2009 (2) TMI 498 - HC - Income Tax

Assessment: Notional interest excluded from fair market value under s.23(1)(a) where recipient exempt under s.10(2A)

Bombay HC dismissed the appeal, upholding the Tribunal's view that the AO could not reckon notional interest on deposits when determining fair market ... Disallowance of interest paid on borrowed funds - Company from a Partnership firm were exempt from tax u/s.10(2A) - Whether on the facts and in the circumstance of the case and in law the Hon’ble Tribunal was right in holding that the Assessing Officer cannot consider notional interest on deposit received by the Assessee Company while arriving at the fair market value u/s.23(1) (a) of the Income-tax Act? - HELD THAT:- We find that there is no profit for the relevant assessment year. Hence the question as framed would not arise. The Tribunal followed the judgment of this Court in J.K. Investors (Bom) Ltd.[2000 (6) TMI 9 - BOMBAY HIGH COURT]. Nothing has been brought to our notice that the ratio of this judgment would not be applicable. In the light of that the said question would not arise. Consequently Appeal dismissed. Issues:1. Disallowance of interest paid by the Assessee Company on borrowed funds2. Consideration of notional interest on deposit received by the Assessee Company for fair market value calculationIssue 1: Disallowance of interest on borrowed fundsThe appeal raised the question of whether the Tribunal was correct in deleting the disallowance of interest paid by the Assessee Company on borrowed funds used to invest in the capital of another Partnership Firm. The appellant argued that since the profits derived from the Partnership Firm were exempt from tax under section 10(2A) of the Income-tax Act, the interest expense related to such tax-free profits should be disallowed under section 14A of the Income Tax Act. However, the court found that for the relevant assessment year, there was no profit, rendering the question irrelevant. Therefore, the court dismissed the appeal on this issue.Issue 2: Notional interest on deposit for fair market value calculationRegarding the consideration of notional interest on a deposit received by the Assessee Company for arriving at the fair market value under section 23(1)(a) of the Income-tax Act, the Tribunal relied on the judgment of the High Court in J.K. Investors (Bom) Ltd. The court noted that nothing was presented to suggest that the ratio of the mentioned judgment was inapplicable. Consequently, the court held that the question raised in this regard did not arise and dismissed the appeal on this issue as well.In conclusion, the High Court of Bombay dismissed the appeal by the Revenue on both issues. The court found that the questions raised were not applicable based on the facts and circumstances of the case and the relevant legal provisions.