Case Law Details
DCIT Vs Girish R. Tanti (ITAT Rajkot)
ITAT Rajkot held that in absence of any specific provisions under the Income Tax Act, notional income on advance cannot be brought to tax. Accordingly, addition deleted.
Facts-
ROI for the assessment under consideration was filed u/s. 139 of the Act on 29-09-2011 and order u/s. 143(3) of the Act dated 29-3-20 14 originally assessed the total income at Rs. 17,54,953/-. Thereafter, the PCIT-Rajkot by way of order u/s. 263 of the Act dated 18-03- 2016 held that the original order u/s. 143(3) of the Act dated 29- 03-20 14 is erroneous as well as prejudicial to the interest of the revenue and thereby set aside the aforesaid order. The primary reason for setting aside the order was that interest on advances given by the assessee to Sanman Holding Private Limited was not offered to tax in assessment year 2011-12, though in assessment year 2010-11, the said interest was offered to tax by the assessee. The assessee filed appeal against the order u/s. 263 of the Act before ITAT, Rajkot which decided that the issue in respect of accrued interest was valid and accordingly dismissed the assessee’s appeal.
Pursuant to ITAT order, the AO assessed the total income at Rs. 35,17,54,953/- wherein the AO computed notional interest at the rate of 10% on deposits held by the assessee with M/s Sanman Holdings Private Limited on the ground that the same was not offered to tax all the assessee is following accrual system of accounting and added the same to the assessee’ s total income.
CIT(Appeals) allowed the assessee’ s appeal in relation to the notional interest. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
In the case of ShivnandanBuildcon (P.) Ltd.[2015] 60 taxmann.com 347 (Delhi) it is held that in absence of any specific provision under which said notional income on advance could be brought to tax, impugned addition was to be deleted.
We are of the considered view that interest having neither been accrued to the assessee (as per specific terms of the Agreement placed on record before us) and neither any interest having being received by the assessee, such interest cannot be subject to tax in the hands of the assessee on purely “notional basis”. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals), who in the instant set of facts, deleted the interest sought to be taxed in the hands of the assessee on notional basis.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-2, Rajkot in Appeal no. CIT(A)- 2/0125/2016-17 vide order dated 10/01/2018 passed for the assessment year 2011-12.
2. The Revenue has taken the following grounds of appeal:-
“1. The Ld. CIT(A)-2, Rajkot has erred in law and on facts in deleting the addition of Rs. 35,00,00,000/- made by the Assessing Officer on account of notional interest @ 10 % on deposit made of Rs. 350 crores to M/s. Sanman Holdings Pvt. Ltd.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A)-2, Rajkot ought to have upheld the assessment order of the Assessing officer.”
3. The brief facts of the case are that the assessee, an individual, is engaged in the business of generation of power and energy. The return of income for the assessment under consideration was filed under section 139 of the Act on 29-09-2011 and order under section 143(3) of the Act dated 29-3-20 14 originally assessed the total income at ~ 17,54,953/-. Thereafter, the PCIT-Rajkot by way of order under section 263 of the Act dated 18-03- 2016 held that the original order under section 143(3) of the Act dated 29- 03-20 14 is erroneous as well as prejudicial to the interest of the revenue and thereby set aside the aforesaid order. The primary reason for setting aside the order was that interest on advances given by the assessee to Sanman Holding Private Limited was not offered to tax in assessment year 2011-12, though in assessment year 2010-11, the said interest was offered to tax by the assessee. The assessee filed appeal against the order under section 263 of the Act before ITAT, Rajkot which decided that the issue in respect of accrued interest was valid and accordingly dismissed the assessee’s appeal. Pursuant to ITAT order, the AO assessed the total income at ~ 35,17,54,953/- wherein the AO computed notional interest at the rate of 10% on deposits held by the assessee with M/s Sanman Holdings Private Limited on the ground that the same was not offered to tax all the assessee is following accrual system of accounting and added the same to the assessee’ s total income.
