The Rajkot bench of the Income Tax Appellate Tribunal( ITAT ) has held that notional income from interest-free loans is not taxable in the absence of a specific provision in the Income Tax Act, 1961.
Shri Girish R. Tanti, the assessee is engaged in the business of the generation of power and energy. The return of income for the assessment under consideration was filed under section 139 of the Act on 29-09-2011 and an order under section 143(3) of the Income Tax Act dated 29-3-2014 originally assessed the total income at 17,54,953/-.
The PCIT-Rajkot by way of an order under section 263 of the Income Tax Act dated 18-032016 held that the original order under section 143(3) of the Income Tax Act dated 2903-2014 is erroneous as well as prejudicial to the interest of the revenue and thereby set aside the aforesaid order.
The primary reason for setting aside the order was that interest on advances given by the assessee to Sanman Holding Private Limited was not offered to tax in the assessment year 2011-12, though in the assessment year 2010-11, the said interest was offered to tax by the assessee.
On appeal, the assessee contended that the interest income on theloans did not accrue to the assessee nor did the borrower provide for any such interest as payable to the assessee in its books of accounts.
The department did not bring anything on record to controvert the terms of the loan agreement between the assessee and M/s Sanman Holdings Private Limited according to which it was provided that there would be no liability of M/s Sanman Holdings Private Limited to pay interest in case of amalgamation, merger or takeover of the borrower or any other change in its management from the appointed date of such event.
The Supreme Court in the case of Poona Electric Supply v. Ld. CIT(Appeals) (1965) 57 ITR 21 (SC) held that “income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income Tax Act”.
In the case of Asian Hotels(2010) 323 ITR 490 (Delhi),the Delhi High Court considered the issue of notional income from interest-free loans received by the petitioner in respect of shops given on rent. 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.
In light of judicial precedents,a Coram comprising of Shri Waseem Ahmed, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member that interest having neither been accrued to the assesseeand 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”.
While dismissing the appeal of the revenue, the Tribunal upheld the order of CIT(Appeals), who deleted the interest sought to be taxed in the hands of the assessee on a notional basis.
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