: Tax proceedings permit reopening of issues but principle of consistency in classification of heads of income is a relevant consideration; limited scrutiny (per CBDT Circular) may examine connected issues but must remain within factual matrix. Precedent treatment: The Tribunal referred to jurisdictional High Court decisions endorsing the principle that revenue should not change its consistent earlier treatment of characterisation absent change in circumstances. Interpretation and reasoning: The Tribunal treated prior acceptances of IFOS across multiple assessment years and the absence of any prior objection as persuasive. It observed that the AO exceeded proper application of limited-scrutiny powers by recharacterising receipts into business income and making a global differential disallowance without appreciating the mixed-funds position and historical acceptance. Ratio vs. Obiter: Ratio - consistent classification accepted by revenue in earlier and later years, coupled with unchanged factual matrix, militates against recharacterisation in the instant limited scrutiny year. Obiter - limitations on the reach of CBDT Circular when applied mechanistically. Conclusions: The Tribunal affirmed that there was no justification for the AO's recharacterisation and consequent disallowance; the order of the CIT(A) was sustained. Issue 3 - Deletion of addition under section 68 after admission of additional evidence at appellate stage Legal framework: Section 68 casts onus on assessee to prove identity, creditworthiness and genuineness of unexplained credits. Appellate authorities have power to admit additional evidence subject to relevant conditions and, where admitted, to examine and accept such evidence; remand to AO for verification is a procedural option but not obligatory ifAO does not object or remit report. Precedent treatment: It is well established that non-filing of requisite evidence at assessment stage can lead to additions, but appellate admission of new evidence can discharge assessee's onus if documentary proof suffices. Failure of AO to furnish remand report or to object to admission weakens revenue's stance for rejigging appellate findings. Interpretation and reasoning: The assessee furnished confirmations, bank statements and ITR acknowledgements for each lender during appellate proceedings. The CIT(A) admitted this evidence and sought a remand report from the AO; none was received despite reminders. The appellate order contained a detailed examination of the documents and concluded that identity, creditworthiness and genuineness were satisfactorily established. The Tribunal noted that the AO did not object to admission of evidence before CIT(A) nor did the revenue raise a specific ground against admission before the Tribunal. The revenue's belated contentions about cash deposits immediately prior to cheque issuance were not developed as an objection to the admissibility or sufficiency of the evidence at appellate stage. Ratio vs. Obiter: Ratio - where an assessee, in appellate proceedings, produces contemporaneous documentary evidence (ledger confirmations, bank statements, ITR acknowledgements) establishing identity, creditworthiness and genuineness of creditors, and where the AO fails to furnish a remand report or to object to admission, the appellate authority may accept such evidence and delete section 68 additions. Obiter - comments on prudence of remand where AO is functional and on caution regarding cash-deposit patterns. Conclusions: The Tribunal upheld deletion of the section 68 additions, finding that the assessee discharged the burden under section 68 and that there was no jurisdictional or procedural infirmity in the appellate admission and acceptance of additional evidence in the factual matrix. Issue 4 - Remand procedure and effect of non-submission of remand report by Assessing Officer Legal framework: Appellate authorities may remit matters to AO for verification; AO's response/remand report assists appellate adjudication. Absence of remand report does not automatically invalidate appellate admission but may weigh against revenue if AO had opportunity to object. Precedent treatment: The Tribunal relied on the principle that failure by AO to object to admission of documents or to provide remand report, despite being given opportunity, weakens the revenue's case on appeal. Interpretation and reasoning: The CIT(A) sought a remand report and received none; reminders to AO/superior authorities produced no response. The Tribunal observed that revenue did not challenge admission of evidence before the CIT(A) and did not raise a specific ground at the Tribunal contesting admission. Given these facts, the Tribunal treated the appellate examination and acceptance of evidence as valid. Ratio vs. Obiter: Ratio - non-submission of remand report by AO, coupled with absence of objection to admission of evidence, permits appellate acceptance of evidence and precludes successful challenge by revenue on ground of non-verification. Obiter - recommended that remand is appropriate where factual disputes require on-site or further factual probe. Conclusions: The Tribunal held that remand was unnecessary in the circumstances and that failure by the AO to produce a remand report or to object justified sustaining the appellate acceptance of evidence and deletion of additions.