Notional Interest Income Credited To P/L A/C As Per Accounting Standard Requirement Is Not Liable For Tax Under Real Income Principle: Mumbai ITAT

The Bench of B.R. Baskaran (Accountant Member) and Sandeep Singh Karhail (Judicial Member) reiterated while referring to the case of M/s. Shriram Properties Limited (ITA No. 431/Chny/2022 dated 20.3.2023) that “when there is a contractual obligation for not charging any commission, merely for the reason that the assessee has passed notional entries in the books for better representation of financial statements, it cannot be said that income accrues to the assessee which is chargeable to tax for the impugned assessment year.” (Para 8)

As per the brief facts of the case, the assessee is a public limited company engaged in the business of storage and handling of liquid cargo. During the year under consideration, the assessee had given interest free loan to its wholly owned subsidiary named 'Kesar Multimodal Logistic Limited'. Though no interest was due on that loan as per the agreed terms, yet, as per the requirement of Indian Accounting Standard, the assessee accounted for 'notional interest' in the books of account and credited the same in its Profit and Loss account. The notional interest income so credited was Rs.2,76,81,947/-. Since it was only a book entry and it did not really accrue to the assessee at all, it excluded the said amount from Net profit while computing the total income for the purpose of Income tax Act.

While processing the return, the CPC did not allow exclusion, as it was not a deduction allowed under any of the provisions of the Act. Accordingly, the total income of the assessee was enhanced by the amount of Rs. 2.76 crores. The assessee challenged the above said addition made by CPC by filing the appeal before the CIT(A). In the meantime, the assessee also filed a rectification petition u/s 154 before CPC. The said rectification petition was rejected by CPC. Against the rejection, the assessee filed another appeal before the CIT(A).

The CIT(A) took up both the appeals together. However, he first disposed of the appeal filed by the assessee against the rectification order passed u/s 154. The CIT(A) agreed with the contentions of the assessee that the above said interest income did not accrue to the assessee and hence the same is not liable for taxation. Accordingly, he deleted the disallowance made by CPC.

The Bench noted that the CIT(A) dismissed the appeal filed by the assessee against the intimation issued, since he had already granted relief against the very same addition in the appeal filed against the rectification order passed u/s 154.

The Bench further noted that the assessee has not challenged the order so passed by the CIT(A) against the intimation issued.

The Bench observed that the only issue that arises for adjudication now is related to taxability of notional interest income credited by the assessee in his profit and loss account as per the requirement of Indian Accounting Standards.

The Bench further observed that the notional income credited to the profit and loss account cannot be said to have accrued to the assessee, when there is no contractual obligation to pay the same.

The Bench found that it was not shown by the revenue that there existed a contractual obligation to collect interest from the debtors.

Therefore, on finding that the CIT(A) was justified in directing the AO to exclude notional interest income for taxation, ITAT dismissed the Revenue's appeal.

Counsel for Appellant/ Revenue: Jancy Elizabeth Rani

Counsel for Respondent/ Assessee: Yogesh Thar

Case Title: ACIT verses Kesar Terminals and Infrastructure Ltd.

Case Number: I.T.A. No. 3001/Mum/2023

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