2008 (12) TMI 759 - HC - Income Tax

Taxing Notional Interest Deemed Impermissible; Assessee Can Choose Beneficial Set Off for Short-Term Capital Gains.

COMMISSIONER OF INCOME TAX, KOL-II Versus RUNGAMATEE TREXIM (PVT) LTD

The HC of Calcutta condoned the delay under s. 5 of the Limitation Act. The CIT(A) ruled that taxing notional interest on a loan was impermissible as it ... Condonation of delay u/s 5 of Limitation Act - Taxation of notional interest on loan - Mode of set off for short term capital gain - loan given by the assessee to a company of which the assessee was a promoter. HELD THAT:- This court after perusing the application for condonation of delay, condoned the delay u/s 5 of the Limitation Act based on the grounds stated in the petition. Taxation of notional interest on loan: The CIT (A) held that the Assessing Officer had taxed hypothetical income, emphasizing that the Income Tax Act does not permit taxation of hypothetical income. The Commissioner concluded that the addition of notional interest as business income was deleted, and the mode of set off for short term capital gain was also discussed. Mode of set off for short term capital gain: The CIT found that the Act did not prescribe a specific mode of set off for short term capital gain, allowing the assessee to choose the most beneficial option. It was noted that the assessee's option should favor them and not the revenue, as per established legal principles. The CIT concluded in favor of the assessee, stating that the disallowance had been made on presumption. High Court found no illegality or irregularity in the order passed by the Tribunal and upheld the decision. It was determined that no substantial question of law was involved in the appeal, leading to the dismissal of the appeal. Issues involved: Condonation of delay u/s 5 of Limitation Act, Taxation of notional interest on loan, Mode of set off for short term capital gain.Condonation of delay: The High Court of Calcutta, after hearing the Advocate for the appellant and perusing the application for condonation of delay, condoned the delay u/s 5 of the Limitation Act based on the grounds stated in the petition.Taxation of notional interest on loan: The issue arose regarding notional interest on a loan given by the assessee to a company of which the assessee was a promoter. The Commissioner of Income Tax (Appeals) held that the Assessing Officer had taxed hypothetical income, emphasizing that the Income Tax Act does not permit taxation of hypothetical income. The Commissioner concluded that the addition of notional interest as business income was deleted, and the mode of set off for short term capital gain was also discussed.Mode of set off for short term capital gain: The Commissioner found that the Act did not prescribe a specific mode of set off for short term capital gain, allowing the assessee to choose the most beneficial option. It was noted that the assessee's option should favor them and not the revenue, as per established legal principles. The Commissioner concluded in favor of the assessee, stating that the disallowance had been made on presumption.Judgment: The High Court found no illegality or irregularity in the order passed by the Tribunal and upheld the decision. It was determined that no substantial question of law was involved in the appeal, leading to the dismissal of the appeal. All parties were directed to act on a xerox signed copy of the order.