2024 (1) TMI 1191 - HC - Income Tax

Revision u/s 263 - accrued interest income on deposit - addition on account of notional interest @10% on deposit - HELD THAT - In view of the concurrent findings of the fact arrived at by both the authorities and in view of the fact that there was a stipulation in the loan agreement between the assessee and the M/s. Sanman Holdings Private Limited, which was placed on record by way of a paper book, Clause-f of the loan agreement reads as under Borrower shall pay interest at the end of the financial year to the Lender at the rate of 10% per annum, subject to its financial position and profitability, on the Loan from the date of disbursement of the Loan, after deduction of applicable Tax deduction at source. Any unpaid interest at the last business day of financial year shall be treated as loan to the borrower on first business day of next financial year. In event of amalgamation, merger or demerger or takeover of borrower or any other change in its management the liability to pay interest shall cease and lender shall not be entitled to any interest from the appointed date for such event . As M/s.Sanman Holdings Private Limited to whom the assessee has advanced the loan was amalgamated with M/s. Tanti Holdings Private Limited, no interest was liable to be paid to the assessee as per the aforesaid clause. This fact is considered by both the authorities and accordingly it was held that the no interest accrued to the assessee from 01.04.2010. No substantial question of law.

Summary

Issues involved:
The issues involved in this case are whether the Tribunal erred in upholding the addition of notional interest made by the Assessing Officer and whether the interest income on the loan given by the assessee accrued, considering the amalgamation of the borrower company.

Issue 1: Notional Interest Addition
The respondent-assessee, engaged in the power and energy business, had an assessment order passed under Section 143(3) of the Income Tax Act. The Principal Commissioner set aside the order under Section 263 as interest on advances was not taxed. The Tribunal upheld this decision, leading to the Assessing Officer assessing notional interest on deposits with Sanman Holdings Pvt. Ltd. The assessee contended that no interest was payable due to financial crisis and amalgamation with Tanti Holdings Pvt. Ltd. The CIT(A) allowed the appeal, stating the interest income did not accrue, hence deleting the addition.

Issue 2: Accrual of Interest Income
The Tribunal considered the terms of the loan agreement between the assessee and Sanman Holdings Pvt. Ltd., noting no liability to pay interest in case of amalgamation. The Revenue appealed, but the Tribunal observed no evidence that interest income accrued to the assessee. It was highlighted that income cannot be taxed on a purely notional basis, emphasizing the need for income to accrue or be received. The loan agreement clause supported the fact that no interest was payable post-amalgamation, leading to the dismissal of the appeal.

This judgment highlights the importance of considering the specific terms of agreements and the actual accrual of income before making tax assessments. The decision emphasizes the need for concrete evidence of income accrual, rather than relying on notional or hypothetical scenarios for taxation purposes.