ITAT Mumbai Rules Out Addition for Hypothetical Interest on Loan Transactions

Background and Context

The decision in Lalit C. Jobanputra Vs DCIT (ITAT Mumbai) deals with a recurring controversy in search assessments: whether mere workings or notings in seized papers are sufficient to justify addition of notional or hypothetical interest as undisclosed income, without concrete proof that such interest actually accrued to or was received by the assessee.

In this case, the Revenue made an addition of ₹93,06,477 as alleged undisclosed interest income on a loan of ₹5.50 crore advanced by the assessee to Shri Rajeev Bhale, solely on the basis of a seized interest computation sheet showing interest at 24% per annum. The Income Tax Appellate Tribunal, Mumbai Bench ultimately deleted the entire addition, holding that income tax cannot be levied on the basis of presumptions and notional calculations alone.

Procedural History

Original Return and Search Proceedings

  • The assessee is an individual.
  • A return of income was originally filed under Section 139(1) of the Income Tax Act 1961 on 24/10/2011, declaring a total income of ₹81,47,98,450 for Assessment Year 2011-12.
  • A search under Section 132 was carried out on 19/08/2011 in the Joban Putra group cases by the Investigating Wing, Mumbai. The assessee was also covered in this search.
  • Following the search, a notice under Section 153A was issued and duly served.
  • The assessee filed a return in response to Section 153A on 14/07/2012, declaring a revised total income of ₹82,37,30,450.

Assessment and First Appellate Stage

During the search, certain documents were seized from the residence of the assessee, including pages marked 7–10 of Annexure-A. These documents reflected:

  • A loan of ₹5.50 crore allegedly given by the assessee to Shri Rajeev Bhale; and
  • A detailed interest computation at 24% per annum, resulting in a figure of ₹93,06,477 as interest.

The Assessing Officer (AO):

  • Concluded that this interest of ₹93,06,477 represented undisclosed interest income of the assessee.
  • Made an addition under Section 143(3) r.w.s. 153A on the basis that the assessee had not disclosed this interest in the return of income.

The assessee carried the matter before the Commissioner of Income Tax (Appeals)-47, Mumbai [CIT(A)], contending that:

  • Though the loan of ₹5.50 crore to Shri Rajeev Bhale was accepted as genuine,
  • No interest at 24% or otherwise, except what was already disclosed, was ever actually received,
  • The borrower was in serious financial trouble and even struggled to settle the principal.

The CIT(A), however, dismissed the appeal, treating the seized interest calculations as sufficient material and holding that the assessee had not given convincing evidence to rebut the Revenue’s stand.

First Round Before ITAT and Remand

The assessee then filed a second appeal before the ITAT.

In its order dated 17.02.2021, the Tribunal:

  • Set aside the issue to the file of the AO,
  • Gave a specific direction to the AO to verify from Shri Rajeev Bhale whether the assessee had actually received interest as reflected in the seized computation sheet.

The essential mandate of the remand was:

Do not merely rely on the working in the seized paper; ascertain, by examination of the borrower, whether interest was in fact paid or credited to the assessee.

Proceedings After Remand and Second Order of CIT(A)

Pursuant to the Tribunal’s direction:

  1. The AO issued summons under Section 131 to Shri Rajeev Bhale.
  2. A statement of Shri Rajeev Bhale was recorded on oath. He stated, inter alia, that:
    • He had received ₹5.50 crore from the assessee.
    • There was no formal written loan agreement.
    • He was unable to repay the loan in the normal course due to financial stress.
    • Around ₹4.50 crore of the loan was subsequently adjusted against the purchase price of another property of his, which had been mortgaged to State Bank of India, and which the assessee purchased in 2017.

The AO found perceived contradictions between:

  • The assessee’s claim that the principal amount had been fully recovered, and
  • Documents (e.g., sale deed) indicating that only ₹4.50 crore was adjusted towards the earlier loan through the property transaction.

The AO also referred to: