2022 (11) TMI 243 - AT - Income Tax

Accrual of income - Addition of notional interest @ 10 % on deposit made - AO computed notional interest at the rate of 10% on deposits held by the assessee with M/s Sanman Holdings Private Limited on the ground that the same was not offered to tax all the assessee is following accrual system of accounting and added the same to the assessee s total income - HELD THAT - The assessee has placed on record before us copy of letter by M/s Sanman Holdings Private Limited to the assessee intimating its inability to pay interest due to financial crisis. The assessee has also placed on record copy of letter dated 30-09- 2011 of M/s Tanti Holdings Private Limited in which it stated that the company M/s Sanman Holdings Private Limited amalgamated into it with effect from 01-04-2010 and also acknowledging the liability to pay unsecured loan of ₹ 350 crores taken by M/s Sanman Holdings Private Limited to the assessee. CIT(Appeals) also observed that the assessee did not utilise any interest-bearing loans to advance the sum of ₹ 350 crores to M/s Sanman Holdings Private Limited. Therefore, the Department has not brought on anything on record to demonstrate that the interest income sought to taxed had accrued to the assessee nor has the Revenue brought anything on record that any interest income was in fact received by the assessee. It is a well-settled principle of law that income cannot be taxed in the hands of the assessee, on purely notional basis. Either the income should accrue to the assessee, as per terms of agreement or otherwise, or else the same should have been received by the assessee. In the instant facts, as per terms of Agreement, on amalgamation of M/s Sanman Holdings Private Limited into M/s Tanti Holdings Private Limited by way of Orders of High Court of Mumbai and Gujarat, there is no obligation for M/s Sanman Holdings Private Limited to pay any interest to the assessee. In the case of Asian Hotels 2007 (12) TMI 274 - DELHI HIGH COURT considered the issue of notional income from interest free loans received by the petitioner in respect of shops given on rent. AO computed tax of 18 percent per annum on the notional interest on the basis that they resulted in benefit to the petitioner. Rejecting this contention, the Court held that the notional income from the interest free loans is not taxable in the absence of a specific provision in the Income Tax Act - interest having neither been accrued to the assessee (as per specific terms of the Agreement placed on record before us) and neither any interest having being received by the assessee, such interest cannot be subject to tax in the hands of the assessee on purely notional basis . Accordingly, we find no infirmity in the order of Ld. CIT(Appeals), who in the instant set of facts, deleted the interest sought to be taxed in the hands of the assessee on notional basis. Appeal of the Department is dismissed.

Summary

Issues Involved:
1. Deletion of addition of Rs. 35,00,00,000/- made by the Assessing Officer on account of notional interest.
2. Whether the Ld. CIT(A)-2, Rajkot ought to have upheld the assessment order of the Assessing Officer.

Issue 1: Deletion of Addition of Rs. 35,00,00,000/- on Account of Notional Interest

The Revenue appealed against the order of the Commissioner of Income Tax (Appeals)-2, Rajkot, which deleted the addition of Rs. 35,00,00,000/- made by the Assessing Officer (AO) on account of notional interest at 10% on a deposit of Rs. 350 crores made to M/s. Sanman Holdings Pvt. Ltd. The assessee, engaged in the business of power and energy generation, had filed the return of income for the assessment year 2011-12, which was initially assessed at Rs. 17,54,953/-. However, the PCIT-Rajkot found the original assessment order erroneous and prejudicial to the interest of the revenue because the interest on advances given to Sanman Holdings Pvt. Ltd. was not offered to tax in the assessment year 2011-12, despite being offered in the previous year.

The AO, following the ITAT's direction, reassessed the income, including the notional interest of Rs. 35 crores. The assessee contended before the CIT(A) that M/s. Sanman Holdings Pvt. Ltd. had informed them of their inability to pay interest due to financial crises and subsequent amalgamation with M/s. Tanti Holdings Pvt. Ltd., which was approved by the High Courts of Bombay and Gujarat. The assessee argued that no interest income accrued or was payable after 01-04-2010, as per the loan agreement.

The CIT(A) accepted the assessee's argument, stating that only real income can be taxed, not notional income. The CIT(A) noted that the loan agreement specified no liability to pay interest in case of amalgamation or other changes in management. The CIT(A) also observed that the assessee had sufficient non-interest-bearing funds and had not claimed any interest expenses. Consequently, the CIT(A) deleted the addition of Rs. 35 crores.

Issue 2: Whether the Ld. CIT(A)-2, Rajkot Ought to Have Upheld the AO's Assessment Order

The Department argued that the CIT(A) should have upheld the AO's assessment order. However, the DR acknowledged that the interest was sought to be taxed on a purely notional basis and did not bring any evidence to counter the loan agreement terms, which indicated no liability for interest payment post-amalgamation. The DR also did not provide any proof that the interest income had actually accrued or was received by the assessee.

The Tribunal noted that in subsequent assessment years 2012-13 and 2013-14, the Revenue did not make any additions for notional interest, despite the deposit with M/s. Tanti Holdings Pvt. Ltd. still being outstanding. The Tribunal emphasized that income tax is a tax on real income, not hypothetical or notional income, citing various judicial precedents, including the Supreme Court's decisions in Poona Electric Supply and Godhra Electricity Company.

The Tribunal concluded that since no real income accrued to the assessee and no interest was received, the interest could not be taxed on a notional basis. Therefore, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Department's appeal.

Conclusion:

The appeal of the Department was dismissed, and the order of the CIT(A) deleting the addition of Rs. 35 crores on account of notional interest was upheld. The Tribunal reiterated that only real income, not notional or hypothetical income, can be taxed.