Notional Interest cannot be Taxed on Funds Provided to Subsidiary when no Interest Paid: ITAT Dismisses Appeal against Shoppers Stop [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ), has dismissed the revenue’s appeal against Shoppers Stop. It had deleted an addition made on account of notional interest, holding that where no interest is charged or received on funds advanced to a subsidiary, such hypothetical income cannot be brought to tax.

During scrutiny assessment for the Assessment Year 2011-12, the Assessing Officer (AO) noted that Shoppers Stop, the respondent had advanced funds to its subsidiary, Gateway Multichannel Retail (India) Ltd., without charging interest.

The AO, computed notional interest at 13.5% and added ₹3.09 crore to the taxable income. continuing on the assumption that the assessee ought to have earned interest.

The Commissioner of Income Tax (Appeals) deleted the addition, following earlier and subsequent years’ orders in the assessee’s own case, against which the Revenue preferred an appeal before the Tribunal.

The bench noted that in the previous years, assessee’s own funds were higher than the advances made to the subsidiary, giving rise to a presumption that the advances were made out of interest-free funds.

The tribunal referred to assessee’s own case where it observed the decision of In Excel Industries Ltd. 358 ITR 295 (SC), which held that “ to recognize income, it has to pass through three tests, namely, (a) whether the income accrued to the assessee is real or hypothetical; (b) whether there is a corresponding liability of the other party to pay the amount; and (c) probability or improbability of realization to be considered from a realistic and practical point of view.”

In the previous decision of the assessee’s case, the tribunal said that “We observe that Gateway has neither provided for interest in its books of accounts nor paid any interest till date. The other condition of improbability of realization is also applicable here. We hold that the addition cannot be made even u/s 5 of the Act.”

The bench of Prabhash Shankar Accountant Member and Rahul Chaudhary, Judicial Member said that the above decision squarely applies to the present case of the assessee. Therefore, the hypothetical addition of interest income on Shoppers was removed.

The appeal was allowed accordingly.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates