ACIT Vs. Satyam Properties & Finance Limited (ITAT Delhi)
AO cannot add notional interest for Inter Corporate Deposit (ICD) made at Bank FD Rate
The aforesaid appeal has been filed by the revenue against impugned order dated 2.9.2014, passed by Ld. CIT (Appeals) X Delhi for the quantum of assessment passed u/s 143(3) for the assessment year 2010-11. The sole ground raised by the revenue is regarding deletion of addition of Rs. 6,77,97,413/-.
2. The brief facts of the case are that the assessee company is Non Banking Finance Company registered with Reserve Bank of India and is wholly owned subsidiary of Bennett, Coleman & Co. Ltd. (BCCL). During the year under consideration the assessee has earned interest on Inter Corporate Deposit (ICD) given to BCCL. The assessee had extended ICD amounting to Rs. 147 lacs to BCCL which is 100% holding company, initially @ 10% per annum for three years vide agreement dated 17.6.2009. However in the late of the year 2009, BCCL proposed for reduction in the rate of interest to 7.25% per annum based on the then prevailing market rates. The assessee agreed to this reduction of rates, w.e.f., 1.1.2010 as it was not possible to obtain a better rate of interest from any safe source such as leading banks. The AO required the assessee to justify the reduction of rate of interest on the ICD from 10% to 7.25% per annum. In response to which, the assessee filed detailed reasons along with documents in support justifying the reduction of rate of interest on ICD. However the Ld. AO did not accept the assessee’s explanation and observed that rate of interest should be adopted at 15% on loans to BCCL as the charging of interest is not on arm’s length. Accordingly, he proceeded to compute the interest @ 15% per annum at Rs. 17,39,83,561/- thus making an addition of Rs. 6,77,97,413/-.
3. Before Ld. CIT (A), assessee made detailed submissions which has been incorporated from pages 6 to 9 of the appellate order, the sum and substance for which are that, income can only be said to have been accrued once the assessee has acquired a right to receive the same or there is a debt created in favor of the person by somebody. Till then it cannot be said that he has acquired a right to receive the income or that income has accrued to him. In support reliance was placed on the judgment of Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas and Co. (1962)46 ITR 144 (SC) and Godhra Electricity Co. Ltd. vs. CIT 225 ITR 746 (SC). Secondly, it was submitted that ICD was actually a risk free and the same was given to the 100% holding company and hence the risk factor was very low and the rate of interest was higher than the prevailing rate of interest offered by the bank on their fixed deposits at that point of time. Further the provision of section 40A(2)(b) would not be applicable, because interest earned on ICD extended to BCCL was the income of the assessee and not the expense and therefore, such interest income cannot be enhanced by the AO by invoking section 40(a)(2)(b) or by applying arms length principle as appearing in section 92 as it will not apply in assessee’s case during the year under consideration. Ld. CIT (A), duly accepted the assessee’s contention and held that AO was not justified in enhancing the rate of interest charged by the assessee from 7.25% to 15% and accordingly, the addition made by the AO was deleted.
4. After hearing both the parties and considering the relevant finding of the impugned orders as well as the material referred to before us, we find that the sole issue raised by the revenue is, whether the rate of interest by the assessee on the ICD @ 7.5% per annum could have been enhanced by the AO or not. It is an undisputed fact that assessee has advanced an amount of Rs. 147 crores as an ICD to BCCL which is its 100% holding company. Initially it was agreed that interest rate of 10% per annum for a period of three years would be given, however as per the insistence of BCCL, it was proposed that the rate of interest would be at 7.2% which was based on then prevailing market. Assessee agreed to such reduction of the rate of interest to 7.25% per annum w.e.f. 1.1.2010, as the assessee was an opinion that it was not possible to obtain a better rate of interest from any safe source such as leading banks. Before the AO the assessee has also submitting a chart showing the interest rate as on December 2009, wherein the HDFC, SBI and PNB were offering interest rate of less than 7.25% on fixed deposits for a maturity of up to 3 years. Ld. AO held that rate of interest should be seen not from the angle of fixed deposits offered from the banks rather it has to be seen how much the banks have charged interest to give loans to run the business where there is a full risk associated with loans. Accordingly, he held that the interest rate should be seen from the provision of section 40A(2)(b) and under arm’s length principle which admittedly is not applicable for the year under consideration. Ostensibly, in this case, it is not issue of dis allowance of interest which has been claimed as expense, albeit here the assessee has been receiving interest which is shown as income @ 7.25% which as per the revenue should have been @ 15%. For making such enhancement of notional income, first of all, it has to be seen, whether such an income had actually accrued to the assessee, i.e., whether the assessee got vested with any right to receive such kind of an income from BCCL or there is any debt which been created in favor of the assessee by the BCCL. There cannot be any enforceable right to receive the income to the assessee over and above what has been agreed among st the party, because as per the mutual agreement between the parties the rate of interest agreed was 7.25%, which alone could have enforced by the assessee and not what has not been agreed upon. Hence here in this case it cannot be held that any income has accrued to the assessee. In any case the assessee has tried to justify the rate of interest agreed among at the parties by bringing on record the various rate of interest on FDRs at the relevant time offered by different the bank which was far below than 7.25%, which in our opinion the onus on the assessee if any to prove the reasonableness too has been discharged, which though in our opinion was not required. AO has treated the subscription of ICD as a loan which in our understanding is not a correct way to interpret an ICD, because it is a deposit made by the subscriber of the ICD issued by a company on a fixed rate of interest and hence it cannot be treated as a loan. Thus such an enhancement of notional income as done by the AO cannot be appreciated, because the AO cannot step into the shoes of the businessman to hold that he should have maximum profit from the transaction. There is no real income which has accrued to the assessee and accordingly, the view taken by the Ld. CIT (A) for deleting the addition is upheld and the ground raised by the revenue is dismissed
4. In the result the appeal of the revenue is dismissed.
Order pronounced in the open court on 25/10/2017.