Fact of case
The appellant, All Grow & Investment Pvt. Ltd. (NBFC), had advanced ₹1.4 crore to M/s. Escorts Ltd. as an inter-corporate deposit and earned interest on it up to March 31, 1998. However, no interest was paid after this date, as the entire deposit was recalled in August 1998. The AO added ₹8.75 lakhs to the income of the appellant for AY 1999-2000, attributing notional interest for the period of non-payment.

Issues Involved:

  1. Whether the addition of ₹8.75 lakhs for the non-payment of interest was valid under the provisions of the Income Tax Act.
  2. Whether the CIT(Appeals) was justified in accepting additional evidence regarding the payment and non-payment of interest.
  3. Whether the ITAT's direction to restore the addition was correct given the absence of material evidence.

Petitioner’s Arguments:
The appellant argued that the loan had been recalled by M/s. Escorts Ltd. and no interest was due for the period from April to August 1998. It also presented additional evidence, including a letter from Escorts Ltd. confirming the repayment of the loan without interest.

Respondent’s Arguments:
The CIT (Appeals) disagreed with the AO’s assessment and relied on judicial precedents, including ACIT v. Shoorji Vallabhadas & Co., to argue that tax cannot be levied on hypothetical or non-existent income.

Court’s Findings:
The Delhi High Court sided with the appellant, ruling that the ITAT's decision to reinstate the ₹8.75 lakh addition was incorrect. The court found that the CIT(Appeals) was correct in accepting the evidence provided by the assessee and noted the failure of the AO to inquire further regarding the actual income. As a result, the High Court set aside the ITAT's decision and allowed the appeal in favor of the appellant.

Important Clarifications:
The ruling reaffirms the principle that tax cannot be imposed on income that does not accrue, even if such income is recorded in books as hypothetical income.

Sections Involved:

  • Section 145 of the Income Tax Act (Mercantile System of Accounting)
  • Section 260A of the Income Tax Act (Appeal to High Court) 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:598-DB/SRB20012015ITA172015.pdf

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