2019 (3) TMI 4 - AT - Income Tax

Accrual of real income - Addition on account of notional interest - share application money remaining without allotment of shares - availability of interest free funds in the hands of assessee by way of Capital Account - HELD THAT - Where the assessee has own funds and had utilized the same for the purpose of giving advances to different concerns who were related to Apollo Tyres, where the assessee was dealer in tyres of Apollo Tyres Ltd., no adverse inference can be drawn against the assessee. The availability of interest free funds in the hands of assessee by way of Capital Account is not disputed and in such circumstances, where the available funds were much more than interest free advances in the hands of assessee, no disallowance on account of interest expenses is to be made in the hands of assessee. - Decided in favour of assessee.

Issues involved:
- Dismissal of appeal by CIT(A) confirming addition of notional interest on share application money without allotment of shares.
- Whether notional interest can be taxed as real income.
- Availability of own funds for making deposits.
- Disallowance of interest expenses based on available funds.

Analysis:
1. The appeals were filed against separate orders of CIT(A)-1, Kolhapur, relating to assessment years 2008-09 and 2009-10 under section 143(3) of the Income-tax Act, 1961. Both appeals, concerning the same assessee on a similar issue, were heard together. The primary issue was the addition made on account of notional interest on share application money remaining without allotment of shares.

2. The assessee contended that the addition of notional interest was not justified as it did not constitute 'real income' and should be deleted. The Assessing Officer observed that no interest was charged on accrual basis for the deposits made under the head 'Company Shares'. The assessee explained that the investments were made from own funds and were necessary for the business, receiving discounts from companies instead of interest.

3. The Assessing Officer calculated interest at 7% on the deposits and made an addition of ?8,13,465, considering the investments made from 2003 to 2007. The CIT(A) upheld this addition, rejecting the plea that no notional income could be taxed. The assessee appealed against this decision.

4. During the appeal, the Authorized Representative for the assessee argued that the deposits were made from own funds, as evidenced by the Balance Sheet, and no disallowance should be made on interest attributable to such deposits. The Departmental Representative relied on the lower authorities' orders.

5. The Tribunal analyzed the Balance Sheet and noted a credit balance of ?47,22,400 in the Capital Account of the assessee, with deposits totaling ?22,36,000. Considering the availability of interest-free funds and the utilization for advances to related concerns, the Tribunal held that no adverse inference could be drawn. It concluded that no disallowance on account of interest expenses should be made in the hands of the assessee.

6. The Tribunal applied the decision in one appeal to the other, as the facts and issues were identical. Consequently, both appeals of the assessee were allowed, and the addition of notional interest was set aside.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing the availability of own funds and the lack of justification for taxing notional interest as real income in this case.

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