Dhrubajyoti Roy, JCIT for the Appellant. Subash Agarwal, Advocate for the Respondent.

This is an appeal preferred by the revenue against the order of Ld.CIT(A)-7, Kolkata dated 05.03.2019 for 2012-13.

2. At the outset, the Ld. Counsel for the assessee pointed out that the only two grounds raised by the revenue and both the issues are covered in assessee’s own case by the order of this Tribunal and the ld. CIT(A) has only followed the decisions of Tribunal to decide in favour of the assessee. Per contra, the ld. D.R could neither controvert this contention of the ld. A.R of the assessee nor point out any difference in facts or law to take another view.

3. Ground no. 1 raised by the revenue against the action of the ld. CIT(A) in deleting the addition was Rs. 1,07,83,489/- made as notional interest on the loans given to certain companies / persons by the assessee.

4. Brief facts of the case as noted by the Assessing Officer is that the assessee in the earlier assessment years has reflected notional interest under ‘income from other sources’ which were in respect of interest free loans and advances given by the assessee to certain companies / persons. According to Assessing Officer, the assessee had submitted before him as on 31.03.2012, the following loans as appearing in books of account out of loans on which notional interest was being charged in the earlier assessment years:

M/s Oxides & Specialities Ltd. Rs. 5,30,93,000/-

M/s Gujarat Carbon & Industries Ltd. Rs. 1,84,96,925/-

According to Assessing Officer, the assessee submitted that interests in respect of loan given to above companies were charged up to the financial year 2001-02. However since, the aforesaid two companies were incurring huge losses and were unable to pay the principal amount as well as interest, the assessee had stopped charging interest on such loans. However, this contention of the assessee was not accepted by the Assessing Officer. According to him, the assessee had not given up its right to receive the interest. Therefore, the notional interest @ 15% per annum on the loans was determined at Rs. 1,07,83,489/- and treated as income under the head ‘income from other sources.’

5. Aggrieved by the order, the assessee preferred an appeal before the ld. CIT(A) who was pleased to delete the addition by holding as under:

“I have considered the submission of the A.R of the appellant in the backdrop of the assessment order. At the outset, I find that the issue relates to charging of notional interest on loans which were never received by the appellant. In my humble opinion, I find that there is no provision in the Income Tax Act for charging of any income on a notional basis. What is to be charged to tax would only be on income actually earned and not otherwise. In any case, I find that the same issue had cropped up for the AY 2001-02 in the appellant’s own case since the appellant had stopped charging interest on the amount of the said loans from the said assessment year. The direction of the CIT(A) to the AO to charge notional interest for that assessment year was reversed by the Jurisdictional ITAT, ‘E’ Bench vide order dated 21.07.2005 in ITA No. 980/Kol/05 Kolkata wherein it was held that no amount can be treated as notional interest in a case where interest has not been charged by the assessee. For the next AY 2002-03, similar action was again carried out by the AO in charging the notional interest income which was deleted by the jurisdictional CIT(A) following the above ruling of the ITAT. No further appeal was preferred by the Department on this ground. The issue of notional income has been deliberated on a number of occasions by various courts such as in the case of CIT vs. Goyal M.G. Gases (P) Ltd., (163 Taxman 541) by the Delhi High Court wherein reliance was placed on the decision of the Apex Court in the case of CIT vs. Birla Gwalior reported in 89 ITR 266 to the effect that when there was no real accrual of interest and the assessee has also not recorded interest in its books of account, no notional interest can be levied on such loans. It is also evident from the accounts of the appellant that no interest has been charged on the amounts for the year under consideration. Considering the entire gamut of the case, I find that there was never an occasion for the AO to charge notional interest on the outstanding loan amounts considered to be bad since AY 2001-02 on both facts and law. In the appeal orders dated 24.08,2017 and 11.01.2018 passed by the CIT(A)-2 for the AYs 2010-11 and 2011-12 in Appeal Nos. 1264/CIT(A)-2/2014-15 and 1259/CIT(A)-2/2014-15 respectively, similar addition made by the AO in the assessment order passed u/s 143(3) (of Income Tax Act, 1961) was directed to be deleted following the decision of the ITAT “E” Bench in ITA No. 980/Kol/05 for the assessment year 2001-02. In view of the foregoing discussion and also to maintain judicial consistency, the AO is directed to delete the impugned addition of Rs.1,07,83,489/-. This ground is allowed.”

