JAYSHREE MOTORS PRIVATE LIMITED,KOLKATA vs. ITO, WARD - 3(4), KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

01. For that, on the facts and in the given circumstances, the addition of Rs.5,76,231/- on account of notional interest on temporary accommodation by way o loan free of interest to an associate company was not justified and therefore, is liable to be quashed/cancelled.

Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 2 02. For that, on the facts and in the given circumstances, the Learned Assessing Officer was totally unjustified in concluding that the Appellant adopted dual policy of utilizing interest baring bank loan for running its business operations and giving its own funds to a related company without any interest. The Learned Assessing Officer did not appreciate the other aspect o commercial prudence on the basis of which, the sums were given to associate firm time to time for meeting its various statutory obligations. Thus, the addition so made is totally unjustified, completely illegal and bad in law and may, therefore, kindly be deleted.

3. For that, on the fats and in the given circumstances, the Learned CIT(A) did not go into the detail and confirmed the addition made by the Assessing Officer. The observation of the Leaned CIT as regards taking loans on interest and giving them to a sister concern without interest was not correct.

Shri D.S. Damle, Ld. Authorized Representative appeared on behalf of assessee and Shri Provash Roy, Ld. Senior Departmental Representative appeared on behalf of Revenue.

Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 3 4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the loan was given to the associate enterprises out of its own surplus fund and no borrowed fund has been utilized for the loan given to the associate enterprises. However, Ld. CIT(A) rejected the plea of assessee and confirmed the order of AO by observing as under:-

“I have gone through both the A/R’s arguments as well as the AO's order. I believe the AO has firmly established that the company indeed exhibited a dual policy in taking loans on interest and advancing the same without interest to its sister concern. The case law as cited by the appellant, thus is not relevant to the fats of the case. The adoption of the interest rate by the AO is also fair. In the circumstances, this ground of the appellant fails. The addition is confirmed.”

Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

“We have perused the order passed by the Commissioner of Income Tax (Appeals) and the order passed by the learned Tribunal. It appears that the question arose in respect of notional interest n loan when the assessee had advance interest-free loan to one Hindustan National Glass & Industries Ltd. it further appears that the assessee was one of the promoter of the said company. The Commissioner of Income Tax (Appeals) in his order held as follows: ‘I have carefully considered the facts of the case and the findings of the Assessing Officer from the audited accounts. I find that as of 31st March, 2005 the assessee’s net owned funds was Rs.6.88 crores which were far in excess of the interest free advance given to M/s Hindustan National Glass & Industries Ltd., a company of which the assessee was a promoter. The assessee did not have any borrowed funds on 31st March, 2005 and as such it was not a case where borrowed funds were diverted for granting interest free loans the assessee had applied its own funds in granting interest free advance to a body corporate of which the assessee was a promoter. On these facts, I fully agree with the A/R’s submissions that the Assessing Officer has brought to tax notional or hypothetical Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 5 income. The Supreme Court in catena of case has held that the subject matter of tax is always income which should be real income and not hypothetical income. The Income Tax Act does not permit taxation of hypothetical or opportunity income and what is subject matter of tax is read income, irrespective of the fact whether an entry is made in the books of account or not. This is the ratio laid down in the case of Godhra Electric Co. Ltd. vs. CIT 225 ITR 746). The Income Tax Act does not compel an assessee to earn maximum income but brings to tax only the income which is actually earned by an assessee. It is a settled proposition of law that in what manner the assessee should conduct his business is best left to the discretion of the assessee and the Assessing Officer cannot sit in the arm chair of the businessman to decide, what should have been the income earned. If an assessee does not bargain to earn income then an Assessing Officer cannot compel him to earn such income and cannot resume accrual of income, based entirely on his subjective notions as what constitutes fare return on investment. In business there cannot be certainly about earning of income and therefore business income cannot be assessed entirely on notional basis. In any opinion, none of the provisions of Chapter-IV of the Income Tax Act authorized the Assessing Officer to assess notional of hypothetical income. The addition of the notional interest of Rs.10 Lacs as business income of the assessee is therefore deleted.’”

Now coming to the argument of ld. AR that the borrowed fund was not utilized for the purpose of giving the interest free loan to associate concerns, the question arises before whether it is given out of the borrowed fund or owned fund that needs to be adjudicated. From the submission of the assessee we find that the sufficient fund was available with the assessee as discussed above to advance the money to its associate concern. The ld. DR has not brought anything contrary to the arguments of the ld. AR. Therefore, in our considered view, the authorities below should have disallowed the interest expenses rather than charging interest income on notional basis. In the instant case, the interest expense claimed by assessee but AO instead of disallowing the interest has added the interest income on notional basis which was not the dispute from the facts of the case. In this connection, we rely in the decision of Hon'ble jurisdictional High Court in the case of CIT vs. Rungamatee Trexim (Pvt) Ltd. in GA No. 3796 of 2008 dated 09.12.2008 supra.

Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 6 Respectfully following the decision of Hon'ble jurisdictional High Court we reverse the orders of Authorities Below and we allow ground of assessee’s appeal. AO is directed accordingly.