2017 (1) TMI 678 - AT - Income Tax

Addition under the head notional interest - Held that - We find that the assessee had advanced loan from its interest free funds and had not charged any interest, that the AO had taxed notional interest in the hands of the assessee without bringing any evidence of charging of interest by the assessee. He has also not explained as to how the interest income accrued to the assessee. In the normal course of its business transaction the assessee had advanced loan and had not charged any interest. Charging or not charging of interest is a discretion of an assessee-especially when the advance is made out of interest free funds. We are of the opinion, that the order of the FAA does not suffer from any legal infirmity - Decided against revenue Disallowance made u/s. 14A - Held that - We find that the FAA had disallowed the expenditure that was claimed against the exempt income. The basic concept for disallowance u/s. 14A of the Act r. w. r. 8D of the Rules is to deprive the assessee of double benefit i. e. claiming deduction against tax free income. In the case under consideration the FAA has restricted the disallowance to the extent it was claimed against the exempt income. In our opinion there is no need to interfere with his order. So, confirming the same second ground is decided against the AO.

Summary

Issues:
1. Deletion of addition made under notional interest.
2. Disallowance made under section 14A of the Act.

Deletion of Addition Made Under Notional Interest:
The case involved a reassessment where the Assessing Officer (AO) added notional interest of ?7.48 crores under the head of notional interest. The AO based this decision on a loan advanced by the assessee to another company. The First Appellate Authority (FAA) held that only income accrued or received could be taxed, and an assessee could not be compelled to earn income in a particular way. The FAA also noted that advancing interest-free loans in business was common practice. The FAA found the addition of notional interest by the AO not sustainable due to lack of evidence of charging interest by the assessee. The Tribunal upheld the FAA's decision, stating that the AO had not provided evidence of how the interest income accrued to the assessee. The Tribunal agreed that charging or not charging interest is at the discretion of the assessee, especially when using interest-free funds.

Disallowance Made Under Section 14A of the Act:
The AO made a disallowance under section 14A of the Act regarding investments shown in the balance sheet. Initially, the AO calculated a disallowance of ?7.20 crores, which was later rectified to ?72 lakhs due to an error in calculation. The FAA restricted the disallowance to ?1,212, as the assessee had not claimed any other expenditure. The Tribunal noted that the purpose of disallowance under section 14A was to prevent double benefit for the assessee against tax-free income. The Tribunal agreed with the FAA's decision to restrict the disallowance to the extent claimed against exempt income and dismissed the appeal filed by the AO.

In conclusion, the Tribunal upheld the FAA's decisions in both issues, dismissing the appeal filed by the AO.