RED FORT SHAHJAHAN PROPERTIES PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE-21(1), NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2”: NEW DELHI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 7239/Del/2018 (Assessment Year: 2014-15) Red Fort Shahjahan Properties Vs. DCIT, Pvt. Ltd, Circle-21(1), N-226, LGF, Greater kailash-1, New Delhi New Delhi PAN: AADCR6247E (Appellant) (Respondent)

SA No. 235/Del/2019 (In ITA No. 7239/Del/2018) (Assessment Year: 2014-15) Red Fort Shahjahan Properties Vs. DCIT, Pvt. Ltd, Circle-21(1), N-226, LGF, Greater kailash-1, New Delhi New Delhi PAN: AADCR6247E (Appellant) (Respondent)

Assessee by : Shri K. M. Gupta, Adv Revenue by: Shri H. K. Choudhary, CIT DR Ms. Nimita Pandey, Sr. DR Date of Hearing 26/03/2019 Date of pronouncement 14/06/2019

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by Red Ford Shanjhan Properties Pvt Ltd { assessee, appellant} against the order of the deputy Commissioner of income tax – circle 21 (1), New Delhi (the learned assessing officer passed u/s 143 (3) read with section 144C of the income tax act, 1961 (the act) dated 24/10/2018. In the assessment order against the returned income of the assessee of rupees for 1674470/– transfer pricing adjustment of INR 3 4682874/– and addition on account of accrued interest on loan of INR 3 8413000/– was made and consequently the total income was assessed at

rupees 114770344/–. Aggrieved by the order of the learned assessing officer assessee has raised the following grounds of appeal:- “1. That on facts, in circumstances of the case and in law, the Learned Dispute Resolution Panel („Ld. DRP‟) grossly erred in issuing directions to the Learned Assessing Officer („Ld. AO‟)/ Learned Transfer Pricing Officer („Ld. TPO‟) for making further enquiry while passing the final assessment order in complete disregard to provisions of section 1440(8) of the Income Tax Act, 1961 („the Act‟) and thereby rendering the final assessment order passed by Ld. AO as void ab-initio. 1.1 Without prejudice to the Ground of appeal No. 1, the Ld. AO/TPO grossly erred in violating the principles of natural justice in not providing the Appellant with necessary data to confirm compliance to the directions of the Ld. DRP before issuance of the final assessment order. 2. On a further without prejudice basis, the Ld. DRP grossly erred in confirming the arbitrary and self-contradicting approach of the Ld. AO/TPO in making transfer pricing adjustment of INR 3,46,82,874 on interest payment on Fully and Compulsory Convertible Debentures („FCCDs‟) by Appellant to its Associated Enterprise („AE‟) without reference to actual terms of comparable security issuance, a necessary requirement in terms of Rule 10B of the Income Tax Rules, 1962 („the Rules‟). 3. On a further without prejudice basis, the Ld. DRP erred in confirming transfer pricing addition pertaining to interest payment on FCCDs by: 3.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 3.2. rejecting, without reason, the quantitative and qualitative screens/filters applied and set of comparables arrived at by the Appellant, following a detailed and robust search methodology carried out in the Transfer Pricing ('TP') documentation (also referred to as „TP Study‟ or „TP Report‟) maintained by it in terms of section 92D of the Act read with Rule 10D of the Income- tax Rules, 1962 („Rules‟) and proceeding to arrive at the fresh comparables set by applying certain arbitrarily selected filters and arriving at his own comparables set instead; 3.3. benchmarking the interest rate paid by the Appellant on FCCDs issued to its AE using the fresh search, by applying insufficient filters and ignoring critical factors necessary to determine arm‟s length rate of interest; 4. Without prejudice to the above-mentioned grounds of appeal, the Ld. TPO/ Ld. AO erred in ignoring spread while calculating arm‟s length rate of interest on FCCDs.” 2. Brief facts of the case shows that assessee is a company, filed its return of income on 28/11/2004 declaring total income of rupees for 1674470/–. Assessee is engaged in the business of promoting the development and construction of housing projects. During financial year 2007 – 08 and 2009 – 10 and 2010 – 11, the assessee has issued fully and compulsorily Page | 2

