Case Law Details
Brief Facts of the Case
In the present case the Hon’ble High Court have deleted the addition on account of a notional income when advances were made without charging of any interest.
Facts of the case
These are the writ petitions which were preferred against the orders passed by the Commissioner of Income Tax under Section 264. In the assessment order, the addition of Rs.19,32,000/- on account of notional interest earned on advances given to Smart Tourist Private Limited was made. The petitioner is aggrieved by the fact that the said addition did not have any factual basis and it is for this reason that the petition under Section 264 of the said Act was filed before the Commissioner seeking revision of the assessment order on account of the said addition. The assessee had given an advance of Rs. 1,61,00,0001- to M/s Smart Tourist Pvt. Ltd. This advance was reportedly given for purchase of land. The AO while making 12% interest on these advances stated that there is no explanation why the assessee has given loan to the above concern out of its funds and no interest has been charged for this loan. In the absence of any explanation, evidence regarding identities of the parties and purpose of the loans, notional interest at 12% per annum is charged on the loan amount given.
Contentions of the Assessee
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 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.
Contentions of the Revenue
The AO in its order have mentioned that the agreement of the advances have not been filed. The identity of the parties have not been established.
Held by CIT(A)
The Ld. CIT(A) observed that the assessee has failed to furnish documents like agreement to sell and valid confirmations in support of its contentions. Even during proceedings u/s 264, the assessee has not furnished these vital details. On, the consideration of the facts and circumstances of this case, Ld. CIT(A) held that the Assessing Officer was justified in making this addition and therefore, refused to interfere in the orders of the Assessing Officer. Also, the Revision Application u/s 264 was also rejected by the ld. CIT(A).
Held by the High Court
The High Court relied on the Authority of Highways Construction Co. Pvt. Ltd. v CIT [1993] 199 ITR 702, wherein this court held where the facts were that 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, how the Income Tax authorities can fix a notional interest as due, or collected by the assessee. The 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 above Judgment the decision was in the favour of the assessee and accordingly in the present facts of the Case the Decision was held in the favour of the assesse.
