The reversal of interest expenses does not constitute gross receipts for the purpose of audit requirements under section 44AB of the Income Tax Act.

ORDER

PER SANDEEP SINGH KARHAIL, J.M.

The assessee has filed the present appeal against the impugned order dated 18/10/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2022-23.

2. In this appeal, the assessee has raised the following grounds: –

“1. On the facts and circumstances of the case and in law, the order passed by the AO is bad in law.

2. On the facts and circumstances of the case and in law, the AO erred in holding that section 44AB of the act is applicable to the Assessee.”

3. The sole grievance of the assessee is against the rejection of its return of income under section 139(9) on the basis that the books of accounts were not audited under section 44AB of the Act by the assessee even though the assessee has claimed income under the head “Profits and Gains of Business or Profession” of more than INR 1 crore.

4. The brief facts of the case are that the assessee filed its return of income on 07/11/2022, declaring a business loss of INR 18,62,318. Subsequently, notice under section 139(9) dated 14/12/2022 was issued intimating the assessee that its return of income is defective on the basis that the assessee has not audited its books of accounts under section 44AB of the Act even though its gross receipt is more than INR 1 crore. The assessee’s rectification application against the notice issued under section 139(9) of the Act was rejected by the Assessing Officer (“AO”). The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that the sundry credit balances, which were written back by the assessee during the year under consideration, qualify as business receipts and are treated as income from business or profession under the Act. The learned CIT(A) further held that since the liability arose out of a business transaction, its reversal is considered a business receipt and is taxable under section 28 as part of the profits and gains from business or profession. Thus, it was held that since the assessee in the present case has adjusted his business loss in the returned income (sundry credit balance written back), the same proves that the returned income is the business income of the assessee, and since the said amount was more than INR 1 crore, the assessee was required to get its accounts audited under section 44 AB of the Act. Being aggrieved, the assessee is in appeal before us.

5. During the hearing, the learned Authorised Representative (“learned AR”), by referring to the financial statement of the assessee, forming part of the paper book, submitted that the revenue from operations during the year under consideration was Nil and, therefore, the assessee did not get his accounts audited as per the provisions of section 44AB of the Act. The learned AR further submitted that since during the year under consideration, the interest expenses amounting to INR 160,60,99,934 of earlier years payable to the lenders were waived, the impact of the same was given in the books by reversing these interest expenses and was disclosed as “Other Income” in the audited financials.

6. On the other hand, the learned Departmental Representative vehemently relying upon the impugned order submitted that the sundry credit balance written back is the business income of the assessee and, therefore, should have been considered for the purpose of determining the limit for having the accounts audited under section 44AB of the Act.

7. We have considered the submissions of both sides and perused the material available on record. As per the assessee, it had borrowed from various financial institutional lenders, which it could not repay due to diverse commercial reasons. During the financial year 2021-22, the