TMI Blog2022 (11) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... mited. Therefore, the Department has not brought on anything on record to demonstrate that the interest income sought to taxed had accrued to the assessee nor has the Revenue brought anything on record that any interest income was in fact received by the assessee. It is a well-settled principle of law that income cannot be taxed in the hands of the assessee, on purely notional basis. Either the income should accrue to the assessee, as per terms of agreement or otherwise, or else the same should have been received by the assessee. In the instant facts, as per terms of Agreement, on amalgamation of M/s Sanman Holdings Private Limited into M/s Tanti Holdings Private Limited by way of Orders of High Court of Mumbai and Gujarat, there is no obligation for M/s Sanman Holdings Private Limited to pay any interest to the assessee. In the case of Asian Hotels [ 2007 (12) TMI 274 - DELHI HIGH COURT] considered the issue of notional income from interest free loans received by the petitioner in respect of shops given on rent. AO computed tax of 18 percent per annum on the notional interest on the basis that they resulted in benefit to the petitioner. Rejecting this contention, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nman Holding Private Limited was not offered to tax in assessment year 2011-12, though in assessment year 2010-11, the said interest was offered to tax by the assessee. The assessee filed appeal against the order under section 263 of the Act before ITAT, Rajkot which decided that the issue in respect of accrued interest was valid and accordingly dismissed the assessee s appeal. Pursuant to ITAT order, the AO assessed the total income at ₹ 35,17,54,953/- wherein the AO computed notional interest at the rate of 10% on deposits held by the assessee with M/s Sanman Holdings Private Limited on the ground that the same was not offered to tax all the assessee is following accrual system of accounting and added the same to the assessee s total income. 4. In appeal before Ld. CIT(Appeals), the assessee contended that on 31- 03-2010, M/s Sanman Holdings Private Limited informed assessee that the company was passing through critical financial crisis and was incurring losses and therefore it would not be possible to provide/pay interest with effect from 01-04-2010 and that the Board of Directors was contemplating amalgamation of the company with M/s Tanti holding Private Limited with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility to provide/pay interest had ceased from 01/04/2010. The assessee thus contends that no interest accrued to assessee and therefore interest income is not justified. In this regard the assessee placed reliance upon the court judgments to the effect that only real income can be taxed and not the notional income. The Assessing Officer rejected the contentions of the assessee mainly on the grounds that the assessee had shown interest income on the same deposit in immediately preceding assessment year and that the facts of the case of assessee were different from the cases of Shoorji Vallabhdas Co. 46 ITR 144 (SC) and of Arihant Avenue Credit Ltd., 36 Taxmann.coml4 relied upon by the assessee. One of the pleas of the assessee was that the assessee had sufficient own capital and non interest bearing funds and deposits and therefore it was not case of divergence of funds as non interest bearing advance. This plea of the assessee was rebutted by the A.O. stating that here it is not a case of divergence of interest bearing funds to non interest bearing advances but here is the case that the assessee did not offer interest income to tax which accrued on interest bearing advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also noteworthy that subsequently in A.Y. 2012- 13 and 2013-14 no such additions on account of national income have been made by A.O. even though the deposit of the assessee with M/s Tanti Holding Private Limited is still outstanding. In view of above discussion in my considered opinion the impugned addition is not sustainable and the same is directed to be deleted. 5. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals). The DR during the course of arguments placed reliance on the order of Ld. CIT(Appeals), however, he also agreed to the fact that interest has been sought to be taxed in the hands of the assessee on purely notional basis. The DR did not bring anything on record to controvert the terms of the loan agreement between the assessee and M/s Sanman Holdings Private Limited according to which it was provided that there would be no liability of M/s Sanman Holdings Private Limited to pay interest in case of amalgamation, merger or takeover of borrower or any other change in its management from the appointed date of such event. We also observe that in the subsequent assessment years 2012-13 and 2013-14, the Revenue itself did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at on commercial principles subject to the provisions of the Income-tax Act . Subsequently, the Orissa High Court in Prafulla Kumar Malik AIR 1969 Ori 187 emphasized that income tax is imposed only on profits he actually receives and not on the profits he might have, but has not received . This real accrual of income test was elaborated by the Supreme Court in Godhra Electricity Company(1997) 225 ITR 746 . In this case, a Government Circular entitled the assessee to recover consumption charges from its customers at enhanced rates. As this order was the subject matter of protracted litigation, the assessee was unable to recover the enhanced charges. Consequently, the assessee challenged the inclusion of such amount within its assessable income on the ground that no real income had accrued. Reiterating its earlier decision in Morvi Industries Ltd. v. CIT(1971) 82 ITR 835 and CIT v. Birla Gwalior (1973) 89 ITR 266, the Supreme Court held that tax cannot be imposed on hypothetical accrual of income. It was observed that the question of real accrual of income must be considered by taking the probability of realisation in a realistic manner. In the case of Asian Hotels(2010) 323 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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