Assessment can be of only real income and not any notional one – ITAT

Real vs. Notional Income has considerable judicial precedents in terms of directing assessment of only real income and not any notional one – ITAT

In a recent judgment, Guwahati ITAT deleted addition made by AO for notional interest income on interest free advances by observing that concept of Real vs. Notional Income has considerable judicial precedents in terms of directing assessment of only real income and not any notional one.

ABCAUS Case Law Citation:
4496 (2025) (04) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) in confirming notional income of interest income added under Section 69A of the Income Tax Act, 1961 (the Act).

The assessee was a Non-Banking Financial Company (NBFC). The assessee had advanced interest free loans. The Assessing Officer made the addition u/s 69A on account of notional Interest @ 9% per annum on accrual basis on the loan amount given.

The CIT(A) observed that the Assessing Officer in the Assessment order held that the assessee itself admitted that the funds have been given for earning interest income and assessee company followed mercantile system of accounting during the year under consideration. The CIT(A) opined that the Assessing Officer was justified making the addition of notational interest and dismissed the appeal of the assessee.

Before the ITAT contended that though the assessee was an NBFC but the impugned transactions did not yield any income whatsoever. It was also stated that in all of the six cases, the amounts taken as loan were duly returned, albeit in succeeding financial years.

It was argued that even though the books of accounts were maintained on mercantile basis but the interest income had not been shown on notional basis simply because at the time of dispersal of the said loans it was clear that there would be no interest income accruing from the same.

The assessee further mentioned that it was not the case of the AO that some income had actually accrued by way of interest and the same had not been disclosed to the Department. The assessee relied on the judgment of the Calcutta High Court and argued that the notional income could not be taxed since only real income has to be taxed.

The Revenue contended that in the case of NBFC the only commercial activity is advancing loan on interest. It was stated that it was strange that huge sums of money had been advanced without any interest.

The Tribunal observed that undisputed facts were that loan was advanced to the six parties under consideration and no interest income was shown as accrued thereon. It was not the case of the AO that some actual income was earned and not disclosed to the Department. In fact, no enquiry or investigation into the facts surrounding non receipt of any income from the said parties had been conducted by the AO.

The Tribunal observed that \non receipt of interest income on loans advanced by an NBFC would be the starting point of any investigation to ascertain as to whether there could be any income earned outside of the books of accounts, but this suspicion in itself would not be the basis for any addition on account of notional income earned. 

The Tribunal further noted that AO recorded in his order that the audited balance sheet, tax audit report and other documents were duly filed before the Assessing Officer. Admittedly, no adverse inference had been drawn from a perusal of these documents by the AO. Thus, the theory of notional income in this particular case cannot be supported under any circumstances.

The Tribunal stated that the concept of Real Vs. Notional Income has considerable judicial precedents in terms of directing assessment of only real income and not any notional one as held by various High Courts.

Accordingly, the Tribunal held that AO was not justified in bringing to tax “notional income” and the addition made on that account was deleted. 

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