ITAT Deletes Notional Interest Addition on Interest-Free Loans to Subsidiaries and Remands Ad-hoc Capitalization of Installation Expenses:

ITAT Deletes Notional Interest Addition on Interest-Free Loans to Subsidiaries and Remands Ad-hoc Capitalization of Installation Expenses The Income Tax Appellate Tribunal (ITAT) Delhi has held that Notional interest on interest-free advances cannot be assessed as income if there is no actual receipt , particularly where the assessee possesses sufficient interest-free funds. The assessee, M/s Continental Engines Pvt. Ltd., filed its return of income for Assessment Year 2017-18 declaring an income of Rs 6.93 crore. During the scrutiny assessment under Section 143(3), the AO made additions that aggregated to over Rs 4 crore. The CIT(A) deleted the additions relating to notional interest and cessation of liabilities while sustaining the capitalization of installation expenses. Aggrieved, both the assessee and the Revenue approached the Tribunal. The Tribunal upheld the order of the CIT(A), which deleted the addition of Rs 1.36 crore made on account of notional interest. It observed that Section 36(1)(iii) permits disallowance of actual interest expenditure where borrowed funds are not used for business purposes, but it does not authorize taxation of hypothetical or notional income. The Tribunal observed that the AO is not able to establish any nexus between borrowed funds and the interest-free advances granted to subsidiaries. With respect to the addition of Rs 1.80 crore under Section 41(1), the Tribunal held that the liabilities had subsequently been written back and duly offered to tax in later assessment years and taxing the same amount again would result in impermissible double taxation. Regarding the capitalization of installation expenses, the Tribunal held that there was no justification for a blanket capitalization of 5% of asset cost. However, it restored the matter to the AO for the limited purpose of verifying the assessee's claim that installation charges were already embedded in the cost of the assets acquired during the year while allowing the appeal of the assessee for statistical purposes.