In a recent ruling, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) ruled that that notional guarantee increasing investment cost cannot be treated as actual income.
The assessee/appellant, Adani Wilmar, a prominent name in the consumer goods sector, filed its tax return for the assessment year 2018-19, declaring an income of Rs. 7,29,10,574. The assessment was completed on June 7, 2021, with the AO assessing the company’s total income at Rs. 569,46,59,915. The AO made an additional adjustment of Rs. 7,32,417 under Section 14A of the Income Tax Act 1961 (ITA) but did not add Rs. 99,72,600 classified as notional corporate guarantee income.
This amount had been disclosed by the assessee in its financial statements under note 28, listed as “other income.” However, the assessee-company reduced this income from its taxable income, arguing that it was merely notional and did not constitute actual revenue. Indian Accounting Standards required the company to disclose this notional guarantee income, but the assessee claimed that since it was not received, it should not be considered for tax purposes.
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The Principal Commissioner of Income Tax (PCIT), disagreeing with the AO’s view, invoked Section 263 of ITA to revise the assessment. According to the PCIT, the AO had not adequately scrutinized the notional income and should have added it to assessee’s taxable income, making the assessment “erroneous” and “prejudicial to the interests of the revenue.” The PCIT issued a notice to the assessee-company, leading to the current appeal before the ITAT.
Before the tribunal, the assessee, represented by its Authorized Representative (AR) Shri Vartik Choksi, argued that the PCIT had wrongly invoked Section 263 of ITA. The company contended that the AO had thoroughly examined the issue of notional guarantee income during the assessment process. A detailed reply was submitted to the AO, who had issued a notice on February 1, 2020, asking for clarification regarding the notional guarantee income.
The assessee- company explained that the notional guarantee income of Rs. 99,72,600 had been declared as per Indian Accounting Standards but was not actually received. Therefore, it was correctly deducted from the assessee’s taxable income. The AR pointed out that the AO had satisfied himself with the assessee’s explanation and took the view that this notional income did not need to be taxed.
The assessee further argued that the PCIT was simply taking a second view of the same issue, which is not permissible under Section 263 of the tax statute. The AR emphasized that the assessment order was neither erroneous nor prejudicial to the interests of the revenue. The assessee backed its arguments with several judicial precedents. Among these was the Gujarat High Court ruling in CIT v. Arvind Jewellers (259 ITR 502), where it was held that merely having a different opinion does not render the original assessment erroneous. The company also referred to the Supreme Court judgment in Malabar Industrial Company Ltd. v. CIT (243 ITR 83), which clarified that for a revision to be justified under Section 263 of ITA, both conditions—error in the order and prejudice to the revenue—must be met.
Another critical case referenced was PCIT v. Minal Doshi, where the Gujarat High Court ruled that notional or hypothetical income, which had not been received, could not be taxed. The appellant-company also drew attention to the Supreme Court’s judgment in CIT v. G M Mittal Stainless Steel Pvt. Ltd. (263 ITR 255), which stated that even if an assessment appears prejudicial to revenue, it cannot be termed erroneous if the AO conducted a reasonable inquiry and reached a justified conclusion.
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The assessee also relied on the Gujarat High Court ruling in PCIT v. Asian Box Corporation , where the court held that the PCIT could not take a second view if the AO had already thoroughly examined the issue. This further supported the company’s argument that the PCIT’s order was unwarranted.
The Revenue, represented by Shri Sudhendu Das (CIT DR), defended the PCIT’s decision. The Department contended that the AO had failed to properly scrutinize the notional guarantee income and should have added it to the company’s taxable income. According to the Department, this failure resulted in a loss to the revenue, and the PCIT was right in exercising his powers under Section 263 of ITA to correct the error.
The Department insisted that the notional income disclosed by the assessee should not have been ignored, as it formed part of the company’s financial statements and therefore had tax implications. The PCIT’s view was that the AO’s omission was both erroneous and prejudicial to revenue interests.
After carefully considering the arguments from both sides, the bench consisting of Judicial Member Ms. Suchitra Kamble and Accountant Member Shri Narendra Prasad Sinha, quashed the order passed by the PCIT under Section 263 of the tax statute. The tribunal held that the AO had indeed examined the issue of notional guarantee income during the assessment proceedings. The AO had issued notices, received explanations, and accepted the assessee-company’s contention that the income was not actually received and therefore should not be taxed.
The ITAT found that the PCIT’s observation that the AO had failed to examine the issue was incorrect. The tribunal ruled that the notional guarantee income merely increased the cost of the company’s investment but did not generate actual revenue, thus affirming the AO’s decision to not tax it.
The tribunal concluded that the PCIT had taken a second view, which is impermissible under Section 263 of the tax legislature. Citing the Supreme Court’s ruling in Malabar Industrial Company Ltd. v. CIT, the ITAT reiterated that for an order to be revised under Section 263 of ITA, it must be both erroneous and prejudicial to the revenue. In this case, neither condition was satisfied.
In result, the appeal was allowed.
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