convertible debentures to associated enterprises. In the transfer pricing study documents assessee reported the payment of interest on these fully and compulsorily convertible debentures of INR 9 7241700/– adopting the CUP method as the most appropriate method and submitted that interest rate at the rate of 15% per annum paid by the assessee to the associated enterprise is at arm‟s-length. The assessee adopted the average base rate of Punjab national bank during financial year 2013 – 14 at 10.25 percentage and further selected 2 comparables wherein adding to the Base rate spread rate of 4.50% and 3.75% found that average rate of effective interest paid by this company is 14.375 % and therefore the rate of interest given by the assessee that is 15% on the issue of FCCD was stated to be at arm‟s length. 3. On a reference made by the learned assessing officer, the learned assistant Commissioner of income tax, transfer pricing officer – 3 (2) (2), New Delhi (the learned TPO) examined the international transaction of the assessee and issued a show cause notice on 20/9/2016 wherein he stated that the assessee has paid in interest of INR 9 7241700/– @ of 15% towards the issue of fully convertible compulsorily debentures to Ti Themba Investments Limited , Cyprus is not at arm‟s-length. The learned transfer pricing officer was of the view that the market based approach advocated by the honourable Delhi High Court would be considered for benchmarking. He was of the view that as assessee is situated in Cyprus and the money or the currency which it receives in the form of interest is Indian rupees. However, the assessee has provided interest to its associated enterprise at the rate of 15% per annum and computed the arm‟s-length price of the above transaction using the prime lending rate of the Indian bank for FY 2013 – 14 adopting the CUP method. It was further noted that as the price negotiation of interest has been made during the initial period when the agreement for the issue of financial instrument was entered upon and further the debentures were also issued in financial year 2009 – 10 and 2010 – 11, therefore, the base rate if to be considered in the case, should be computed of the year in which the process of issuing debentures were initiated. He therefore used the Bloomberg database for benchmarking of the aforesaid transactions of the taxpayer, which was also followed by the transfer pricing officer for assessment year 2012 – 13. Based on the search

carried out by the learned transfer pricing officer, it was found that ALP of the rate of interest is 9.65 percentages only. In response to the show cause notice issued by TPO, assessee submitted its reply. The learned TPO rejected the explanation of the assessee and held that the learned transfer pricing officer has followed the same approach in assessment year 2012 – 13 and the DRP in its order dated 6/12/2016 has also upheld the benchmarking process followed by the TPO. After the detailed analysis the learned transfer pricing officer found that market rate of interest at which the loans were extended to the assessee in financial year 2013 – 14 comes out to be 9.65%, 9%, and 9.35 percentages respectively. He further held that no spread is required as the same has been taken into consideration for computing the rate of interest accordingly he computed the arm‟s-length price of the above interest payment and held that adjustment is INR 3 4799106/– as under:- serial financia amount rate of arm‟s- difference amount of numbe l year invested interest length in adjustme r in rupees on rate of percentag nt securitie interest e s paid on by the securities assessee to be in considere financial d in year financial 2013 – year 2013 14 – 14 A B C D=b-c E=d*A 1 2007 – 62210000 15% 9.65% 5.35% 33282350 08 0 2 2009 – 10771000 15% 9% 6% 646260 10 3 2010 – 15407000 15% 9.35% 5.65% 870496 11 Total 34799106