6. Aggrieved the revenue is before us.

7. We have heard both the parties and perused the record. We note that the ld. CIT(A) has taken note of the fact that the assessee has not received any interest and principal loan amount from two companies i.e. M/s Oxides & Specialities Ltd. and M/s Gujarat Carbon & Industries ltd. We also take note that these companies are incurring huge losses and could not pay principal amount as well as interest. So, the assessee has stopped charging interest on such loans and has not reflected it in its books. Thereafter, the ld. CIT(A) has relied upon the order of Tribunal in assessee’s own case for AY 2001-02, 2010-11 and 2011-12 for giving decision in favour of the assessee. We note that the ld. CIT(A) has rightly taken note of the decision of Hon’ble Delhi High Court in the case of CIT vs. Goyal MG Gases P Ltd. (163 Taxman 541) wherein the Hon’ble High Court relied upon the decision of the Hon’ble Supreme Court in the case of CIT vs. Birla Gwalior (89 ITR 266) wherein it was held that what has to be seen is whether income can be said to have really accrued to the assessee.

When there was no real accrual of interest and the assessee has also not recorded interest in its books of account, no notional interest can be levied on such loans. The ld. CIT(A) has given finding of fact that the assessee in its books of accounts has not charged any interest against the loans of these two companies. This findings of fact has not been assailed before us. Therefore, taking into consideration of this fact the ld. CIT(A) has rightly deleted the notional interest. Therefore, the ground raised by the revenue is dismissed.

8. Coming to ground no.2 raised by the revenue against the action of ld. CIT(A) in allowing the claim of the assessee to write off of irrecoverable principal amount of loan which was claimed u/s 36(1)(vii) (of Income Tax Act, 1961) read with Section 36(2) (of Income Tax Act, 1961).

9. Brief facts of the case as noted by the Assessing Officer is that while verifying the assessment records for earlier assessment years it was seen by the Assessing Officer that against the order of this Tribunal in assessee’s own case on the same issue for AY 2002-03, the department has filed appeal u/s 260A (of Income Tax Act, 1961) before the Hon’ble High Court and is awaiting the decision of Hon’ble High Court. Therefore,the assessee’s claim in respect of principal loan amount written off Rs. 4,63,40,475/- was disallowed.

10. Aggrieved the assessee preferred an appeal before the ld. CIT(A) who deleted the addition held as under:

“5.2. I have considered the submission of the A.R of the appellant in the backdrop of the assessment order. I find that this issue is already a covered matter in favour of the appellant supra. In the appellant’s own case for the assessment year 2002-03 similar issue had come up before the Hon’ble ITAT, Kolkata in ITA NO. 706/Kol/2008 supra.

In this assessment year the appellant in addition to its business of growing and manufacture of tea, fertilizer etc. had also carried on the business of growing loans and ICDs. The interest on loans was held assessable under the head profits and gains of business. The assessee had written off the principal amount of loans as also the unrealized amount of interest as bad debts. The Assessing Officer had allowed the claim in respect of write off of principal; amount of loan. The Department had filed appeal before the ITAT. In the order passed by the ITAT, the order of the ld. CIT(A) was upheld (supra) in favour of the assessee. In view of the foregoing, the Assessing Officer is directed to allow deduction of Rs. 4,63,40,475/- by way of bad debts u/s 36(1)(vii) (of Income Tax Act, 1961) or alternatively as business loss u/s 28 (of Income Tax Act, 1961). These grounds are allowed.”

11. Aggrieved the revenue is before us.

12. We have heard both the parties and perused the records. We note that the ld. CIT(A) has followed the assessee’s own case decided by this Tribunal for AY 2002-03 wherein the similar issue had come up before us in ITA No. 706/Kol/2008 dated 30.09.2008. The ld. CIT(A) noted that in this assessment year the assessee in addition to its business of manufacturing of tea, fertilizer etc, had also carried on the business of granting of loans and ICDs. The ld. CIT(A) noted that the interest on loans was held assessable under the head profits and gains of business and the assessee had written off the principal amount of loans as also the unrealized amount of interest as bad debts. The Assessing Officer had allowed the claim of bad debts in respect of the unrealized interest but had disallowed the claim in respect of write off of principal amount of loan on the reason that the department has preferred an appeal before the Hon’ble High Court against the decision of Tribunal in AY 2002-03. We note that for AY 2002-03 this Tribunal has decided the issue in favour of assessee. We note that for AY 2002-03 similar issue came up for adjudication before this Tribunal in assessee’s own case when the Tribunal upheld the action of ld. CIT(A) and allowed the write off of bad debts. Therefore, on similar facts and issue, the ld. CIT(A) has followed our ratio in assessee’s own case and decided in favour of assessee which decision we confirm.

13. In the result, appeal of the revenue is dismissed.

Order is pronounced in the open court on 13.11.2020.

Sd/- Sd/-

(J P. M. Jagtap) (A. T. Varkey)

Vice President Judicial Member

Dated: 13.11.2020