Undisclosed interest income addition fails where seized papers show only a calculation and no proof of actual receipt.

Alleged undisclosed interest income on a loan advanced to a third party was held unsustainable where the seized papers only showed a 24% interest working and not actual receipt. The assessee denied earning such interest, the borrower was in financial difficulty, and the principal was ultimately adjusted through transfer of property. As the remand direction to verify the borrower was not met with adequate evidence of accrual or receipt, the addition was treated as based on presumption rather than proof and was deleted in favour of the assessee.

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Issues: Whether the addition of alleged undisclosed interest income on the loan advanced to a third party was sustainable on the basis of seized papers and surrounding circumstances.

Analysis: The seized material only contained a working of interest at 24% on the advance, while the assessee denied receipt of such interest and maintained that only the principal amount was recovered. The remand direction required verification from the borrower, but the assessment was sustained without bringing on record adequate evidence that interest had actually accrued and been received. The record also showed that the borrower was in financial difficulty and that the principal was ultimately adjusted through transfer of property, which weakened the inference that interest income had in fact arisen. In these circumstances, the addition rested on presumption rather than substantiated proof of receipt.

Conclusion: The addition towards alleged undisclosed interest income was deleted and the issue was decided in favour of the assessee.

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