It was further found that assessee has borrowed money from out of India on which assessee is paying 15% interest, whereas assessee has given an interest free advances to its associate company in India. The assessee was asked above query, which was replied by it. The assessee submitted that it has been charging interest from the above company in the past years which has been duly offered to tax as income, however, nowadays the company has been represented that it has been not been able to acquire the land parcel from M/s Deccan infrastructure and land Holdings Ltd and hence it is not able to commence the project. It was further stated that as the borrower has not been able to commence the project it has not been able to commence development and sale of the project and therefore it is facing serious liquidity crunches. The learned assessing officer rejected the explanation of the assessee for the reason that assessee had raised a loan for its business purpose and has given interest free loan to the associate concern which has also advanced the loan to some other party for non- business purposes on interest free bases. Therefore the interest paid by the assessee is not allowable as deduction u/s 36 (1) (iii) of the act. Therefore the learned AO stated that assessee has failed to establish the commercial expediency and the business purpose for advancement of the loan and therefore assessee has simply diverted the interest-bearing funds to the non-interest-bearing advances to its sister concern. In view of this, the learned assessing officer disallowed a sum of INR 1,92,60,000/– being interest paid for non business purposes. Accordingly the assessment was proposed at INR 9,57,33,576/– against the returned income of Rs. 4,16,74,470/–. 6. Aggrieved with the order of the learned assessing officer of draft of the proposed income, the assessee preferred objection before the learned Dispute Resolution Panel. The learned Dispute Resolution Panel after considering all aspects of the matter directed the learned Transfer Pricing Officer to remove the bank and PSU from the list of comparables in various assessment years and to recompute the rate of interest to be applied for adjustment as against 15% interest paid by the assessee. With respect to the disallowance of the interest, the learned Dispute Resolution Panel upheld the findings of the learned Assessing Officer. Consequent to that,

final assessment order u/s 143 (3) read with section 144C of The Income Tax Act was passed on 24/10/2018, wherein learned Transfer Pricing Officer revised the adjustment on account of the interest paid to a foreign associated enterprise from INR 3, 48,00,183/– to INR 3,46,82,874/–. consequently the addition of INR 3,46,82,874/– was made on account of the transfer pricing adjustment on interest paid to an associated enterprises. Further the learned AO according to the direction of the learned DRP made an addition of INR 3,84,13,000/– on account of accrued interest on loan given to Red Fort Akbar properties private limited. Accordingly, the total income of the assessee was assessed at Rs. 11,47,70,344/–. Assessee aggrieved with that order has preferred an appeal before us. 7. On the TP issues , learned authorised representative vehemently argued before us that a. The learned TPO has grossly erred in selecting all debentures issued during the relevant year without giving relevance to the debentures issued by the borrowers in the same industry in which the appellant operates. b. He has ignored the critical filters necessary for the purpose of determining the arm‟s-length price of the rate of interest in its fresh search. c. He also raised an issue about the ignoring the spread and the safe harbour rules to consider the credit risk spread to determine the arm‟s-length interest rate. d. Additional evidences submitted during the hearing before the learned DRP being a fresh search conducted by assessee with National securities database Ltd wherein the comparables have been identified using appropriate filters were ignored. e. In the and he submitted that the issue is that for assessment year 2012 – 13 the coordinate bench on the identical facts and circumstances are set aside the whole issue back to the file of the learned transfer pricing officer in ITA number 918/del/2017 dated 25/3/2009. 8. The learned CIT DR supported the order of the lower authorities. He submitted that benchmarking of the assessee is fallacious. It has applied

CUP method but compared FCCD with loan. He further submitted that there is no comparability of the product by the assessee so TP benchmarking is rejected. He submitted that it is not necessary that same industry must always be compared with such financial instruments. He submitted that even assessee has not provided such industry comparability with the product comparability. He submitted that only interest instrument needs to be compared not the industry of the assessee. 9. We have carefully considered the rival contention and find that identical issue has been the bone of contention between the assessee and the revenue for assessment year 2012 – 13 in assessee‟s own case wherein in ITA number 918/del/2017 as per order dated 25/3/2019 the whole issue was set aside to the file of the learned transfer pricing officer to determine the arm‟s-length price of the interest paid by the assessee. The coordinate bench wide para number 6 has given the liberty to the assessee to produce the relevant evidences before the learned transfer-pricing officer. The coordinate bench has held as under:- “6. We have heard the rival submissions and have gone through the entire material available on record. As per the adjustment towards interest paid on international transaction, as noted above, is concerned, we feel that the additional evidences produced before us are of vital importance OS to adjudicate the issue and therefore, we feel it appropriate to admit the same on record for consideration. Keeping in view the nature of the evidences, the AO/TPO is required to make fresh calculation of arm‟s-length price of the international transactions noted hereinabove. We therefore restore this issue to the file of the AO/TPO to examine and calculate the AMP of the international transactions after considering the additional evidences furnished by the assessee before us. The assessee is directed to produce the same before the AO/TPO. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, the grounds involving this issue are allowed for statistical purposes.” 10. We reject the argument of the ld AR that interest on FCCD issued in only industry similar to the assessee must be taken for benchmarking. We do not find any support for the argument of the assessee. In fact in CUP only

