Notional interest income cannot be taxable under the real income principle: Mumbai ITAT
ACIT verses Kesar Terminals and Infrastructure Ltd.
Case Number: I.T.A. No. 3001/Mum/2023
Facts:
- During the year under consideration, the assessee had given interest free loan to its wholly owned subsidiary named ‘Kesar Multimodal Logistic Limited’.
- Though no interest was due on that loan as per the agreed terms, yet, as per the requirement of Indian Accounting Standard, the assessee accounted for ‘notional interest’ in the books of account and credited the same in its Profit and Loss account.
- The notional interest income so credited was Rs.2,76,81,947/-. Since it was only a book entry and it did not really accrue to the assessee at all, it excluded the said amount from Net profit while computing the total income for the purpose of Income tax Act.
- While processing the return, the CPC did not allow exclusion, as it was not a deduction allowed under any of the provisions of the Act. Accordingly, the total income of the assessee was enhanced by the amount of Rs. 2.76 crores.
- The assessee challenged the above said addition made by CPC by filing the appeal before the CIT(A). In the meantime, the assessee also filed a rectification petition u/s 154 before CPC. The said rectification petition was rejected by CPC. Against the rejection, the assessee filed another appeal before the CIT(A).
- The CIT(A) took up both the appeals together. However, he first disposed of the appeal filed by the assessee against the rectification order passed u/s 154. The CIT(A) agreed with the contentions of the assessee that the above said interest income did not accrue to the assessee and hence the same is not liable for taxation. Accordingly, he deleted the disallowance made by CPC.
ITAT Mumbai held as below:
- It was not shown by the revenue that there existed a contractual obligation to collect interest from the debtors.
- The only issue that arises for adjudication now is related to taxability of notional interest income credited by the assessee in his profit and loss account as per the requirement of Indian Accounting Standards.
- The notional income credited to the profit and loss account cannot be said to have accrued to the assessee, when there is no contractual obligation to pay the same.
- So the notional interest income cannot be liable for taxation under Real Income principle and so the Revenue’s appeal is dismissed.
The copy of the order is as under:
