2021 (1) TMI 872 - AT - Income Tax

Accrual of income - Addition of notional interest on the loans given to certain companies / persons by the assessee - income from other sources - HELD THAT - CIT(A) has rightly taken note of the decision of Goyal MG Gases P Ltd. ( 2007 (7) TMI 241 - DELHI HIGH COURT) wherein it was held that what has to be seen is whether income can be said to have really accrued to the assessee. When there was no real accrual of interest and the assessee has also not recorded interest in its books of account, no notional interest can be levied on such loans - CIT(A) has given finding of fact that the assessee in its books of accounts has not charged any interest against the loans of these two companies. This findings of fact has not been assailed before us. - CIT(A) has rightly deleted the notional interest. Therefore, the ground raised by the revenue is dismissed. Write off of irrecoverable principal amount of loan which was claimed u/s 36(1)(vii) read with Section 36(2) - HELD THAT - CIT(A) noted that in this assessment year the assessee in addition to its business of manufacturing of tea, fertilizer etc, had also carried on the business of granting of loans and ICDs. The ld. CIT(A) noted that the interest on loans was held assessable under the head profits and gains of business and the assessee had written off the principal amount of loans as also the unrealized amount of interest as bad debts - AO had allowed the claim of bad debts in respect of the unrealized interest but had disallowed the claim in respect of write off of principal amount of loan on the reason that the department has preferred an appeal before the Hon ble High Court against the decision of Tribunal in AY 2002-03 wherein decided the issue in favour of assessee and allowed the write off of bad debts. Decided in favour of assessee.

Summary

Issues:
1. Deletion of notional interest addition on interest-free loans
2. Allowance of write-off of irrecoverable principal loan amount

Issue 1: Deletion of notional interest addition on interest-free loans

The Assessing Officer had added notional interest of ?1,07,83,489 on interest-free loans given by the assessee to certain companies, which the assessee had stopped charging interest on due to the companies' inability to pay. The CIT(A) deleted the addition, citing that no provision in the Income Tax Act allows charging income on a notional basis. The CIT(A) referred to previous cases where similar additions were deleted, emphasizing that no real accrual of interest and absence of interest recorded in the books prevent levying notional interest. The Tribunal upheld the CIT(A)'s decision, noting that the companies were incurring losses and the assessee had not charged interest in its books, thus dismissing the revenue's appeal.

Issue 2: Allowance of write-off of irrecoverable principal loan amount

The Assessing Officer disallowed the claim of ?4,63,40,475 for writing off the principal loan amount, pending a decision from the High Court on a similar issue from a previous assessment year. The CIT(A) allowed the claim, referencing a previous case where the Tribunal upheld the deduction of bad debts for the assessee. The Tribunal affirmed the CIT(A)'s decision, noting that the issue was previously decided in favor of the assessee for the same assessment year in a similar scenario. The Tribunal confirmed the allowance of the write-off, dismissing the revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decisions in both issues, ruling in favor of the assessee by deleting the notional interest addition on interest-free loans and allowing the write-off of the irrecoverable principal loan amount. The Tribunal emphasized judicial consistency and adherence to previous rulings in similar cases, ultimately dismissing the revenue's appeal in both instances.