IN INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA Before Shri Waseem Ahmed, Accountant Member and Shri S.S.Viswanethra Ravi, Judicial Member ITA No.1818/Kol/2010 Assessment Years:2007-08 Jayshree Motors Pvt. Ltd., ITO Ward-3(4), White House, 4 t h Floor, 8/2 Esplanade, V/s. Block-D, 119, Park Street, 3 r d Floor, Kolkata- Kolkta-700 016 700 069 [PAN No.AABCJ 2880 K] Appellant .. Respondent By Appellant Shri D.S.Damle, FCA By Respondent Shri Provash Roy, JCIT-SR-DR Date of Hearing 19-09-2016 Date of Pronouncement 28-09-2016 O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by assessee is against order of Commissioner of Income Tax (Appeals)-I, Kolkata dated 26.07.2010. Assessment was framed by ITO Ward- 3(4), Kolkata u/s 143(3)(ii) of Income Tax Act, 1961 (hereinafter referred to as Act ) vide his order dated 22.12.2009 for assessment year 2007-08. grounds raised by assessee per its appeal are as under:- 01. For that, on facts and in given circumstances, addition of Rs.5,76,231/- on account of notional interest on temporary accommodation by way o loan free of interest to associate company was not justified and therefore, is liable to be quashed/cancelled. ITA No.1818/Kol/2010 A.Y. 2007-08 Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 2 02. For that, on facts and in given circumstances, Learned Assessing Officer was totally unjustified in concluding that Appellant adopted dual policy of utilizing interest baring bank loan for running its business operations and giving its own funds to related company without any interest. Learned Assessing Officer did not appreciate other aspect o commercial prudence on basis of which, sums were given to associate firm time to time for meeting its various statutory obligations. Thus, addition so made is totally unjustified, completely illegal and bad in law and may, therefore, kindly be deleted. 03. For that, on fats and in given circumstances, Learned CIT(A) did not go into detail and confirmed addition made by Assessing Officer. observation of Leaned CIT as regards taking loans on interest and giving them to sister concern without interest was not correct. 04. For that Appellant Company craves leave to submit additional grounds and/or amend or alter present grounds either before or during course of appellate proceedings. Shri D.S. Damle, Ld. Authorized Representative appeared on behalf of assessee and Shri Provash Roy, Ld. Senior Departmental Representative appeared on behalf of Revenue. 2. common inter-connected issue raised by assessee in Ground No.1 and 2 are that Ld. CIT(A) erred in confirming order of Assessing Officer by sustaining disallowance of interest of Rs.5,76,231/- on account of interest free loan given to its associate company. 3. Facts in brief are that assessee is Private Limited Company and engaged in sales and services of Ford passenger cars and its spare & accessories. During year assessee was having interest bearing loan and has incurred interest expenditure of Rs.35,13,420/- thereon. AO during course of assessment proceedings observed that assessee has given interest free loan to its associate concern on which interest income was worked out at Rs.5,76,231/- on notional basis. Accordingly, AO added sum of Rs.5,76,231/- to total income of assessee. ITA No.1818/Kol/2010 A.Y. 2007-08 Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 3 4. Aggrieved, assessee preferred appeal before Ld. CIT(A) whereas assessee submitted that loan was given to associate enterprises out of its own surplus fund and no borrowed fund has been utilized for loan given to associate enterprises. However, Ld. CIT(A) rejected plea of assessee and confirmed order of AO by observing as under:- I have gone through both A/R s arguments as well as AO's order. I believe AO has firmly established that company indeed exhibited dual policy in taking loans on interest and advancing same without interest to its sister concern. case law as cited by appellant, thus is not relevant to fats of case. adoption of interest rate by AO is also fair. In circumstances, this ground of appellant fails. addition is confirmed. Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. 5. Before us Ld. AR submitted paper book which is running pages 1 to 46 and cited case law. Ld. AR of assessee stated that loan was given to associate enterprise out of its own surplus fund and which is as on 31.03.2007 of assessee is of Rs.1,83,59,374/- and interest free advance given to its associate concern is of Rs.45,01,820/-. He also submitted that AO in instance case, has worked out interest income on advance given to associate concern on notional basis, therefore act of AO is beyond provision of law. Had AO disallowed interest expense rather charging interest income on advance given on notional basis then situation would have been different in so far as to make disallowance on advance given. On other hand, Ld. DR vehemently supported order of Authorities Below. 