2025 (12) TMI 498 - AT - Income Tax

Section 69A addition on bank fixed deposits remanded; only interest income taxable after verification, not pledged principal

Alliance Books Suppliers Pvt. Ltd. Versus ACIT, Circle 2 (1), West Bengal

The Tribunal held that the addition under s.69A on account of time deposits with a bank and the related interest was not sustainable without proper ... Reopening of assessment - reasons to suspect OR reason to believe - live link between the tangible material and formation of the belief that the income has escaped assessment - Addition on account of time deposit purchased by the assessee from Central Bank of India treating the same as unexplained money u/s 69A and also confirming the interest as made by the learned AO on account of bank interest to Central Bank of India HELD THAT:- We find that the assessee’s account was declared NPA following which security/guarantee given by the assessee in the form of FDRs with interest thereon to various institutions. We note that the bank has not responded to the various requests by the assessee. I Ends of justice would be well served if the case is restored to the file of the learned AO and learned AO is directed to collect all these information by issuing summon to the bank to furnish all the details. Accordingly, we set aside the issue to the file of the learned AO with a direction to issue necessary summon to the bank and call for the details from the bank and assessed the income accordingly. Needless to say that only interest income on FDS is to be assessed and the principal amount of FDs which was given as security to the bank against bank guarantee of ₹ 4 crores if disclosed is not liable to be taxed as income. With this observation, the case of the assessee is restored to the file of the learned AO for re-adjudication.Appeal of the assessee is allowed for statistical purposes. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the amount represented by fixed deposits placed as margin/security for bank guarantees, which were subsequently invoked by the bank upon the account becoming NPA, could be treated as unexplained money taxable under section 69A of the Act. (2) To what extent the interest income on such fixed deposits is liable to be assessed as income of the assessee, and what factual enquiry is required for proper determination. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Taxability of fixed deposits given as margin/security and treated as unexplained money under section 69A Interpretation and reasoning The Tribunal noted that the assessee had obtained bank guarantees from a bank up to Rs. 4 crores against which it had provided fixed deposits as margin/security. These fixed deposits, along with accrued interest, were stated to have been given as security/guarantee to various institutions and were subsequently invoked and adjusted by the bank when the assessee's account was declared NPA and the premises were taken over under the SARFAESI Act. The Tribunal recorded that the bank had not responded to repeated requests from the assessee for details, and that there was insufficient material on record regarding the factual particulars of the fixed deposits and their utilisation by the bank. In such circumstances, the Tribunal considered that an enquiry directly from the bank was necessary. The Tribunal clarified that the principal amount of the fixed deposits, having been provided as security against bank guarantees, does not constitute taxable income if it is otherwise disclosed in the assessee's records, and should not be brought to tax as unexplained money under section 69A. Conclusions The principal amount of the fixed deposits furnished as margin/security for bank guarantees, if already disclosed, is not liable to be taxed as income and cannot be treated as unexplained money under section 69A. The assessment on this aspect was set aside for proper verification from the bank. Issue (2): Assessment of interest income on the fixed deposits and need for further factual enquiry Legal framework The Tribunal proceeded on the basis of general principles of income-tax law governing taxability of interest income on fixed deposits, in the context of reassessment proceedings under sections 147, 148, 148A(d) of the Act, and the addition made by the Assessing Officer treating interest as income based on information such as Form 26AS and TDS details. Interpretation and reasoning The assessee's communication to the income tax authorities and to the bank, as extracted in the assessment order, showed that TDS had been deducted by the bank on interest credited on fixed deposits during the relevant assessment year. The assessee pleaded lack of records due to closure of business and NPA status, and asserted that the bank had invoked the guarantees and adjusted the fixed deposits and interest against outstanding dues. The Tribunal observed that the bank had not furnished requisite information despite the assessee's requests and that a proper determination of the correct quantum and nature of interest income required direct information from the bank. The Tribunal found that the Assessing Officer must obtain all relevant details from the bank by issuing summons and then determine the taxable interest income based on such primary evidence. The Tribunal explicitly stated that only the interest income on the fixed deposits is to be assessed as income, thereby distinguishing it from the principal amount of the fixed deposits furnished as security. Conclusions The matter relating to interest income on the fixed deposits was remitted to the Assessing Officer with directions to issue summons to the bank, call for complete details of the fixed deposits and interest, and thereafter re-assess the income in accordance with law, restricting the taxability to interest income alone and not the principal deposit amount used as security.