product comparability is to be seen i.e. Comparison of interest on FCCD of similar size and time with FCCD raised by any other company with similar credit rating. These data needs to be provided by assessee. Further on careful consideration of the order of the coordinate bench and respectfully following the same we also set aside the whole issue back to the file of the learned transfer pricing officer with a direction to re-determine the arm‟s-length price of interest payment on fully compulsorily convertible debentures issued by the assessee with a comparable product such as credit rating, size, timing etc. . The assessee is also directed to advance all the arguments, which it would like, to place before him along with any additional evidences. The learned TPO will also examine the whole issue with respect to whether fully compulsorily convertible debentures are comparable with simple debentures or are required to be benchmarked differently. According to us FCCD (Fully compulsorily convertible debenture ) is not a traditional debt, but a complex financial instrument wherein the final repayment is through the issuance of common equity to investors ( which has a high value than the amount of loan also and vice versa) , based on fixed conversion rate, (or in a band). It is a mix of debt and equity features. The unique feature of a FCCD is that the owners of the debentures must convert their debentures into equity. The risk and return profile of such security is entirely dependent on the characteristics or feature of the instrument in question. The moot point here is the recognition of the fact that these instruments possess not only the feature of the equity but of the debt as well. Characterization of these instruments can also be done based on the regulations prescribed by various regulatory bodies and credit rating agencies. For example, Basel II states that a mandatory convertible debt instrument qualifies as hybrid capital instrument. As per the FDI norms of the government of India, only fully and mandatorily convertible debentures are taken as FDI; the rest are taken as ECBs. The FDI Circular defines „Capital‟ as equity shares; fully, compulsorily, & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures. Even the International Accounting Standard provides that if a FCCD is convertible into a fixed number of equity shares, then the FCCD will qualify as equity from inception. Rating agencies like Crisil, treats FCCDs as a part

of common equity while computing capitalization ratio. There is a dominance of the equity feature in FCCDs with some entirely classifying it as an equity instrument. However, true characterization and quantification of Debt/Equity feature in FCCDs would depend on the deeper analysis of its substance over form. Therefore comparing the interest payment on FCCD with bond interest rates is fallacious. 11. Further, the learned authorised representative relied upon the safe of the rules issued by the Ministry of Finance central board of direct taxes by notification number 07/06/2017 that applies only to the transaction of loan. In the present case, it is the mixed transaction of loan as well as of equity and therefore the safe harbour rule does not apply, as they do not deal with such instrument. 12. Thus, assessee as well as the ld TPO should look in to this aspect. Needless to say, the assessee should be granted proper opportunity of hearing before deciding the issue. The learned transfer pricing officer shall determine ALP and thereafter the learned AO should pass a draft assessment order giving proper opportunity of approaching the learned dispute resolution panel to the assessee and then pass final order , on receipt of direction of the learned dispute resolution panel or in case the assessee does not approach dispute resolution panel, then pass the final assessment order in accordance with the law. Accordingly, ground number 1 – 4 of the appeal are set aside to the file of the learned assessing officer/transfer pricing officer and therefore allowed accordingly. 13. Ground number 5 relates to the order of the learned assessing officer where the notional interest income amounting to INR 3 8413000/– has been added to the total income of the assessee on account of inter corporate loan given by the appellant to its related party. The brief facts of the issue show that assessee is engaged in the business of development and construction of real estate projects in India. In past the appellant has issued 648278 fully compulsorily convertible debentures holding 15% coupon rate of face value of INR 1000 each to its associated enterprise in Cyprus. The learned assessing officer on examination of the details in the draft assessment has made the addition holding as under:-

