TMI Blog2022 (4) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... interest expenditure if the interest was paid in respect of capital borrowed which was not used for the purposes of business or profession. As per the mandate of Sec. 36(1)(iii), the amount of interest paid in respect of capital borrowed for the purposes of business or profession is an allowable deduction. In the instance case AO could have invoked the provisions of s 36(1)(iii) to hold that the borrowed capital was not used for the purposes of business or profession. However, the same has not been done and the provisions of Sec. 36(1)(iii) have not been invoked. Rather Ld. AO has computed notional interest on loans advanced by the assessee which do not find support of any statutory provisions. Therefore, the action of Ld. AO, in adding the notional interest on outstanding loans, in not in accordance with law and hence not sustainable. Another aspect of the matter is that the loan has been granted by the assessee to its sister concern. Naturally the assessee had business interest in that entity. The assessee has charged interest till 31.03.2012 and thereafter no interest has been charged as per mutual understanding since the borrower entity was facing financial difficulties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the fact that under the Income Tax Act notional interest cannot be assessed. 3. The CIT(A) erred in not appreciating the fact that the appellant did not charge interest on amount advanced to Hymavathi Enterprises Private Limited as they requested not to charge interest as they were facing financial difficulties and that non charging of interest was due to financial difficulties faced by Hymavathi Enterprises Private Limited. 4. For these and other grounds that may be adduced before or at the time of hearing the Honorable ITAT may be please to delete the additions of ₹ 4,16,71,809/-. As evident the assessee is aggrieved by assessment of notional interest of ₹ 416.71 Lacs. 2. The Ld. AR assailed the addition of notional interest and submitted that the same could not be added to the income of the assessee. The Ld. AR also assailed the addition by relying upon the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (288 ITR 1) and also on the decision of Hero Cycles Pvt. Ltd. vs. CIT (379 ITR 347). The copy of the same has been placed on record. The Ld. Sr. DR, on the other hand, submitted that the borrowed funds were utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant had taken loans from its shareholders and interest expenditure has been claimed to the tune of ₹ 6,44,65,7587-. On the other hand, appellant is admitted to have advanced an amount of ₹ 31 Cr. to M/s. Hymavathi Enterprises Pvt. Ltd. The total outstanding amount is stated to have been shown at ₹ 36,06,76,719/-. It means that appellant had borrowed loans at ₹ 55,21,26,719/- during the asst year 2014-15. However, out of the said borrowed amount, appellant is admitted to have advanced loan to the tune of ₹ 36,06,76,719/- to M/s. Hymavathi Enterprises Pvt. Ltd. which is substantial amount. During the assessment proceedings, the appellant was asked to show a cause as to why interest has not been charged against the loan amount given to M/s. Hymavathi Enterprises Pvt. Ltd. In response to AO's show cause notice, appellant is seemed to have stated that M/s. Hymavathi Enterprises Pvt. Ltd. has made a request of not charging interest due to its financial difficulties which has been readily accepted by the appellant and not charged interest against the loan amount given to M/s. Hymavathi Enterprises Pvt. Ltd. 4.4. Be it as it may, before me, Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpressed inability to pay interest on advances since they were facing financial difficulties. Accordingly, they requested assessee not to charge interest which was agreed upon by both the parties. However, rejecting the same, Ld. AO has computed notional interest of 18% on outstanding loans advanced by the assessee. On the basis of these facts, we are of the considered opinion that the addition of notional interest is not sustainable in the eyes of law. It is trite law that only real income is to be assessed to tax unless expressly provided under the act. No statutory provision has been shown to us which mandate addition of notional interest. The assessee had debited interest expenditure during the year. As per the provisions of Sec. 36(1)(iii), Ld. AO could have disallowed interest expenditure if the interest was paid in respect of capital borrowed which was not used for the purposes of business or profession. As per the mandate of Sec. 36(1)(iii), the amount of interest paid in respect of capital borrowed for the purposes of business or profession is an allowable deduction. In the instance case, Ld. AO could have invoked the provisions of s 36(1)(iii) to hold that the borrowed ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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