DNS FINANCIAL SERVICES ,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), BANGALORE

Briefly stated the facts for Assessment Year 2018-19 shows that Assessee is engaged in the business of earning interest income from loans and advances, filed its return of income on 30.08.2018 at a total income of Rs. 39,93,510/-. The case was selected for scrutiny, and necessary notices were issued in time. The Assessee was found to be owner of a fixed deposit with Indian Overseas Bank of Rs. 1,04,36,358/-. The bank has deducted tax at source of Rs. 2,39,064/- against the interest credit of Rs. 19,81,374/- as per Form No. 26. This interest income is not disclosed by the Assessee in the return of income and therefore the Assessee was asked to show cause why the amount should not be taxed in the hands of the Assessee.

The Assessee replied that fixed deposit held with Indian Overseas Bank is not the money belonging to the Assessee but money belonging to Vihaan Direct Selling (India) Private Limited [Vihaan] and since the account is frozen by the Bank interest is paid on such balances in the account of that entity. However, the said interest or the fixed deposit is not owned by the Assessee and therefore same cannot be taxed in the hands of the Assessee. The Ld. Assessing Officer rejected the contention of the Assessee and asked to explain the transaction with Vihaan Direct Selling (India) Private Limited. The Assessee explained that Assessee had entered into an arrangement with Vihaan Direct Selling (India) Private Limited who was engaged into multi-level marketing business catering into various customers to provide services relating to management of collection of money and disbursement to

The Ld. Assessing Officer rejected the contention of the Assessee. He held that the Assessee has not explained why the business transactions of the Assessee with Vihaan are deposited in a term deposit account instead of a current account. The Assessee received the amount pertaining to the other entity into a term deposit account clearly shows that the primary motive of the person to deposit the amount is to earn a fixed rate of interest. It was stated that amount deposited is Rs. 1,04,36,358/- on which the interest is earned and therefore the Ld. Assessing Officer made an addition of Rs. 19,81,374/- being the interest income of the Assessee out of the above transaction.

The Assessment Order was passed u/s. 143(3) of the Act on 15.04.2021.

Aggrieved with the same, the Assessee preferred an Appeal before the Ld. CIT(A) wherein the Assessee reiterated the same facts. However, the Ld. CIT(A) rejected the contention of the Assessee. He held that the same belongs to Vihaan are unsubstantiated as the Assessee has to inform the bank account details of Vihaan to enable the incoming payments. The Assessee was also required to transfer the amount to the account of Vihaan. Meanwhile, the account was frozen by the

For Assessment Year 2019-20, the issue is similar. The addition relates to interest earned on the fixed deposit, which was also confirmed by the Ld. CIT(A) by a consolidated order covering both assessment years. 9. The issue for consideration is whether the interest earned on the fixed deposits is taxable in the hands of the Assessee. The learned authorised representative submitted that the fixed deposits and the interest earned thereon belonged to Vihaan Direct Selling (India) Private Limited and not to the Assessee. He further submitted that the Assessee was only acting under an arrangement with Vihaan and relied on the relevant agreement and account copies placed in the paper book. Therefore, merely because the interest was reflected in Form 26AS in the Assessee’s name, it could not be taxed in the Assessee’s hands if the underlying funds did not belong to it. 10. We have carefully considered the rival submissions and perused the orders of the lower authorities. 11. The Assessee is engaged in financial services, including earning income from loans and advances, and has offered its business income accordingly. During assessment, the Assessing Officer noticed that interest income from a fixed deposit, reflected in Form 26AS, had not been offered to tax. The bank later revised the interest figure. 12. The Assessee explained that, under a 2013 arrangement with Vihaan Direct Selling (India) Private Limited, it managed collections and disbursements on behalf of Vihaan for a service fee. A designated Indian Overseas Bank account was maintained for this purpose. According to the Assessee, the funds in that account belonged to Vihaan and were to be used only as directed by Vihaan. Owing to regulatory action concerning Vihaan’s multi-level marketing operations, the account was