The Income Tax Appellate Tribunal in the case of DCIT vs Maruti Securities Limited wherein allowed the appeal of Revenue and held that notional interest on advances cannot be charged on the accrual basis.
The Assessee-Company called Maruti Securities Limited engaged in the business of investment in capital markets filed its return of income declaring a loss to the tune of five lakh.
During the proceedings, AO observed that there were unsecured loans to the extent of 19.25 crores under advances recoverable in cash or kind.
Further assessee-company has not entered into agreements for charging interest @ 8% on four parties. The AO had an opinion that earlier year’s, company had entered into an agreement with the same party for receipt of interest @8% p.a. At the end of the year, Assessee-company has again entered into an agreement to waive off the interest stating that all the three parties suffered losses.
Since the company was following the mercantile system of accounting, the practice of entering and cancellation agreement is not acceptable and the AO held that interest is not a notional interest and it constitutes interest income not offered to tax. Accordingly, AO calculated the interest on amounts advanced by the assessee and brought to tax the same.
Aggrieved with the action of AO, Assessee appealed before CIT (A) where authority bank on the decision of ITAT, Hyderabad Benches in the assessee’s own case for the AYs 2005-06 to 2006-07 and 2008-09 to 2011-12 where it has been held that interest is a notional interest and no notional income can be brought to tax on loans and advances.
While pressing the same CIT (A) deleted the addition and directed the AO to verify whether interest received on the accrual basis and tax them on receipt basis. Being aggrieved with the order Revenue upon appeal before ITAT relied on lower authorities’ decision.
On contrary, the counsel for Assessee argued that the issue of Notional interest has a direct link in the assessee’s own case of this tribunal and also brought the attention to the CIT (A)’s order for the AYs 2008-09 to 2011-12.
Finally, the tribunal ordered that notional interest on above advances cannot be charged on the accrual basis.
The Tribunal bench comprising of Judicial Member P.Madhavi Devi and Accountant Member D.S. Sunder Singh directed the AO to verify the interest actually received and assess the same on actual receipt basis.
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