Estimated Interest on Interest-Free Advances Cannot Be Taxed Without Verification: ITAT [Read Order]
The tribunal observed that the estimated interest on loans to friends and relatives cannot be taxed without evidence of actual utilisation and receipts. The ruling emphasises natural justice and the need for proper substantiation before making notional additions to taxable income.
![Estimated Interest on Interest-Free Advances Cannot Be Taxed Without Verification: ITAT [Read Order]](https://images.taxscan.in/h-upload/2025/11/13/2104807-estimated-interest-interest-free-advances-verification-itat-taxscan.webp "Estimated Interest on Interest-Free Advances Cannot Be Taxed Without Verification: ITAT [Read Order]")
The Nagpur bench of the Income Tax Appellate Tribunal (ITAT) has held that interest-free loans to friends or relatives require the verification of the assessing officer (AO) before taxation.
In the Assessment Year 2015–16, an addition of notional interest income was made on interest-free advances and loans extended to friends and relatives of the assessee, Dr. Vinit Vishwasrao Hingankar.
The AO estimated interest at 12.75% on advances totaling Rs. 1.51 crore, amounting to Rs. 19.35 lakh, reasoning that major portions of the assessee’s funds were financed through interest-bearing loans. This estimated interest was added to the assessee’s income under Section 143(3) of the Income Tax Act.
The assessee contended that adequate interest-free funds were available to meet professional requirements and that interest-bearing funds were not used to finance these loans.
Moreover, no actual interest income was received, and the interest-free advances were duly disclosed in the balance sheet under current assets. The assessee emphasized that taxation on a notional basis, without verification, was not tenable and cited supporting evidence and judicial precedents to substantiate the position.
The CIT(A) had dismissed the appeal, confirming the addition.
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During the hearing, the tribunal observed that the assessee had expressed willingness to furnish confirmations, PAN, income details, and supporting evidence for the interest-free advances.
In line with principles of natural justice, the single bench of Pavan Kumar Gadale ( Judicial Member) restored the matter to the AO for verification. The AO was directed to examine the confirmations, supporting documentation, and financial records before making any addition to taxable income.
The Tribunal highlighted that estimating notional interest on interest-free loans without verifying actual utilisation or receipts could lead to incorrect taxation. The ruling reinforces the principle that tax authorities must base additions on verifiable facts, particularly where the assessee’s funds are adequately disclosed and used legitimately for business or professional purposes.
The appeal was thus partly allowed, with the issue restored to the AO for proper examination, ensuring fairness in assessment and adherence to evidentiary standards.
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