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Facts
The assessee, M/s. Akshay Mercantile Pvt. Ltd., is in appeal against the order of the CIT(A) for Assessment Year 2004-05. The Assessing Officer (AO) made an addition on account of estimated interest income on loans and advances. The CIT(A) partly confirmed the addition but reduced the rate of interest.
Held
The Tribunal held that the AO's addition was based on an assumption that interest had accrued on all loans, but there was no finding that the loans were interest-bearing or that interest had actually accrued. Therefore, the estimation of notional interest was not justified.
Key Issues
Whether the estimation of notional interest income on loans and advances is justified without concrete findings of accrual.
Sections Cited
143(3)
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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
1.1 Aforesaid cross-appeals for Assessment Year (AY) 2004-05 arises out of order of learned Commissioner of Income Tax (Appeals)-II, Chennai [CIT(A)] dated 05-12-2012 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 29-12- 2006. The appeal of assessee is accompanied by stay application wherein the assessee is seeking stay of recovery of outstanding demand by the revenue. 1.2 The grounds taken by the assessee are as under: - The order of Learned CIT (A) dated 5th December 2012 is quite arbitrary, illegal and 1. contrary to the facts of the case of your appellant. a. The Learned CIT(A) has erred in partly confirming the recognition of Interest estimated by learned assessing officer. b. The Learned CIT(A) ought to realize that the nature of business is a key ingredient to adopt a accounting policy. c. The Learned CIT(A) ought to realize that an assessee cannot pay tax on a notional income the receipt of which cannot be confirmed until a happening of a particular event.
1.3 The grounds taken by the revenue read as under: -
1. 1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in restricting the addition towards interest accrued at 18% as against 24% adopted by the A.O. without assigning any reason.
2. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition made at Rs.67,15,248 towards accrued interest on pronotes without noting that the relied upon orders of the CIT(A) in Appeal No. CIT(A)/CHE/ 147/05-06 dt 14-08-2007 has been disputed, the issue has not become final and appeal before the Hon'ble ITAT is pending in ITA.No.151/CHNY-2007.
2. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition made at Rs.64,24,800 towards accrued interest on advances recorded in laptop computer but not reflected in the accounts without noting that the relied upon orders of the CIT(A) in Appeal No. CIT(A )/CHE/147/05-06 dt 14-08-2007 has been disputed, the issue has not become final and appeal before the Hon'ble ITAT is pending in ITA.No.151/CHNY-2007.
At the outset, it is noted that the revenue’s appeal is not maintainable in terms of low tax effect Circular No. 5 of 2024 as issued by CBDT on 15- 03-2024 read with subsequent Circular No. 09 of 2024 dated 17-09-2024 which prescribe monetary limit of Rs.60 Lacs before an appeal could be preferred by revenue before Tribunal. From records, it emerges that the total tax liability as computed by Ld. AO is well below the aforesaid limit. Therefore, the appeal of the revenue stand dismissed on account of low tax effect. In the said background, we take up assessee’s appeal wherein the sole issue that fall for our consideration is computation of estimated interest income on loans and advances.
The Ld. AR advanced arguments supporting the case of the assessee whereas Ld. CIT-DR has supported the findings given by lower authorities. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. Proceedings before lower authorities 3.1 The assessee reflected interest on loans and advances for Rs.12.80 Lacs on loans of Rs.162.24 Lacs. The Ld. AO observed that interest was not recognized in few cases whereas the assessee being a company was to maintain accounts on mercantile basis. In the absence of any response as forthcoming from the assessee, Ld. AO computed interest of 24% and made addition of Rs.28.18 Lacs. 3.2 During appellate proceedings, it was stated that the assessee was engaged in film financing wherein interest is realized only at the time of release of the movies. In some cases, even the principal is not realized. However, Ld. CIT(A) upheld the observations of Ld. AO and held that once income has accrued, the same has to be offered to tax. However, Ld. CIT(A) reduced estimated interest to 18% and partly allowed the grounds raised
by the assessee. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication
4. From the facts, it emerges that the assessee is following a particular accounting policy to recognize interest on loans and advances. The addition made by Ld. AO proceeds on the assumption that interest had accrued on all the loans advanced by the assessee. However, there is no finding that all loans were interest bearing loans and the interest, in fact, had accrued on these loans. There is no quarrel that the assessee being resident corporate assessee is required to offer income on mercantile basis. However, there has to be accrual of income first. In the absence of any such concrete finding by lower authorities, the estimation of notional interest is not justified. Therefore, we delete the impugned addition as sustained by Ld. CIT(A) and allow the appeal of the assessee. No other ground has been urged in the appeal.