The Income Tax Appellate Tribunal, Delhi, has delivered a significant ruling clarifying that deemed interest cannot be imposed on amounts arising from a slump sale transaction when those amounts have been consistently treated as liabilities, not advances, across multiple assessment years. This decision reinforces the principle that revenue authorities cannot arbitrarily re-characterize transactions after accepting their nature for years without new factual or legal grounds.
Background & Facts
The Dispute
The appellant, UM Autocomp Private Limited, is engaged in the manufacturing and trading of automotive components. The dispute centers on an addition of Rs. 10,15,41,040 made by the Assessing Officer (AO) as deemed notional interest on an outstanding amount of Rs. 63,46,31,505 shown against M/s. UM Power Ltd. in the appellant’s balance sheet for A.Y. 2022-23. The AO treated this amount as an interest-free loan advanced by the appellant to its group company, invoking provisions for deemed interest under Section 2(22)(e) and Section 36(1)(iii) of the Income Tax Act, 1961.
Key Facts
- The appellant filed its return of income for A.Y. 2022-23 on 12.10.2022 declaring a loss of Rs. 4,70,90,571.
- The assessment was completed under Section 143(3) read with Section 144B on 18.03.2024, resulting in a total income of Rs. 5,44,50,469 after the deemed interest addition.
- The Rs. 63,46,31,505 outstanding against M/s. UM Power Ltd. originated from the acquisition of the automotive division of M/s. Unitech Machines Ltd. via a Business Transfer Agreement (BTA) dated 14.03.2017.
- The BTA was executed on a slump sale basis for a total consideration of Rs. 340 crores.
- The amount of Rs. 63,46,31,505 comprised two components as per the audited balance sheet of M/s. Unitech Machines Ltd. as of 28.02.2017:
- Rs. 37,43,24,934 under Short Term Loans and Advances (Related Parties)
- Rs. 25,86,03,847 under Trade Receivables (More than Six Months from Due Date)
- These liabilities were carried forward into the appellant’s books post-acquisition and remained unchanged from A.Y. 2017-18 to A.Y. 2022-23.
- The appellant submitted balance sheets for A.Y. 2017-18 to 2021-22 showing identical treatment of the amount.
- The AO had examined and accepted the BTA and its accounting treatment during A.Y. 2017-18, passing an assessment order on 26.12.2019 under Section 143(3) without any disallowance of deemed interest.
- The appellant also submitted a reply dated 06.12.2019 during A.Y. 2018-19 detailing the inherited assets and liabilities, which were accepted by the department.
- The total actual interest expenditure for A.Y. 2022-23 was only Rs. 20,48,141, making the deemed interest addition of over Rs. 10 crore disproportionate.
Procedural History
- 14.03.2017: Business Transfer Agreement executed for slump sale of automotive division of M/s. Unitech Machines Ltd.
- 26.12.2019: Assessment order for A.Y. 2017-18 passed under Section 143(3), accepting the BTA and no deemed interest addition.
- 06.12.2019: Reply submitted by appellant during A.Y. 2018-19 detailing inherited liabilities; accepted by AO.
- 12.10.2022: Return filed for A.Y. 2022-23 declaring loss.
- 18.03.2024: AO completed assessment under Section 143(3) r.w.s. 144B, making deemed interest addition of Rs. 10,15,41,040.
- 02.09.2025: CIT(A)/NFAC upheld the addition.
- 21.04.2026: Hearing held before ITAT Delhi.
- 13.05.2026: Judgment pronounced.
Relief Sought
The appellant sought deletion of the deemed interest addition of Rs. 10,15,41,040, reversal of penalty proceedings under Section 270A, and cancellation of interest levied under Sections 234A, 234B, 234C, and 234D.
The Legal Issue
The central question was whether an amount carried forward as a liability from a slump sale transaction, consistently accepted by the Revenue over five assessment years, can be re-characterized as an interest-free loan advanced by the assessee to attract deemed interest under the Income Tax Act.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the Rs. 63.46 crore was not an advance but a liability inherited under the Business Transfer Agreement. The transaction was a slump sale, not a loan disbursement. The Revenue had examined and accepted this position during A.Y. 2017-18 and subsequent years without any disallowance. The principle of consistency, as upheld in CIT v. S. A. Builders Ltd. (288 ITR 1), precluded the Revenue from taking a contrary stand without new facts or law. The total actual interest expense of Rs. 20.48 lakh further rendered the Rs. 10.15 crore deemed interest addition arbitrary and disproportionate.
For the Respondent
The Department’s representative supported the lower authorities’ view that the amount shown against M/s. UM Power Ltd. constituted an interest-free advance and thus attracted deemed interest under Section 2(22)(e) and Section 36(1)(iii). No specific counter-arguments were presented beyond reliance on the AO’s and CIT(A)’s reasoning.
The Court's Analysis
The Tribunal emphasized that the Revenue had already adjudicated the nature of the transaction during A.Y. 2017-18 and accepted the appellant’s explanation that the amount was a liability arising from a slump sale, not a loan. The consistent treatment over five assessment years created a legitimate expectation and bound the Revenue under the doctrine of consistency.
"The revenue accepted this position consistently for past several assessment years right from A.Y. 2017-18 we see no reason to deviate from this position during the Assessment Year 2022-23."
The Tribunal further noted that the amount was bifurcated between trade receivables and short-term loans, both of which were part of the acquired liabilities, not new advances. The appellant had not disbursed any fresh funds; the liability was inherited. The Tribunal also found the interest rate of 16% arbitrary, especially when the actual interest expense was only Rs. 20.48 lakh.
The Tribunal distinguished CIT v. Abhishek Industries Ltd. (286 ITR 1), holding that case involved actual advances, not inherited liabilities from a slump sale. The CIT(A) had erred in re-characterizing the addition from deemed interest income to disallowance under Section 36(1)(iii), thereby creating a new case for the Revenue - an impermissible exercise under settled law.
The Verdict
The appeal was allowed. The Tribunal directed the deletion of the deemed interest addition of Rs. 10,15,41,040. The AO was directed to recompute the total income without this addition. The penalty proceedings under Section 270A and interest levied under Sections 234A, 234B, 234C, and 234D were also cancelled. The order was to be implemented within 45 days of the judgment date.
What This Means For Similar Cases
Consistency Overrides Retrospective Re-characterization
- Practitioners can now rely on prior acceptance by the Revenue as a strong defense against retrospective re-characterization of transactional elements.
- Where a slump sale liability has been consistently reported and accepted over multiple years, any subsequent addition of deemed interest is legally unsustainable.
Slump Sale Liabilities Are Not Advances
- Amounts inherited as liabilities under a slump sale agreement cannot be treated as advances made by the transferee, even if shown under "Loans and Advances" in the balance sheet.
- The nature of the item must be traced to its origin; inherited liabilities retain their character.
Actual Interest Expenditure as a Benchmark
- Deemed interest additions must be evaluated against actual interest expenses incurred. A massive deemed interest addition where actual interest is minimal is prima facie arbitrary and disproportionate.
- Practitioners should highlight this disparity in appeals to challenge unreasonable additions.
Procedural Fairness in Re-characterization
- Revenue authorities cannot create a new ground of disallowance during appellate proceedings that was not raised in the original assessment.
- Any re-characterization must be initiated at the AO level and supported by evidence, not introduced for the first time by the CIT(A) or Tribunal.
Commercial Expediency Is Legally Recognized
- The Tribunal reaffirmed that business decisions made for commercial expediency, such as acquiring a division to gain strategic control, are valid and cannot be second-guessed by tax authorities.
- The precedent of S.A. Builders Ltd. remains binding: tax authorities must respect the commercial rationale of transactions unless proven to be a sham.