4. In appeal before Ld. CIT(Appeals), the assessee contended that on 31- 03-2010, M/s Sanman Holdings Private Limited informed assessee that the company was passing through critical financial crisis and was incurring losses and therefore it would not be possible to provide/pay interest with effect from 01-04-2010 and that the Board of Directors was contemplating amalgamation of the company with M/s Tanti holding Private Limited with effect from 0 1-04-2010, subject to approval of High Court of Bombay and Gujarat. Subsequently, M/s Sanman Holdings Private Limited got amalgamated with M/s Tanti Holdings Private Limited after obtaining to approval the High Court. The assessee further submitted before Ld. CIT(Appeals) that M/s Tanti Holdings Private Limited informed the assessee on 13-09-2011 that it acknowledges the liability to pay the principal amount of ~ 350 crores given as unsecured loans by the assessee to M/s Sanman Holdings Private Limited, but in view of the loan agreement of the assessee with M/s Sanman Holdings Private Limited, no interest is provided or payable from 01-04-2010. Accordingly, the assessee contended before Ld. CIT(Appeals) that the interest income on the said loans did not accrue to assessee nor did the borrower provide for any such interest as payable to the assessee in its books of accounts. In view of the above facts, Ld. CIT(Appeals) allowed the assessee’ s appeal in relation to the notional interest, assessed as income in the assessee’ s hands with the following observations:
3.1.3 Decision
“Brief facts to recapitulate are that the assessee had a deposit with M/s Sanman Holding Private Limited of Rs 350 crores on which it had earned interest of Rs 10.76 crores in A. V. 2010-1 1 and had offered for same for taxation. However, when no interest income on these deposits was offered in A. V. 2011-12 and the A. O. did not verify this aspect in original assessment u/s 143(3) dated 29/03/2014, the Pr. CIT-2, Rajkot, directed the A. O. u/s 263 to make fresh assessment finding the Assessment Order erroneous and prejudicial to the interest of revenue. Honorable ITAT vide order dated 11/11/2016 upheld the order of Pr, CIT-2, Rajkot u/s 263.
In view of the direction of Pr. CIT-2, Rajkot the present assessment has been finalized after making an addition of Rs 350 crores as notional interest income accrued on the deposit outstanding with M/s Tanti Molding Private Limited in which erstwhile M/s Sanman Holding Private Limited got amalgamated with effect from 01/04/2010 with approval by the Honourbale High Courts of Gujarat and Mumbai vide their orders dated 10-05-2011 and 20/08/2011.
The assessee had contended that pursuant to loan agreement dated 2 5/09/2009, M/s Tanti Holding Private Limited intimated the assessee vide its letter dated 30/09/201 1 that liability to provide/pay interest had ceased from 01/04/2010. The assessee thus contends that no interest accrued to assessee and therefore interest income is not justified. In this regard the assessee placed reliance upon the court judgments to the effect that only real income can be taxed and not the notional income.
The Assessing Officer rejected the contentions of the assessee mainly on the grounds that the assessee had shown interest income on the same deposit in immediately preceding assessment year and that the facts of the case of assessee were different from the cases of Shoorji Vallabhdas & Co. 46 ITR 144 (SC) and of Arihant Avenue & Credit Ltd., 36 Taxmann.coml4 relied upon by the assessee.
One of the pleas of the assessee was that the assessee had sufficient own capital and non interest bearing funds and deposits and therefore it was not case of divergence of funds as non interest bearing advance. This plea of the assessee was rebutted by the A. O. stating that here it is not a case of divergence of interest bearing funds to non interest bearing advances but here is the case that the assessee did not offer interest income to tax which accrued on interest bearing advance given by assessee.
Having considered facts and circumstances of the case and rival contentions, I find it an uncontroverted fact that the addition has not been made on account of diversion of interest bearing funds to non interest bearing advance. The addition has been made by A. O. holding that no such interest income had accrued to assessee. It is contended that only the real income can be taxed. It is contended that in the loan agreement with M/s Sanman Holding Private Limited dated 25/09/2009 it was provided that there would be no liability of M/s Sanman Holding Private Limited to pay interest in case of amalgamation, merger or de-merger or takeover of borrower or any other change in its management form the appointed date of such event.
It is contended that on 31/03/2010 M/s Sanman Holding Private Limited informed the assessee that company was passing through critical financial crisis and was incurring losses and therefore it would not be possible to ^provide/pay in interest with effect from 01/04/2010 and that the Board of Directors were contemplating amalgamations of the company with M/s Tanti Holding Private Limited with effect from 01/04/2010 subject to approval of High court of Bombay and Gujarat. It is further contended that M/s Tanti Holding private limited informed the assessee on 13/09/201 1 that it acknowledges the liability to pay the principal amount of Rs 350 crores given as unsecured loans by the assessee to M/s Sanman Holding Private Limited but in view of the loan agreement of the assessee with the M/s Sanman Holding Private Limited, no interest is to be provided or payable from 01/04/2010.
It is thus contended that the interest income on the said loan did not accrue to assessee nor did not borrower provide for any such interest to assessee in his books of accounts.
Having considered facts and circumstances of the case of rival contentions, I find merit in contentions of the assessee that only real income can be taxed and not notional one. The loan agreement and subsequent fact of amalgamation clearly establish that no interest accrued to the assessee. The A. O. has admitted that it is not a case of diversion of interest bearing non interest bearing advances. It also find that the assessee has a deposit of Rs. 522. cr. from own HUF to which no interest is paid Besides, the assessee has not claimed any interest expenses. It is also noteworthy that subsequently in A. V. 2012- 13 and 2013-1 4 no such additions on account of national income have been made by A. O. even though the deposit of the assessee with M/s Tanti Holding Private Limited is still outstanding. In view of above discussion in my considered opinion the impugned addition is not sustainable and the same is directed to be deleted.”
5. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals). The DR during the course of arguments placed reliance on the order of Ld. CIT(Appeals), however, he also agreed to the fact that interest has been sought to be taxed in the hands of the assessee on purely notional basis. The DR did not bring anything on record to controvert the terms of the loan agreement between the assessee and M/s Sanman Holdings Private Limited according to which it was provided that there would be no liability of M/s Sanman Holdings Private Limited to pay interest in case of amalgamation, merger or takeover of borrower or any other change in its management from the appointed date of such event. We also observe that in the subsequent assessment years 2012-13 and 2013-14, the Revenue itself did not make any such additions on account of notional interest, even though the deposit of the assessee with M/s Tanti Holdings Private Limited is still outstanding. The assessee has also placed on record before us copy of letter dated 31-03-2010 by M/s Sanman Holdings Private Limited to the assessee intimating its inability to pay interest due to financial crisis. The assessee has also placed on record copy of letter dated 30-09- 2011 of M/s Tanti Holdings Private Limited in which it stated that the company M/s Sanman Holdings Private Limited amalgamated into it with effect from 01-04-2010 and also acknowledging the liability to pay unsecured loan of ~ 350 crores taken by M/s Sanman Holdings Private Limited to the assessee. Further, Ld. CIT(Appeals) also observed that the assessee did not utilise any interest-bearing loans to advance the sum of ~ 350 crores to M/s Sanman Holdings Private Limited. Therefore, the Department has not brought on anything on record to demonstrate that the interest income sought to taxed had accrued to the assessee nor has the Revenue brought anything on record that any interest income was in fact received by the assessee. It is a well-settled principle of law that income cannot be taxed in the hands of the assessee, on purely “notional” basis. Either the income should accrue to the assessee, as per terms of agreement or otherwise, or else the same should have been received by the assessee. In the instant facts, as per terms of Agreement, on amalgamation of M/s Sanman Holdings Private Limited into M/s Tanti Holdings Private Limited by way of Orders of High Court of Mumbai and Gujarat, there is no obligation for M/s Sanman Holdings Private Limited to pay any interest to the assessee. In the case of ShivnandanBuildcon (P.) Ltd.[2015] 60 taxmann.com 347 (Delhi) assessee-company had given advance to one ‘S’ company out of its funds and no interest had been charged for this loan. The Assessing officer computed notional interest on said advance and made addition in income of assessee. The Delhi held that in absence of any specific provision under which said notional income on advance could be brought to tax, impugned addition was to be deleted. The Supreme Court in the case of Poona Electric Supply v. Ld. CIT(Appeals) (1965) 57 ITR 21 (SC) held that “income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act”. Subsequently, the Orissa High Court in Prafulla Kumar Malik AIR 1969 Ori 187 emphasized that income tax is imposed only on “profits he actually receives and not on the profits he might have, but has not received”. This real accrual of income test was elaborated by the Supreme Court in Godhra Electricity Company(1997) 225 ITR 746. In this case, a Government Circular entitled the assessee to recover consumption charges from its customers at enhanced rates. As this order was the subject matter of protracted litigation, the assessee was unable to recover the enhanced charges. Consequently, the assessee challenged the inclusion of such amount within its assessable income on the ground that no real income had accrued. Reiterating its earlier decision in Morvi Industries Ltd. v. CIT(1971) 82 ITR 835 and CIT v. Birla Gwalior (1973) 89 ITR 266, the Supreme Court held that tax cannot be imposed on hypothetical accrual of income. It was observed that the question of real accrual of income must be considered by taking the probability of realisation in a realistic manner. In the case of Asian Hotels(2010) 323 ITR 490 (Delhi),the Delhi High Court considered the issue of notional income from interest free loans received by the petitioner in respect of shops given on rent. The Assessing Officer computed tax of 18 percent per annum on the notional interest on the basis that they resulted in benefit to the petitioner. Rejecting this contention, the Court held that the notional income from the interest free loans is not taxable in the absence of a specific provision in the Income Tax Act. In view of the above judicial precedents cited above and the facts of the instant case, we are of the considered view that interest having neither been accrued to the assessee (as per specific terms of the Agreement placed on record before us) and neither any interest having being received by the assessee, such interest cannot be subject to tax in the hands of the assessee on purely “notional basis”. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals), who in the instant set of facts, deleted the interest sought to be taxed in the hands of the assessee on notional basis.
6. In the result, appeal of the Department is dismissed.
Order pronounced in the open court on 3 1-10-2022
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