Notional interest income credited to P/LA/C as per accounting standard requirement is not liable for tax as per real income principle: Mumbai ITAT

The bank of BR Baskaran (accountant member) And Sandeep Singh Karhail (Judicial Member) repeated, while referring to the case of Ms. Shriram Properties Limited (ITA No. 431/Chny/2022 dated 20.3.2023) That “Where there is a contractual obligation not to charge commission solely for the reason that the taxpayer has made fictitious entries in the books for a better presentation of the financial statements, it cannot be said that income accrues to the taxpayer which is taxable is for the disputed assessment year.” (Paragraph 8)

According to the brief facts of the case, the liquidator is a limited liability company engaged in the storage and handling of liquid cargo. During the year in question, the trustee had extended an interest-free loan to its wholly owned subsidiary called ‘Kesar Multimodal Logistic Limited’. Even though no interest was payable on that loan as per the agreed terms, the taxpayer still, as per the requirements of the Indian Accounting Standard, took into account ‘notional interest’ in the accounts and credited it to its profit and loss account. The notional interest income so credited amounted to Rs.2,76,81,947/-. Since it was merely an entry and did not accrue to the taxpayer at all, the said amount was excluded from the net profit while computing the total income for the purpose of the Income Tax Act.

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

The CIT(A) heard both appeals jointly. However, he first disposed of the appeal filed by the taxpayer against the rectification order u/s 154. The CIT(A) agreed with the contentions of the assessee that the aforesaid interest income did not accrue to the assessee and hence the same is not liable to tax. Accordingly, he vacated the CPC’s denial.

The Bench noted that the CIT(A) had dismissed the appeal filed by the Assessing Officer against the direction issued as 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 observed that the Assessing Officer has not challenged the order thus passed by the CIT(A) against the direction issued.

The Bench noted that the only issue now for consideration relates to the taxability of the notional interest income credited by the taxpayer in his profit and loss account as per the requirements of the 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 taxpayer as there is no contractual obligation to pay the same.

The Bench held that the revenue did not show that there was a contractual obligation to collect interest from the debtors.

When ITAT held that the CIT(A) was justified in directing the AO to exclude notional interest income from taxation, ITAT dismissed the tax authorities’ appeal.

Counsel for Appellant/Revenue: Jancy Elizabeth Rani

Counsel for the respondent/accused: Yogesh Thar

Case title: ACIT verses Kesar Terminals and Infrastructure Ltd.

Case number: ITA No. 3001/Mum/2023

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