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2025 Supreme(Raj) 375
HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR
MR. JUSTICE AVNEESH JHINGAN, MR. JUSTICE MANEESH SHARMA, JJ
Mr. Joy Bajaj S/o Shyam Sundar Bajaj - Appellant
Versus
The Assistant Commissioner Of Income Tax, Ward 4(2), Jaipur. - Respondent
D.B. Income Tax Appeal No. 88/2020
Decided On : 11-03-2025
Advocate Appeared:
For the Appellant : Mr. Sandeep Taneja with Mr. Aditya Sharma
For the Respondent: Mr. Sandeep Pathak with Mr. Palash Gupta
Notional interest on delayed payment cannot be taxed under Section 56(2)(vii) of the Income Tax Act without a clear charging provision.
Headnote:
(A) Income Tax Act, 1961 - Section 56(2)(vii) - Appeal against ITAT order - The appellant purchased two offices for Rs.54,50,000/-; however, due to a dispute, payment was delayed and a civil suit was filed. The ITAT set aside the addition of Rs.53,50,000/- but directed the AO to apply notional interest for delayed payment. The court found that the tribunal erred in imposing notional interest without a clear charging provision. (Paras 3, 11, 14, 16)
(B) Taxation - Legal fictions - The court emphasized that legal fictions in tax law should not be extended beyond their intended purpose. (Paras 13, 15)
Facts of the case:
The appellant purchased two offices from a seller for a total of Rs.54,50,000/-, but due to a dispute, payment was delayed, leading to a civil suit. The ITAT initially accepted the appeal but later directed a re-evaluation of the purchase consideration based on notional interest.
Findings of Court:
The tribunal's direction to apply notional interest was found to lack a legal basis, as no income was actually earned by the appellant during the delay.
Issues: The main issue was whether the ITAT was justified in directing the AO to add notional interest income without a charging section.
Ratio Decidendi: The court ruled that without a specific provision in the Income Tax Act, notional interest cannot be taxed, reaffirming that legal fictions should not be extended beyond their intended scope.
Result: Appeal allowed.
Order :
AVNEESH JHINGAN, J.
1. This appeal is filed against the order of Income Tax Appellate Tribunal (for short ‘the tribunal’) dated 22.03.2019 relating to assessment year 2015-16.
2. The brief facts are that the appellant vide two separate registered sale deeds dated 16.10.2014 purchased two offices from M/s. Radha Swami Buildcon Pvt. Ltd. (hereinafter referred to as ‘the seller’) for the consideration of Rs.28,00,000/- & Rs.26,50,000/-. For payment of the consideration, cheques amounting to Rs.54,50,000/- were issued. There was dispute and the only cheque amounting to Rs.1,00,000/- was encashed. The seller filed a civil suit in 2015 for declaring the sale deeds in favour of the appellant to be null and void. During the pendency of the litigation, the parties settled dispute and new cheques totaling to Rs.53,50,000/- in lieu of earlier cheques were issued and got encashed by seller in the year 2017. The assessing officer (for short ‘the A.O.’) vide order dated 22.12.2017 framed assessment under Section 143(3) of the Act and made an addition of Rs.53,50,000/- under Section 56(2)(vii) of the Act. The CIT dismissed the appeal of the appellant on 14.12.2018. The tribunal set aside the addition of Rs.53,50,000/- by accepting the appeal on 22.02.2019, but the directions were issued that the purchase consideration should be determined by notionally applying interest factor for the period of delay in making the payment. In the rectification application filed, the tribunal rectified the factual errors in the appellate order but outcome of appeal remained as it is. Hence, the present appeal.
3. On 07.05.2022, the appeal was admitted on following substantial questions of law:-
“Whether, in the facts and circumstances of the case and in law, ld. ITAT was justified in directing the ld. AO to add income in the hands of the appellant by calculating the interest income on notional basis u/s 56(2) (vii)(b) of the Income Tax Act, 1961, without there being any charging section, in this regard, under the head “income from other sources”?
4. Learned counsel for the appellant submits that the tribunal after deleting the addition of Rs.53,50,000/- erred in directing that the sale consideration be redetermined taking into consideration interest element on notional basis, for delayed payment consideration. The argument is that Section 56(2)(vii)(b) is not applicable.
5. As per contra the appellant had enjoyed the property for more than two years and also kept Rs.53,50,000/- with him for which he must have earned interest.
6. The portion of Section 56 of the Act in issue is reproduced below:-
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely:—
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(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017,—
(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
(b) any immovable property,—
(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:
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7. The relevant portion of explanatory notes to the provisions of the Finance Act, 2010 are reproduced below:-
“13.4 The provisions of section 56(2) (vii) were introduced as a c
