Case Law Details
The logic that seems to have been applied by the revenue authorities is that the petitioner was a businessman and it would be imprudent for a businessman to advance a sum of Rs. 1.6 crores as in the case of W.P.(C) 6265/2013 to Smart Tourist Private Limited and to not charge anything in return. The explanation sought to be given by the petitioner in both these cases was that the advances were made in the course of their business and it is not at all necessary that an advance given by a businessman at all times must have an element of interest also.
There are various other considerations which come into the calculations when a businessman advances money to another. It is not at all necessary that interest must be charged. It was further submitted by the learned senior counsel appearing on behalf of the petitioners that there is no finding in the assessment orders or in the order of the Commissioner of Income Tax that the petitioners had, in fact, received some amount by way of interest and that such amount was not shown in the accounts. It is also contended that the revenue authorities have not rejected the books of accounts of the petitioner. It was, therefore, submitted that unless and until there was a concrete finding that something was received by the petitioner from the said Smart Tourist Private Limited and other persons similarly situated, nothing can be added by way of notional income. A reference was made to the decision of the Guwahati High Court in B and A Plantations and Industries Ltd. v Commissioner of Income Tax: 242 ITR 22. The relevant portion of that decision reads as under:-
“As regards the addition of notional interest the assessee made an interest free advance of Rs. 19,5 8,256 to Jorhat Investments Ltd., which is a sister concern. The case of the assessee is that they did not charge interest on that advance and in consideration of the same the assessee got the premises at a very low rent of rupees two per sq. feet in a prime locality of Calcutta.
15. The Assessing Officer added a notional interest of 18 per on the advance amount and added the income as the amount of interest. The said addition was approved by the Commissioner of Income Tax (Appeals) and the Tribunal.
16. In this case there is no finding when the assessee had in fact received the interest or that the Jorhat Investments Ltd., had in fact paid the interest to the assessee and the interest was not reflected in the accounts. The finding is that the assessee ought to have charged interest.
17. The facts in the instant case are more or less identical with the case of Highways Construction Co. Pvt. Ltd. v CIT [1993] 199 ITR 702, wherein this court held (page 708) :
“There is no finding of fact to the effect that actually the loan had been granted to the managing director or any other person on interest, or that interest had actually been collected and the collection of the interest was not reflected in the accounts. The finding of the Income Tax Officer is that the assessee ought to have collected interest. In other words, the view of the Income Tax Officer, which has been accepted by the Tribunal, was that the assessee, as a good business concern, should not have granted interest-free loan, or should have insisted on payment of interest. 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 this view, we answer question No. (ii) in the negative, that is, in favour of the assessee and against the Revenue.””
On going through the said decision, it can be discerned that the Guwahati High Court held that there was nothing to show that the assessee had, in fact, received interest or that the company to whom the loan was given had, in fact, paid interest to the assessee. There was also nothing on record to show that the alleged interest was not reflected in the accounts. The only finding recorded was that the assessee “ought to” have charged interest. Referring to an earlier decision of the Guwahati High Court, in Highways Construction Co. Private Limited v. CIT: [1993] 199 ITR 702, the Court observed that their attention had 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 similar vein, when we asked Mr Sahni, who is appearing for the respondent to point out some provision of the Income Tax Act, whereunder such “notional‟ interest could be made the subject matter of tax, the only reference he made was to Section 144 of the said Act. However, we are clear that Section 144 does not at all apply to the present proceedings because the present proceedings originate from an assessment under Section 143(3) of the said Act.
In the absence of any specific provision under which the so called notional income on advances, could be brought to tax, we do not see as to how the impugned orders passed by the Commissioner of Income Tax can be sustained.
Consequently, we allow these writ petitions. The impugned orders are set aside. The addition on account of a notional income on advances is deleted.
I think in future the department would be on the boar of business man and instruct how they will deal with the transactions.