• Dec
  • 27
  • 2013

Addition made by AO of notional interest which was not in existence is not correct

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CIT vs. M/s. Sahara India Mutual Benefit Co. Ltd. (Allahabad High Court)

In the instant case, M/s. Sahara India is the collecting agent not only of the assessee but also of various other companies. As per MoU, the assessee charges interest from M/s. Sahara India where delay in transmission of funds exceeds two months. From the record, it appears that the assessee has charged interest on the balance of Rs.13,80,08,484/- and no interest was paid on the balance of Rs.6,49,86,400/-, as the same did not exceed two months. When the parties have agreed not to charge the interest, as per the condition laid down in the MoU i.e. “if the remittance is within the less than two months”, then the AO cannot compel to do so.

Needless to mention that yardstick will have to be applied from the businessman’s point of view and certainly not according to the AO, as per the ratio laid down in the case of Voltamp Transformers (P) Ltd. vs. CIT, (1981) 129 ITR 105 (Guj); CIT vs. Walchand & Co., 65 ITR 381 (SC). It is only the assessee, who knows the commercial and business relations and the situation thereof and department is not supposed to interfere as per the ratio laid down in the case of Kewal Chand vs. CIT, 183 ITR 207, 211 (Cal).

In the case of Highways Construction Co. Pvt. Ltd. vs. Commissioner of Income-tax, [1993] 199 ITR 702 (supra), the Gauhati High Court observed that -

“…If the assessee had not bargained for interest, or had not collected interest, we fail to see how the income-tax authorities can fix a notional interest as due, or collected by the assessee. Our attention has not been invited to any provision of the Income-tax Act empowering the income-tax authorities to include in the income interest which was not due or not collected”.

In the instant case, the addition was made by the AO on notional interest which was not in the existence. So, the first appellate authority as well as the Tribunal have rightly deleted.

In the light of above discussion and by considering the totality of the facts and circumstances of the case, we find no reason to interfere with impugned orders passed by the Tribunal. The same are hereby sustained along with reasons mentioned therein.

The answer to the substantial questions of law are in favour of the assessee and against the department.

Source- CIT vs. M/S Sahara India Mutual Benefit Co. Ltd. (Allahabad High Court), Appeal No. ITA No.184/2005, Order Date : 09/10/2013


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