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Facts
The assessee, a Non-Banking Financial Company (NBFC), deposited cash amounting to ₹2,71,38,972 during the demonetization period. The Assessing Officer (AO) made an addition on account of these cash deposits. The assessee argued that these deposits were recoveries from loan installments from its microfinance customers. Separately, the assessee had entered into a One Time Settlement (OTS) for its outstanding loans, which included a waiver of interest. The assessee claimed deduction for the interest component paid under OTS.
Held
The Tribunal held that the addition made by the AO on account of cash deposits was unjustified, as the assessee had provided sufficient explanation and evidence regarding the source of funds from its business operations. The Tribunal also held that the assessee was entitled to a deduction for the interest component paid under the OTS, as it had been voluntarily disallowed in earlier years and would otherwise lead to double taxation.
Key Issues
Whether the cash deposits made during demonetization are unexplained income? Whether the interest component paid under OTS is allowable as a deduction?
Sections Cited
143(3), 68, 69, 69A, 269T, 43B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “A”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: The appeal in filed by the assessee and ITA 1. No. 3491/Del/2023 filed by the revenue for AY 2017-18, arise out of the order of the ld National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. NFAC’, in short] in Appeal No. ITBA/NFAC/S/250/2023- 24/1056845323(1) dated 06.10.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.12.2019 by the Assessing Officer, DCIT, Circle-4(2), New Delhi (hereinafter referred to as ‘ld. AO’). As these are cross appeals, hence, they are taken up together and 2. disposed of by this common order for the sake of convenience. for AY 2017-18 (Assessee’s appeal) The solitary issue involved in the appeal of the revenue is challenging 3. the deletion of addition of ₹2,71,38,972/- on account of cash deposits made during the demonetization period by the assessee. We have heard the rival submissions and perused the material 4. available on record. It is not in dispute that a sum of ₹2,71,38,972/- stood deposited by way of cash deposit by the assessee in the bank account during the demonetization period. The assessee duly mentioned that RBL Bank had reported a sum of ₹16,26,580/- twice, which should be reduced from the total deposits. Further a sum of ₹1,50,400/-, which was deposited in the bank account was not reported by RBL Bank. Accordingly, it was submitted that the correct amount of cash deposit made by the assessee is to be considered at ₹2,56,62,792/- instead of Rs. 2,71,38,972/-. From the very same figure of cash deposit, it could be seen that the cash deposits were made in different denominations by the assessee including deposits made in specified bank notes (SBN). We find that the ld AO while making an addition on account of cash deposits had not even bothered to make a basic bifurcation of cash deposits made in SBN and non-SBN. The assessee on its part had sought to explain the source of cash deposits emanated from the normal course of business of the assessee. The assessee is a Non- Banking Financial Company registered with RBI and Categorized as MFI (Micro- Finance Institution). The maximum loan per customer is Rs. 50,000/- and customers are poor, semiliterate/illiterate, residing in semi urban and rural areas. The assessee has been in this business since 1996 and has been Page | 2 recovering loan installments in cash as per the industry practice and has been regularly filing returns. These returns have been scrutinized u/s 143(3) of the Act every year and no additions have been made u/s 68/69/69A or 269T in the past. During the relevant period, Digital payment system was not widespread as it is currently, and cash transactions were the norm in the semi urban and rural areas. The nature of business activity of assessee (Micro Finance activity) which involves dealing with poor men and women, who did not have access to credit from banks and financial institutions. The borrowers (numbering around 17,280), who have paid cash are largely located in small towns and villages and it has been customary for them to repay loan installments only in cash. The name of borrowers who have paid the amount to assessee was produced to the A.O. during the assessment proceedings. It would have been practically impossible for all these customers to visit the banks, exchange notes and deposit the money in assessee's bank account given the constraints the banking system faced during that period. Any refusal by the Company to accept the notes would have resulted in defaults. The assessee as a responsible citizen has deposited all the cash collections in bank accounts. It is evident from the list of customers that in substantial