2015 (5) TMI 192 - HC - Income Tax

Addition on account of interest @ 2% on advances - Held that - there was nothing to show that the assessee had, in fact, received interest or that the company to whom the loan was given had, in fact, paid interest to the assessee. There was also nothing on record to show that the alleged interest was not reflected in the accounts. The only finding recorded was that the assessee ought to have charged interest. Referring to an earlier decision of the Guwahati High Court, in Highways Construction Co. Private Limited v. CIT 1992 (11) TMI 86 - GAUHATI High Court the Court observed that their attention had not been invited to any provision of the Income-Tax Act empowering the income-tax authorities to include in the income, interest which was not due or not collected. In similar vein, when asked Mr Sahni, appearing for the respondent to point out some provision of the Income Tax Act, whereunder such notional‟ interest could be made the subject matter of tax, the only reference he made was to Section 144 of the said Act. However, we are clear that Section 144 does not at all apply to the present proceedings because the present proceedings originate from an assessment under Section 143(3) of the said Act. The addition on account of a notional income on advances is deleted. - Decided in favour of assessee.

Summary

Issues:
Common issue raised in two writ petitions challenging orders passed by the Commissioner of Income Tax under Section 264 of the Income Tax Act, 1961 for assessment year 2009-10.

Analysis:
1. The petitions contested the addition of notional interest earned on advances given to a private limited company. The petitioner argued that the addition lacked factual basis and sought revision under Section 264.
2. The Commissioner considered the objections raised by the petitioner regarding the addition of interest on advances given to the company. The Commissioner noted that the Assessing Officer had added notional interest based on the absence of explanations and evidence regarding the purpose of the advances.
3. The Commissioner reviewed the assessments of the preceding year and the petitioner's contentions. The Commissioner found that the Assessing Officer's actions were justified in making the addition based on the evidence provided. The Commissioner rejected the revision application under Section 264.
4. The reasoning for the addition by the revenue authorities was primarily based on the lack of explanation from the petitioner regarding the advances made to the company. The authorities assumed it was imprudent for a businessman not to charge interest on significant advances.
5. The petitioner argued that interest need not always accompany business advances and highlighted the absence of concrete findings or rejected accounts by the revenue authorities. Reference was made to a decision emphasizing the necessity of actual interest receipts for tax implications.
6. The High Court analyzed the legal basis for including notional interest in taxable income. The Court found no specific provision allowing for taxation of notional income on advances under Section 144, leading to the conclusion that the orders by the Commissioner were unsustainable.
7. Consequently, the High Court allowed the writ petitions, setting aside the impugned orders and deleting the addition of notional income on advances for the assessment year 2009-10. The judgment was limited to this assessment year only.

This detailed analysis of the judgment highlights the key arguments, findings, and legal interpretations involved in the case challenging the addition of notional interest on advances for the assessment year 2009-10 under Section 264 of the Income Tax Act, 1961.