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Notional interest

rohan (CHARTERED ACCOUNTANT CS FINAL) (83 Points)

04 January 2012

CONTRACTOR HAVE GIVEN ADVANCE TO PURCHASE MACHINERY TO SUB-CONTRACTOR..ADVANCE WAS OUTSTANDING AT THE END OF YEAR.....ITO WHILE ASSESSMENT CALCULATED NOTIONAL INTEREST ON THAT ADVANCE...IS ITO JUSTIFIED IN DOING SO?

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8 Replies

CA Neil Ganatra (Partner - Gautam Joshi & Co.) (871 Points)
Replied 04 January 2012

If assessee has taken any loan and paid interest on that and out of that he gives interest free loan to anybody then AO can disallow the notional interest. However advances given for the purpose of business like it is in your case, then AO can not disallow the interest provided you have to give the proof of purchase of machinery in next year by that sub contractor for your business.

KARANDEEP,CA,B.Com,CS FNL (JOB) (457 Points)
Replied 04 January 2012

Agreed with CA Neil Ganatra.

CA SANDESH MAHIPAL (Practicing in GST and MSME ) (1985 Points)
Replied 04 January 2012

Agree With CA Neil Ganatra.

The act of ITO is not correct.

rohan (CHARTERED ACCOUNTANT CS FINAL) (83 Points)
Replied 04 January 2012

thank you Niel ganatra, but in this case assessee have not shown notional interest it is the assessing officer who have calculated ad hoc notional interest and added it into total incoem of assessee...

CA Neil Ganatra (Partner - Gautam Joshi & Co.) (871 Points)
Replied 04 January 2012

Dear Rohan,

it will always be calculated by the AO. I wrote that AO will disallow the notional interest. That doesn't mean that assessee has shown or claimed any notional interest. It simply means that AO will calculate the notional interest and will disallow.

CA MAULIK (C.A) (937 Points)
Replied 04 January 2012

AO can do so only for bogus transactions,for genuine transactions and if proof available,then he cant do so..

CA Neil Ganatra (Partner - Gautam Joshi & Co.) (871 Points)
Replied 04 January 2012

Evenif confirmations and other proofs are available and given to AO, if the advance is given interest free and AO can prove that the advance was given out of the borrowed fund, he can surely make the addition.

rohan (CHARTERED ACCOUNTANT CS FINAL) (83 Points)
Replied 04 January 2012

For disallowing interest AO must give a finding with regard to the nexus between the interest bearing funds available and interest free advances made during the year

Amarpali International Vs. ACIT (ITAT Delhi) - Ld. counsel of the assessee submitted that assessee has adequate interest free funds available with the firm which have been used to make the advances during the year. She claimed that no nexus has been established between the interest bearing fund and advances to sister concerns. We have carefully considered the submissions. We find that for making any disallowance in connection with the interest, it is incumbent upon the authorities below to give a finding with regard to the nexus between the interest bearing funds available with the firm and interest free advances made during the year. In our considered opinion, the interest of justice will be served, if the matter is remitted to the file of the Assessing Officer to consider the issue afresh. Assessing Officer shall examine the assessee's claim that sufficient interest free funds are available to assessee to give advances to the concerns. Accordingly, the issue stands remitted to the file of the Assessing Officer.
Disallowance of Expenditure on estimated basis without cogent reasons, are not sustainable - Assessing Officer has made the disallowances in this regard on estimate basis and in making the disallowances Assessing Officer has not brought on record any specific instances that the vouchers are not maintained or the expenses are not related to the business of the assessee. Assessing Officer has made the disallowances of lumpsum 80% and 75 and Ld. Commissioner of Income Tax (Appeals) has sustained the same also. In our considered opinion, such disallowances based on estimate basis without bringing on record any cogent reasons, are not sustainable. Hence, we set aside the orders of the authorities below on this issue and decide the issue in favour of the assessee.
INCOME TAX APPELLATE TRIBUNAL, DELHI
I.T.A. No. 4505/DEL/2011 – A.Y.: 2007-08
Amarpali International
Vs
Assistant Commissioner of Income Tax