“4. Disallowance of interest u/s 36 (1) (iii) of the income tax act, 1961 on perusal of information available on the record, it was found that assessee has given inter corporate loan of Rs. 414000000/– to M/s Red Fort Akbar properties private limited. Further, the assessee has not received any income on such loans and advances. On further perusal of the balance sheet it was observed that the assessee has taken loan from its sister concern M/s Tie Themba investments Ltd, Cyprus which is based out of India, On which assessee has paid interest at the rate of 15%. The matter was referred to the TPO and wherein the TPO has confirmed that interest rate at the rate of 9% is only arm‟s-length price and accordingly the difference of interest at the rate of 6% was disallowed by the TPO and addition of INR 3,47,99,106/– was made by TPO. During the course of assessment proceedings the assessee was asked that why assessee has given interest free loan and advances to its associated company. Vide reply dated 3/11/2017, the assessee has submitted that it has been charging interest from M/s Red Fort Akbar properties private limited in the past year which has been duly offered to tax as income. However Messer Red Fort Akbar properties private limited represented to the company that it has not been able to acquire the land parcel from Messer Deccan and infrastructure and land Holdings Ltd and hence, not able to commence the project. Also considering the fact that it does not been able to commence development and sale of the project, it has been facing serious liquidity. With a view to examine whether as per provisions of section 36 (1) (iii) the assessee should be allowed the deduction of interest paid on unsecured loans from its associated enterprise company, the relevant legal and factual position as discussed hereunder. In the case of the assessee, it is established that the assessee had raised a loan for its business purpose and has given interest on that and on the other hand the funds were advanced to M/s

Deccan infrastructure and land Holdings Ltd, associate concern for non-business purposes and interest free basis, then the interest payable to the assessee to M/s Tie Themba investments Ltd, Cyprus to the extent cannot be held to be use of fund for business purposes and no deduction accordingly can be permitted under section 36 (1) (iii) of the act. In this case, the assessee has failed to establish the commercial expediency and business purposes of the advance and loan. The assessee has simply diverted the interest- bearing funds. The assessee has failed to file any evidence showing the benefit which the assessee will get out of such transaction. The assessee has failed to demonstrate that how the commencement of the project is relevant to the business of the assessee and how the commencement in development and sale of the project is relevant. In the case of Commissioner of income tax vs Punjab tractors the honourable Punjab and Haryana High Court gave a judgment in favour of revenue on the basis of judgment of the same High Court in the case of M/s Abhishek industries in which it was held that once it is established that the assessee had raised certain loans for its business purposes, on which interest liabilities being incurred and on the other hand the funds were advanced to sister concern for non- business purposes on interest free basis, then the interest payable by the assessee to the financial institutions to that extent cannot be held to be use of fund for the business purposes and no deduction accordingly can be permitted under section 36 (1) (iii) of the act. The contention of the assessee that loan and advances has been given out of reserve and surpluses is not acceptable that the assessee company has own fund of Rs. 28,51,90,486/– and liabilities are to the extent of Rs. 111,88,34,614/–. Further, the current assets are amounting to INR 78,08,27,463/– itself. In view of the above, contention of assessee is not acceptable. In this case, assessee‟s interest liability is being incurred and on the other hand the funds were advanced to sister concern for non-business purposes on interest

free basis, then the interest payable by the assessee to its Cyprus entity cannot be held to be use of funds for business purposes and no deduction accordingly can be permitted under section 36 (1) (iii) of the act. Therefore, the assessee has defrauded though the provisions of the income tax act and accordingly interest of INR 1,92,60,000 being 9% of Rs. 214000000/– added to the income of the assessee.” 14. On objections before the learned Dispute Resolution Panel following directions were passed:- i. the assessee has issued 15% unsecured fully and compulsorily convertible debentures (FCC) of face value of Rs. 1000 each to tie Themba investments Ltd and paid interest at the rate of 15% amounting to INR 9,72,41,700/–. The assessee submitted that the entire funds were utilized by the assessee in initial years ( i.e. financial year 2007 – 08, 2009 – 10 and FY 2010 – 11) for acquisition of land for development of housing project in Chennai. ii. Further, the assessee had made significant profits and development of housing project during FY 2011 – 12 and FY 2012 – 13 and also had significant funds through internal accruals (reserves and surplus amount, as on 31/03/2012 was INR 363930737). Accordingly the assessee gave an intercorporate loan of INR 214000000 to one of its group entity which is Red Fort Akbar properties private limited (red Fort Akbar) out of the said internal accruals out of profits earned by the assessee. iii. Further, the assessee had charged interest income of Rs 48,00,000 on such loan from red Fort Akbar during AY 2013 – 14 and offered the same to tax in the return of income filed by the assessee for the said assessment year. However, owing to liquidity issues faced by the red Fort Akbar, management of the assessee decided to waive of its right to charge interest on intercompany loan provided to red Fort Akbar during AY 2014 – 15. iv. AO made the disallowance on following basis:-

