TaxTMI 
TaxTMI 
2025 (12) TMI 1281
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....or been received nor is deemed to accrue under the Act, and therefore is contrary to the scheme of the statute and the doctrine of real income as settled by the higher judiciary. 2. The assessee is a company incorporated with broad and ambitious objects of engaging in the business of transportation across all modes land, air, water and even space for carriage of passengers, goods, articles and commodities, both within India and overseas. It is common ground that the principal business activities for which the company was incorporated had not yet commenced during the previous year relevant to Assessment Year 2017-18. In this interregnum, the assessee was, inter alia, engaged in making investments in shares and in preliminary corporate and financial arrangements ancillary to its long-term business vision. 3. For the year under consideration, the assessee e-filed its return of income on 30 October 2017 declaring total income at nil. The return was processed under section 143(1) of the Act. Subsequently, the case was selected for limited scrutiny under CASS, the two flagged issues being: (i) verification of expenditure debited in relation to exempt income, and (ii) examination of....
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....hat borrowed funds were utilised stood falsified by the accounts themselves. 6. The Assessing Officer, however, did not accept the explanation. Without identifying any specific loan or interest-bearing liability in the balance sheet, he proceeded to observe that, in his understanding, the assessee did not have "sufficient reserves and surplus" to justify the giving of such large interest-free advances and, therefore, drew the inference that the advances "must have" been made out of borrowed funds. Having so presumed, he took recourse to the RBI's Marginal Cost of Funds based Lending Rate (MCLR) for the relevant financial year and, noting that MCLR broadly hovered around 8% to 8.5%, he adopted a flat rate of 8% as a reasonable commercial lending rate. Applying this rate to the entire amount of Rs.21,71,00,000, he computed a sum of Rs.1,73,68,000 which he treated as interest income deemed to have accrued to the assessee on these loans and advances, and brought the same to tax, notwithstanding the admitted position that no such interest had either been charged or received. 7. The assessee, in its detailed submissions before the Assessing Officer, and later in appellate proceedin....
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.... no scope for presuming diversion of borrowed capital. It was further contended that the Assessing Officer's action effectively amounted to treating "what could have been earned" as income, which is precisely what the doctrine of real income, as laid down by the Supreme Court, forbids. 10. The Assessing Officer, however, rejected these contentions and finalised the assessment by making an addition of Rs.1,73,68,000 on account of alleged notional interest at 8% on the loans and advances of Rs.21,71,00,000, which addition came to be challenged by the assessee before the learned Commissioner of Income Tax (Appeals). 11. The learned CIT(A), after reproducing at length the submissions of the assessee, proceeded to uphold the addition. In substance, he observed that the assessee had failed to furnish sufficient and credible documentary evidence to substantiate its claim that the advances were integrally connected with proposed acquisition of unquoted shares or share subscription transactions. He noted that no agreements, memoranda of understanding, board resolutions or contemporaneous correspondence had been placed on record to demonstrate that the advances were given in furtheranc....
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....tification, the learned CIT(A) agreed with the Assessing Officer that adoption of 8% RBI MCLR as the notional rate of interest was reasonable and in consonance with prevailing lending rates and commercial practice. He took the view that where the tax authorities, faced with unexplained interest-free advances, come to the conclusion that interest income has been suppressed, they are entitled to estimate such income on a reasonable basis, and that recourse to RBI lending benchmarks is neither arbitrary nor unlawful. Summarising his conclusions, the learned CIT(A) held that: (i) the assessee had failed to discharge the onus of proving commercial expediency or genuine share acquisition-related purpose behind the advances; (ii) the non-response of recipient entities to departmental notices under section 133(6) cast a serious shadow on the assessee's version; (iii) the real income theory did not assist the assessee; and (iv) the Assessing Officer had rightly computed notional interest at 8% on the amount of Rs.21,71,00,000. He thus confirmed the addition of Rs.1,73,68,000 and dismissed the assessee's appeal. 15. Aggrieved, the assessee has come in further appeal before us. The learned....
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....ere no evidence of any borrowing, but the aggregate of interest-free funds far exceeds the amount of loans and advances. In such a situation, to nevertheless presume utilisation of non-existent borrowed funds is wholly unwarranted. 18. It is by now well settled that where an assessee has mixed funds, but the interest-free funds available are sufficient to cover the investments or advances in question, a presumption arises that the investments or advances have been made out of interest-free funds. This principle has repeatedly been affirmed in the context of disallowance of interest expenditure under section 36(1)(iii) and allied provisions. In the present case, the position is even clearer, inasmuch as there are virtually only interest-free funds and no borrowings at all. Thus, the entire edifice built on the supposed diversion of borrowed funds collapses. 19. Even more fundamentally, the doctrine of commercial expediency, on which considerable emphasis has been placed by the learned CIT(A), has a very specific and limited application. It comes into play when the question is whether interest expenditure on borrowed funds is allowable, i.e., whether the borrowing and the deplo....