number of cases, the amount collect are not in multiples of Rs 500 which goes to prove that Non SBNs are also included in it. Further, the deposits are made in 12 banks in 61 locations proving that these are part of normal business operations. All those who paid the amounts were existing borrowers, who were repaying loans along with interest in installments (EMI) much before promulgation of demonetization and there is no reason for suspecting the genuineness of transaction. The A.O., if he had any doubts, could have sent notices to borrowers to ascertain the genuineness as the entire details of the borrowers were before him. The A.O. has not given any cogent reasons for rejecting the contentions and evidences produced by the assessee. The A.O’s contention that since the assessee is not permitted to accept SBN notes, all deposits must have been out of pre-existing undisclosed cash, has no logic. The Specified Bank Notes (Cessation of liabilities) Ordinance, 2016 is an Independent Ordinance and those provisions cannot be superimposed in Income Tax Act. Deposit of SBN Notes can only give a scope to the A.O. to enquire into source of receipt and only if it is unexplained, it can be subject to tax u/s 68/69/69A of the Act. The A.O. has not explained as how he came to conclusion that the assessee has deposited its own money. All the 17,280 customers have been tested under KYC rules and the loans were advanced before the demonetization order was promulgated. The banks have accepted the deposits and credited to the assessee's bank account which proves that the currencies had the legal backing of Reserve Bank of India. Further, the deposits of Rs. 2,56,52,792/-represent collection from customers in EMI (Equated Monthly Installments) which has an interest component of approximately (1/6th) amounting to Rs.42,77,132/-, which has already been accounted as Income on accrual basis and offered for tax. Hence this amount has been taxed twice, once under the head Profit and Gains from Business or Profession and again u/s 68. The conclusion drawn by the A.O., ignoring the nature of business operations of the Company and evidence produced is arbitrary and has no basis in law. We find that the ld AO by completely ignoring the submissions and 5. not even addressing the wrong reporting of cash deposits by RBL Bank in the sum of ₹16,26,580/- and non-reporting in the sum of ₹1,50,400 and non bifurcation of deposits made in SBN and non-SBNs, proceeded to treat the entire cash deposits as unexplained money in the assessment. It is found that assessee had explained the source of cash deposits to 6. have emanated out of recovery made from its loan debtors. It is not in dispute that the assessee is a Non-Banking Financial Company duly registered with Reserve Bank of India (RBI). During the course of its lending activity, the assessee company had advanced loan to various thousands of customers and recovery being made from them in form of Equated Monthly Instrument (EMI) both in cash as well as in cheques. The assessee had given the complete list of recovery made from various customers in tabular form from April 2016 to March 2017, from which it could be seen that the recovery made during the demonetization period itself was ₹2,56,62,792/-. The cash had been deposited in 12 banks. It is not in dispute that the assessee had provided details of 17280 customers from whom it had collected the cash recovery and provided the details of customers with unit name, Loan Account Number, name of the person, address, amount of loan, loan sanction date, amount received and date of receipt. The amount recovered from individual customers are very very nominal and the assessee had faithfully deposited the entire collections in its bank account. The ld AO wrongly applied Section 269T of the Act, which barred any borrower to make a repayment of loan in cash in excess of ₹20,000 either on a single day or in aggregate during the year. But this provision has to be looked at from the point of view of the borrower whereas assessee herein is the lender. Hence, we hold that the provision of Section 269T of the Act, per se have been wrongly applied by the ld AO. We find that assessee had merely recovered its pre-existing debts from thousands of customers in cash and had deposited the same in the bank account, including the deposits made during demonetization period. From the table furnished by the assessee, we find that cash recovery have been periodically received by the assessee and the cash deposits were made periodically in the bank account of the assessee. We find that no enquiry whatsoever was carried out by the ld AO with any of the borrowers to cross check the claims made by the assessee herein. The ld CIT(A) had duly appreciated the aforesaid contentions and had deleted the addition made u/s 68 of the Act on account of cash deposits made in the bank, on which we do not find any infirmity in the facts and circumstances of the instant case. Accordingly, the grounds raised by the revenue are dismissed. In the result, the appeal of the revenue is dismissed. for AY 2017