 the assessee company has own funds of Rs. 285190486 and liabilities to the extent of INR 1118834614 while current assets are amounting to INR 780827463 as at 31/03/2014.  The assessee has diverted the interest-bearing funds  the assessee has failed to file any evidence showing the benefit which the assessee will get out of such transaction  the assessee has failed to demonstrate how the commencement of the project is relevant to the business of the assessee and also how the commencement in development and sale of the project is relevant, and  the assessee failed to establish the commercial expediency and business prudence of the inter corporate loan v. The panel has considered the issue. The assessee issued FCCDs to its associated enterprise in FY 2007 – 08, FY 2009 – 10 and FY 2010 – 11 on which interest was paid. These funds were used in earlier years. The loan to Red Fort Akbar was forwarded in assessment year 2013 – 14 out of own funds and interest was received in AY 2013 – 14. This interest was waived for assessment year 2014 – 15 as Red Ford Akbar was facing liquidity issues. The AO has brought out the asset and liability status of the company. vi. On the one hand, the assessee in the TP grounds is claiming that it is operating in high risk industry, the real estate sector was in slump during this assessment year, the borrowing rate was 17 – 18% per annum. On the other hand, the assessee decided not to charge interest from another associated enterprise (because of its financial position). Interest of INR 4,800,000 was charged in assessment year 2013 – 14 from the same AE. It is not known as to what was the rate of interest charged. Even if the financial condition of the borrower AE was not strong, generally the interest accrued to the lender even if it is not paid out during the year. The disallowance made by the AO therefore is not out of order. However, instead of applying rate of 9% has done by the AO it Page | 13

would be fair to verify the rate at which interest was charged from Red Fort Akbar in assessment year 2013 – 14 and apply the same rate to make the disallowance for AY 2014 – 15. vii. The AO is therefore directed to disallow the interest on outstanding loan of INR 214000000 to red Fort Akbar at the same rate as interest was received from it in assessment year 2013 – 14 viii. The objection is disposed off accordingly.” 15. Consequent to that order the learned assessing officer asked the assessee to submit requisite detail as per the direction of the DRP. Assessee also submitted the copy of loan agreement and Ledger account of interest income on loan furnished by the assessee wherein it was found that interest at the rate of 17.95% was charged by the assessee on the loan given to above party in assessment year 2013 – 14. The interest income of INR 4841090/– was booked by the assessee in assessment year 13 – 14 for 46 days at the rate of 17.95% per annum on the loan amount of Rs. 214900000 given by the assessee. Therefore, the learned assessing officer noted that it is clear that the assessee was required to recognize interest income accrued to it in FY 2013 – 14 from the loan given to M/s red Ford Akbar properties private limited. Since assessee, company has been following the mercantile method of accounting, as per which income is recognize when it accrues, irrespective of actual receipt of the same. Furthermore, perusal of the audited accounts of the assessee for the assessment year 2013 – 14 reveals that assessee credited interest income of INR 4841090/– in profit and loss account, which had been charged on loan given to Red Fort Akbar properties private limited for the period of 46 days at the rate of 17.95% as mentioned above and the note number 16 – „other current assets‟ – forming part of the audited balance sheet for the assessment year 13 – 14 reflects that the said amount of interest of INR 4841090/– was accrued on advances given by the assessee. Therefore, he held that there has been no deviation in the method of accounting employed by the assessee in the assessment year 2014 – 15 from that of the preceding year, therefore, assessee cannot treat the same income differently in two assessment years as it has to abide by the principles of consistency thus it has to recognize the interest accrued

