DEPUTY COMMISSIONER OF INCOME TAX, INCOME TAX OFFICE, SALEM vs. BALASUBRAMANIAN PRABHAKARAN, SALEM

The Revenue raised the following grounds of appeal : “1. The assessee is an Individual deriving income from salary, house property, business and other sources. The assessee had filed the return of income for the AY 2021-22 on 24.02.2022, declaring total income of Rs.7,42,51,870/- after claiming deduction u/s 80G of the Act amounting to Rs.39,07,994/-. In the course of assessment proceedings assessing officer has disallowed interest of Rs. 3,12,97,649 on account of interest payment versus receipt rate difference. The AO has calculated 11.62% as interest paid on loans borrowed and 8.05% on interest received on loan given and differential rate of interest 3.57% is on loans given of rs 87,66,84,854. Thus this disallowance has been made by taking average differential interest rate. Further assessing officer has made disallowance Rs. 1,30,000, audit fees, claimed u/s 57(iii) on the ground that it is not an allowable deduction. Subsequently the NFAC, AO passed the assessment order 143(3) read with section 144B of the Incometax Act dt 15/12/2022 asse.”

Briefly facts of the case are that the respondent is an Individual deriving income from business. The Return of Income for the Assessment Year 2021-22 was filed on 24.02.2022 disclosing income of Rs.7,42,51,870/-. Against the said return of income, the assessment was completed by e-Assessment Unit of the Department(hereinafter called ‘AO’) vide order dated 15.12.2022 passed u/s.143(3) r.w.s 144B of the Income Tax Act, 1961 at a total income of Rs.10,56,79,519/-. While doing so, the Assessing Officer made an addition on account of disallowance of notional interest income of Rs.3,12,97,649/- by holding that the appellant diverted interest bearing funds for the purpose of making loans and advances and also disallowed Audit Fee of Rs.1,30,000/-.

Being aggrieved by the above assessment order, the appellant preferred an appeal before ld.CIT(A) who vide impugned confirmed the action of the Assessing Officer.

Being aggrieved by the order of ld.CIT(A), the appellant is in appeal before us in the present appeal.

At the outset, we find that there is a delay in presenting appeal before this Tribunal by 117 days. The appellant had filed petition seeking condonation of delay. We find that there is a reasonable and sufficient cause for delay, we condone the delay and admit the appeal for adjudication merits.

It is submitted that the Assessing Officer made addition of Rs.3,12,97,649/- on account of differential amount of interest payment as against interest received, the Assessing Officer is of the opinion that the borrowed funds have been utilized for the purpose of making loans and advances without any basis.

On the other hand, ld.DR supported the order of the Lower Authorities.

We heard rival submissions and perused the material available on record. On perusal of the assessment order, it would reveal that the Assessing Officer made disallowance of interest by taking average differential interest rate on the funds lent. The Assessing Officer of the opinion that the borrowed funds have been used for the purpose of lending money for the interest at lower rate of interest. However, it only means that the addition was made by the Assessing Officer on notional basis without establishing the ingredient required to be satisfied u/s.40A(2)(b) of the Income Tax Act, 1961. It is trite law that no income can be brought to tax on notional basis, therefore, we direct the Assessing Officer to delete the addition.

In the result, appeal filed by the Revenue stands dismissed. Order pronounced in the open Court on 25th May, 2026.