18. (assessee’s appeal)
The only issue to be decided in this appeal is as to whether the ld 7. CIT(A) was justified in disallowing the interest paid on loans in the facts and circumstances of the instant case. We have heard the rival submissions and perused the material 8. available on record. As stated earlier, the assessee is a non-banking financial Company duly registered with RBI. The assessee borrows loans from banks and financial institutions and advances the same to microfinance customers. The assessee is also categorized as micro finance institution. The assessee had availed term loans from the banks and interest on such term loans, which were not paid actually by the assessee were disallowed by the assessee voluntarily in the return of income in earlier years. The amount of disallowances made in earlier years was ₹25,49,22,936/-. During the year under consideration, the assessee entered into One Time Settlement (OTS) with the banks and financial institutions and got a waiver of substantial sums from the banks and financial institutions under OTS. The assessee had 17 lenders consisting of 1 financial institution (SIDBI) and 16 banks. Since, the assessee company became a sick company and net worth eroded, the financial institution and 14 banks formed a consortium and entered into Corporate Debt Restructuring (CDR) arrangement with the assessee followed by OTS. The total dues to the bank at that point of time was ₹2,14,52,26,858/-. 4 banks did not join the consortium and entered into OTS arrangement with assessee separately. Out of total amount settled in OTS in the sum of ₹67,05,45,091/-, a sum of ₹23,75,55,144/- was apportioned towards interest outstanding and remaining sum of Page | 6 ₹43,29,89,947/- was apportioned towards prinicpal outstanding. The assessee submitted that the differential sums between the loan outstanding as per books and the amount settled under OTS were credited to the profit and loss account by the assessee in the sum of ₹147,46,81,767/-. The following table would explain the situation better:
Payment Gain S. No Particulars Dues appropriated i Term loans 1,84,13,34,257 43,29,89,947 140,83,44,310 2 Funded interest 27,01,38,942 23,75,55,144 3,25,83,798 3 Interest accrued 3,37,53,659 - 3,37,53,659 Grand Total 2,14,52,26,858 67,05,45,091 147,46,81,767 Since, the assessee as and when had made provision for interest 9. payable to banks and financial institutions had duly disallowed the provision under section 43B of the Act in earlier years in the return of income. Pursuant to the OTS and waiver obtained thereon, the waiver amounts were written back and credited to profit and loss account, comprising of both principal portion and interest portion and interest portion was not liable to be taxed again as it had been already disallowed in the year in which provisions were made by the assessee. Hence, the assessee to the extent of apportionment of amount paid under OTS towards interest component in the sum of ₹23,75,55,144/- had duly claimed the sum as deduction u/s 43B of the Act on payment basis during the year under consideration in their return of income. In fact, this fact is disclosed in tax audit report vide reply to Clause number 26(i)(A)(a) & (b) of from 3CD, which is enclosed in page 69 of the paper book. We find that the lower authorities had not appreciated the contention of the assessee in the proper perspective.
We find that assessee in the earlier years had voluntary disallowed 10. the unpaid interest on term loans payable to banks and financial institutions under section 43B of the Act in the return of income. During the year under consideration, they had reached a OTS with Bank and financial institutions to the tune of ₹67,05,45,091/- out of this, a sum of ₹23,75,55,144/- was apportioned towards interest component. Since this interest component has been duly paid by the assessee during the year under consideration, the assessee had merely claimed the sum as deduction on payment basis. Hence, in our considered opinion, the assessee is entitled for deduction of the same u/s 43B of the Act. If this deduction is not granted to the assessee, then it would only result in double taxation as assessee while making provision for interest had already offered to tax in earlier years and while making payment under OTS is also offering said interest to tax. Hence, in order to avoid such double addition, assessee would be entitled for deduction u/s 43B of the Act in the sum of ₹23,75,55,144/- for the year under consideration. Accordingly, the ground raised by the assessee is allowed.
In the result the appeal of the assessee is allowed. 11.
To sum up, the appeal of the revenue is dismissed and the appeal of 12. the assessee is allowed.
Order pronounced in the open court on 12/12/2025.