Taxation applies solely to real income, not notional income, as per the Income Tax Act.

ORDER

PER S.RIFAUR RAHMAN, ACCOUNTANT MEMBER :

1. The assessee has filed appeal against the order of ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT (A)] dated 15.07.2024 for Assessment Year 2017-18 and the Revenue has filed against the order of CIT(A)/NFAC, Delhi dated 14.07.2024 for AY 2018-19.

2. Since the issues are common and the appeals are connected, therefore, the same are heard together and being disposed off by this common order.

3. First we take up assessee’s appeal being ITA No.4137/Del/2024 for AY 2017-18 wherein the assessee has taken the following grounds of appeal :-

“1. That on the facts and circumstances of the case, the appellate order passed by the learned Commissioner of Income Tax (Appeals) [hereinafter referred as "CIT(A)”] is bad both in the eyes of law and on facts.

2. That on the facts and in the circumstances of the case. the learned CIT(A) erred both in law and on fact in confirming ad-hoc estimated addition of Rs.4,13,28,508/- made by the AO on account of notional interest at the rate of 12% on loan & advance given of Rs.40,23,94,230/- as against interest earned of Rs.69,58,719/- without giving any basis for such estimation.

3. That on the facts and in the circumstances of the case, the learned CIT(A) erred both in law and on facts in confirming adhoc estimated addition of Rs.4,13,28,508/- on account of notional interest at the rate of 12% on loan & advance given of Rs.40,23,94,230 by disregarding the settled proposition of law that: (a) income tax is to be levy only on real income and not on notional income and (b) no businessman can be compelled to maximize its profit and the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act.

4. That on the facts and in the circumstances of the case, the learned CIT (A) erred both in law and on facts in confirming adhoc estimated addition of Rs.4,13,28,508/- on account of notional interest at the rate of 12% on loan & advance given of Rs.40,23,94,230/- merely on the basis of various redundant and irrelevant grounds.

5. That the grounds of appeal are independent and without prejudice to each other.”

4. Brief facts of the case are, during assessment proceedings, the assessing officer observed that the assessee has given loan advances and has not charged any interest on the same. He proceeded to calculate the notional interest @12% on the amount of Rs. 40,23,94,230/- and determined the interest of Rs. 4,13,28,508/- and added to the income of the assessee after reducing the interest earned during the year under consideration of Rs 69,58,799/- , which was shown in the return of income. He further observed that the assessee has earned interest @ of 1.72%, which is very low, he determined the same as he calculated average rate of interest earned @ 1.72% i.e. Rs 69,58,799/- divided the same by total loan & advances given of Rs 40,23,94,230/-.

5. In appeal, the Ld. CIT(A) has sustained the addition made by AO. Aggrieved, the assessee is in appeal before us.

6. At the time of hearing, Ld AR submitted that AO has made addition of notional interest of Rs 4,13,28,508/- by estimating the same @ 12% on total loan & advances given during the year under consideration of Rs 40,23,94,230/- which comes out of Rs 4,82,87,307/-less interest earned of Rs 69,58,799/- shown in return of income. The Ld AR has also submitted that there is no provision in the Income tax Act, 1961 to bring to tax notional interest income and only real income could be taxed. The Ld AR has relied on the case law compilation submitted before us wherein it is held that there is no pr