2007 (8) TMI 68 - HC - Income Tax

Income AO made addition in the total income of assessee as notional interest on the ground of no interest has been charged by assessee on the amount advanced by assessee to a company Held that AO contention was not correct and set aside addition

Summary

Issues:
Appeal under section 260A of the Income-tax Act, 1961 regarding addition of notional interest income by the Assessing Officer on account of interest chargeable from another company.

Analysis:
The appeal was filed challenging the order of the Income-tax Appellate Tribunal, Allahabad, regarding the addition of notional interest income by the Assessing Officer. The respondent-assessee, a private limited company, had not charged interest from another company during the assessment year in question. The Assessing Officer added the notional interest income of Rs. 1,59,980, which was later deleted by the Commissioner of Income-tax (Appeals) and affirmed by the Tribunal in the Revenue's appeal.

During the proceedings, it was argued that the respondent-assessee had received interest from the other company during the assessment year and had charged interest in previous years. However, it was revealed that due to the bad financial position of the other company, it was agreed not to charge further interest and instead recover the amount by selling land to the respondent-assessee. The Tribunal held that the respondent-assessee acted prudently to safeguard the principal amount and ensure recovery, hence not charging interest was reasonable in the circumstances.

The Tribunal concluded that in situations where an assessee decides not to charge interest to recover the principal amount, it does not amount to bringing notional income to charge. Therefore, the Tribunal's order was upheld, and the substantial question of law was answered in favor of the assessee, leading to the dismissal of the appeal. No costs were awarded in the case.

This judgment highlights the importance of assessing the actions of an assessee from the viewpoint of a prudent person, especially in cases where decisions are made to safeguard the principal amount and ensure recovery. The Tribunal's decision in this case reflects the principle that not charging interest in certain circumstances, to facilitate recovery, does not warrant the addition of notional income by the Assessing Officer.