2020 (12) TMI 166 - AT - Income Tax

Addition of notional interest income - CIT(A) made addition of interest income on notional basis on different aspects holding that if undisclosed income declared by assessee would have been available in the books of accounts of assessee, notional interest of approximately 14% of average interest rate of such available unaccounted on money , the assessee would have been earned interest - HELD THAT - CIT(A) made addition of ₹ 70 lakhs on different aspect by taking view that undisclosed income would have been available in the books of the assessee. CIT(A) presumed that if ₹ 5 crore were available with the assessee, the notional interest of Rs.@14% on such average account, the assessee must have earned ₹ 70 lakhs and thereby added ₹ 70 lakhs. Assessee vehemently submitted that there is no concept of notional income and that no addition can be made or no presumption basis that assessee would have earned notional interest on surplus available with them. If interest free funds are available, it is the choice of businessman/assessee to arrange his business affairs. The Hon'ble Gujarat High Court in CIT Vs. Arihant Avenue Credit Ltd. 2014 (10) TMI 790 - GUJARAT HIGH COURT held that no addition on account of notional interest is warranted. Similarly, the Hon'ble Delhi High Court in Shivnandan Buildcon (P.) Ltd. 2015 (5) TMI 192 - DELHI HIGH COURT also held that in absence of any specific provisions under Income Tax Act, no notional interest is warranted. We are conscious of the settled position in law that the Income Tax Officer (ITO) cannot decide affairs of businessman as to how the businessman should incur the expenses or earn the interest. It is the sole discretion of businessman to manage its affairs and not the ITO. Considering the aforesaid facts and the case laws referred through, we are of the view that no addition on account of notional interest in absence of any co-gent evidence, against the assessee.

Summary

Issues Involved:
1. Disallowance of interest expenses by the Assessing Officer.
2. Addition of notional interest income by the Commissioner of Income Tax (Appeals).

Analysis:

Issue 1: Disallowance of Interest Expenses by the Assessing Officer
The appeal by the assessee was directed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of interest expenses of &8377; 90,11,978/- claimed on unsecured loans. The Assessing Officer disallowed the entire interest expenses without specifying the reasons in the assessment order. The assessee argued that the interest expenses were genuine and fully allowable under section 36(1)(iii) of the Income Tax Act, as the loans were utilized for business purposes and TDS was deducted. The Commissioner of Income Tax (Appeals) agreed with the assessee, stating that the disallowance was arbitrary and unlawful, and failed to prove that the expenses were not for business purposes. The disallowance was overturned, and the appeal on this issue was allowed.

Issue 2: Addition of Notional Interest Income by the Commissioner of Income Tax (Appeals)
The Commissioner of Income Tax (Appeals) added a notional interest income of &8377; 70 lakhs based on the presumption that undisclosed income would have been available in the books of the assessee. The assessee contended that no concept of notional income exists in the Income Tax Act and argued against the addition, citing relevant case laws. The Tribunal agreed with the assessee, stating that no addition could be made based on presumptions of notional income when no actual interest income was earned. The Tribunal emphasized that it is the businessman's discretion to manage their affairs, and the Income Tax Officer cannot dictate how expenses should be incurred or interest earned. Therefore, the addition of notional interest income was disallowed, and the appeal on this issue was allowed.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning both the disallowance of interest expenses and the addition of notional interest income. The judgment emphasized the importance of proving expenses were not for business purposes and highlighted that no additions can be made based on presumptions of notional income without concrete evidence.