2007 (8) TMI 277 - HC - Income Tax

Interest on loans - CIT had found that assessee had paid up capital/ reserve/surplus of Rs. 6.10 crores on which no interest was being paid and therefore interest-free advances made by it are covered - Tribunal, however, had also recorded a finding that the assessee has not diverted any borrowed fund on which interest was paid for non-commercial purposes and therefore, there is no question of disallowance of interest out of the interest paid by the assessee order of CIT & ITAT is justified

Summary

Issues:
Interpretation of the Income-tax Act, 1961 regarding taxation of notional interest income on loan advances.

Analysis:
The appeal before the Allahabad High Court involved a substantial question of law regarding the taxation of notional interest income under the Income-tax Act, 1961. The primary issue was whether the Income-tax Appellate Tribunal was correct in concurring with the Commissioner of Income-tax (Appeals) that notional interest income cannot be charged to tax. The case revolved around an assessment for the year 1987-88 where the respondent-assessee had claimed a deduction on interest paid on a loan amounting to Rs. 52,46,521. The assessing authority computed a notional interest on loan advances made by the assessee to others, resulting in an addition/disallowance of Rs. 14,09,111. However, the Commissioner of Income-tax (Appeals) had deleted this addition/disallowance, a decision upheld by the Tribunal.

Upon examination, the Commissioner of Income-tax (Appeals) found that the respondent-assessee had substantial capital/reserve/surplus on which no interest was being paid, justifying the interest-free advances made by the assessee. The Tribunal also noted that the assessee had not diverted any borrowed funds for non-commercial purposes, aligning with previous court decisions. Specifically, the Tribunal's view was consistent with the rulings in the cases of CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354 and S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1. Consequently, the High Court ruled in favor of the assessee, dismissing the appeal and upholding the decision of the Tribunal. The judgment clarified the treatment of notional interest income in the context of loan advances and emphasized the importance of commercial purpose considerations in tax assessments.