Facts of the Case

The assessee, Shyam Sundar Murarka, filed an appeal against the order dated 28.08.2025 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi for Assessment Year 2013-14. The assessment was reopened on the allegation that the assessee had advanced a loan of ₹1 crore which was treated as rotation of money. The assessee explained that the amount was advanced out of personal funds through banking channels to a friend, Shri Madhusudan Shroff, and the amount was returned during the same year. The Assessing Officer initially accepted the explanation and made no addition, but subsequently brought to tax notional interest on the said loan. In addition, an amount of ₹1,50,000 was added as unexplained cash.

Issues Involved

Whether notional interest can be added on an interest-free loan advanced by an individual from personal funds when no interest was received, and whether the addition of ₹1,50,000 as unexplained cash was justified.

Petitioner’s Arguments

The assessee contended that he is an individual whose income is assessable on cash basis and that no interest was received on the loan advanced. It was submitted that the loan was given out of personal funds through RTGS, no borrowed funds were involved, and the amount was returned during the year. It was argued that notional interest cannot be taxed when no real income accrued or was received. Regarding the addition of ₹1,50,000, the assessee claimed that it represented withdrawals or cash in hand.

Respondent’s Arguments

The Revenue supported the orders of the Assessing Officer and the CIT(A), contending that notional interest was rightly added and that the assessee failed to substantiate the source of the cash addition.

Court Order / Findings

The ITAT Ranchi held that the assessee is an individual and income is taxable on cash basis. The Tribunal observed that the loan of ₹1 crore was advanced from personal funds, no interest was received, and there was no evidence to show accrual or receipt of interest. It was held that notional interest cannot be added in such circumstances, particularly when no borrowed funds were used. Accordingly, the addition on account of notional interest was deleted. However, the Tribunal noted that the assessee failed to substantiate the source of ₹1,50,000 claimed to be withdrawals or cash in hand. Consequently, the addition of ₹1,50,000 was sustained.

Important Clarification

The Tribunal clarified that in the case of an individual assessed on cash basis, only real income actually received or accrued can be taxed, and notional interest cannot be brought to tax in the absence of evidence of receipt or accrual. At the same time, unexplained cash credits must be substantiated with credible evidence to avoid addition.

Final Outcome

The appeal filed by the assessee was partly allowed. The addition on account of notional interest on the loan of ₹1 crore was deleted, while the addition of ₹1,50,000 as unexplained cash was upheld.

Link to Download Order- https://www.mytaxexpert.co.in/uploads/1769080851_SHYAMSUNDARMURARKAMAINROADVS.ITOWARD31MAINROAD.pdf

 

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