6. We have heard rival contentions of both parties and perused materials available on record. From foregoing discussion, we find that AO in instance case has added interest income on advance given by assessee on ITA No.1818/Kol/2010 A.Y. 2007-08 Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 4 notional basis and it was also confirmed by Ld. CIT(A). However, ld. AR before us argued that dispute before AO was interest expenses claimed by assessee and therefore he should have disallowed interest expenses rather charging interest income on notional basis on amount advanced to associate concern. In this connection we agree with argument of ld. AR in so far income charging on money advanced to associate concern. As per AO fund was given out of borrowed fund therefore interest income was calculated on such fund. There was direct link as per lower authorities between borrowed fund and money advanced to associate concern. We also find whether AO has worked out income on notional basis or he should have disallowed interest expenses, in either case he wanted to levy tax on borrowed money utilized for purpose of business other than assessee. But in our considered view AO was to disallow interest expenses on money advanced to associate concern. lower authorities needs to work out period for which interest bearing loan was utilized by associate concern and interest pertinent to that advanced money. But lower authorities erred in charging interest income on notional basis. In this connection we rely in case law of CIT vs. Rungamatee Trexim (Pvt) Ltd. in GA No. 3796 of 2008 dated 09.12.2008 cited by ld. AR. relevant operative portion of said judgment is reproduced below:- We have perused order passed by Commissioner of Income Tax (Appeals) and order passed by learned Tribunal. It appears that question arose in respect of notional interest n loan when assessee had advance interest-free loan to one Hindustan National Glass & Industries Ltd. it further appears that assessee was one of promoter of said company. Commissioner of Income Tax (Appeals) in his order held as follows: I have carefully considered facts of case and findings of Assessing Officer from audited accounts. I find that as of 31st March, 2005 assessee s net owned funds was Rs.6.88 crores which were far in excess of interest free advance given to M/s Hindustan National Glass & Industries Ltd., company of which assessee was promoter. assessee did not have any borrowed funds on 31st March, 2005 and as such it was not case where borrowed funds were diverted for granting interest free loans assessee had applied its own funds in granting interest free advance to body corporate of which assessee was promoter. On these facts, I fully agree with A/R s submissions that Assessing Officer has brought to tax notional or hypothetical ITA No.1818/Kol/2010 A.Y. 2007-08 Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 5 income. Supreme Court in catena of case has held that subject matter of tax is always income which should be real income and not hypothetical income. Income Tax Act does not permit taxation of hypothetical or opportunity income and what is subject matter of tax is read income, irrespective of fact whether entry is made in books of account or not. This is ratio laid down in case of Godhra Electric Co. Ltd. vs. CIT 225 ITR 746). Income Tax Act does not compel assessee to earn maximum income but brings to tax only income which is actually earned by assessee. It is settled proposition of law that in what manner assessee should conduct his business is best left to discretion of assessee and Assessing Officer cannot sit in arm chair of businessman to decide, what should have been income earned. If assessee does not bargain to earn income then Assessing Officer cannot compel him to earn such income and cannot resume accrual of income, based entirely on his subjective notions as what constitutes fare return on investment. In business there cannot be certainly about earning of income and therefore business income cannot be assessed entirely on notional basis. In any opinion, none of provisions of Chapter-IV of Income Tax Act authorized Assessing Officer to assess notional of hypothetical income. addition of notional interest of Rs.10 Lacs as business income of assessee is therefore deleted. Now coming to argument of ld. AR that borrowed fund was not utilized for purpose of giving interest free loan to associate concerns, question arises before whether it is given out of borrowed fund or owned fund that needs to be adjudicated. From submission of assessee we find that sufficient fund was available with assessee as discussed above to advance money to its associate concern. ld. DR has not brought anything contrary to arguments of ld. AR. Therefore, in our considered view, authorities below should have disallowed interest expenses rather than charging interest income on notional basis. In instant case, interest expense claimed by assessee but AO instead of disallowing interest has added interest income on notional basis which was not dispute from facts of case. In this connection, we rely in decision of Hon'ble jurisdictional High Court in case of CIT vs. Rungamatee Trexim (Pvt) Ltd. in GA No. 3796 of 2008 dated 09.12.2008 supra. ITA No.1818/Kol/2010 A.Y. 2007-08 Jayshree Motors Pvt. Ltd. vs. ITO Wd-3(4), Kol. Page 6 Respectfully following decision of Hon'ble jurisdictional High Court we reverse orders of Authorities Below and we allow ground of assessee s appeal. AO is directed accordingly. 7. Last issue in this appeal of assessee is general in nature and call for any specific adjudication. 8. In result, assessee s appeal stands allowed. Order pronounced in open court on 28/09/2016 Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member 28/09/2016 Kolkata Copy of Order Forwarded to:- 1. Appellant-Jayshree Motors Pvt. Ltd., White House, 4th Floor, Block-D 119, Park Street, Kolkata-16 2. Respondent-ITO Ward-3(4), 8/2 Esplanade East, 3rd Floor, Kolkata-69 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Kolkata 6. Guard file. By order True Copy Jayshree Motors Pvt. Ltd. v. ITO Ward-3(4), Kolkata