on the loan given to Red Fort Akbar properties private limited in the assessment year 2014 – 15. Consequently, learned assessing officer made an addition of INR 3,84,13,000/– on loan given to Red Ford Akbar properties private limited. 16. The learned authorised representative submitted that the appellant has given inter-corporate loan of Rs. 214000000 to Red Ford Akbar as per loan agreement dated 14/02/2013. The term of the loan was for one year and interest was to be paid at the end of the term. The said loan was utilized by that company to acquire the land parcel from Deccan industrial and land Holdings limited. However, Red Fort Akbar was not able to acquire the land parcel from that company and was not able to commence its business operations due to which red Fort Akbar was not able to pay interest to the appellant at the end of the Term loan. Since the recovery of the principal amount of loan was doubtful and the said amount was not received till the year-end. Thus, the action of the learned assessing officer to add a notional income of INR 38413000 in the hands of the appellant for the said financial year is incorrect and bad in law. He further submitted that the corporate tax adjustment made by the learned assessing officer on account of notional interest income on inter corporate loan advanced by the appellant to red Fort Akbar. He highlighted that it is trite law that tax can be imposed only on real income and not on notional income. He further relied upon several judicial precedent as under:- a. Godhra electricity Co Ltd vs CIT (Supreme Court) 225 ITR 746 b. CIT vs Soorji Vallabhdas & company 46 ITR 144 c. CIT vs Arihant avenues and credit Ltd (Gujarat) 217 Taxman 105 d. Maruti securities Ltd vs Deputy Commissioner Of Income Tax (Hyderabad) ITA number 1651/HYD/2017. e. Seth Madan Lal Modi vs CIT (Delhi) 261 ITR 49 f. CIT vs Modipon Ltd 171 ITR 658 g. Highway Construction Co Private Limited vs CIT 199 ITR 702

limited in view of the fact that the chances of the recovery of even the principal amount of loan is negligible. In this regard various Courts have held that no tax is payable in the hands of the appellant unless interest income is real income and not merely accrued income, especially when principal amount on loan had been written off as bad debt in subsequent years. He placed reliance upon a. CIT vs Eicher Ltd 185 taxmann 243, b. CIT vs Goyal MG gases private limited, c. DCIT vs Intercontinental India (ITA number 2033/AHD/2007) and d. chachar Drugs Distributors vs ITO 63 taxmann.com 98 (2015) . 18. In the end, he submitted that appellant has not received the said interest income during the assessment year and assessee has decided to waive of its right to charge interest income from red Fort Akbar of borrowing as it faced serious liquidity issues faced by that borrower company. Further, the appellant has also written off entire principal amount of loan given to red Fort Akbar in subsequent financial year 2018 – 19. Thus in view of the principle laid down by various Courts as mentioned above, addition of such notional interest is bad in law and due relief should be granted to the appellant. 19. The learned departmental representative vehemently supported the order of the lower authorities and submitted that the interest has accrued to the assessee and thereafter it has been waived by the assessee. It is not the case of the assessee that interest income is not at all accrued to the assessee. He further submitted that the write off the amount has been made in financial year 2018 – 19, which was not the case before the learned assessing officer, or learned Dispute Resolution Panel and therefore it is new evidence placed by the assessee before the coordinate bench and therefore it should not be considered. Even otherwise , he submitted that merely write off the loan does not waive the interest already accrued to the assessee in financial year 2013 – 14. He therefore submitted that the order of the learned assessing officer and the learned dispute resolution panel should be upheld. 20. We have carefully considered the rival contention and perused the orders of the lower authorities. Admittedly in this case the assessee has given a loan

to sister concern on interest. The assessee also received interest in the past year. However, during the year, the assessee has not shown any income and therefore the learned assessing officer has made addition to the total income of the assessee holding that the interest income on the above advances accrued to the assessee but it has not been accounted for. An issue arose before Honourable Bombay High court in case of CIT V Neoan Solutions Pvt Ltd 387 ITR 667 where on the facts that the assessee subscribed to 2 per cent. non-convertible unsecured debentures issued by one of its group companies in 2003. As the company, which issued the debentures, was in financial difficulties waiver of interest on the debentures until March 31, 2010 was approved at a meeting of the debenture holders in 2004. A resolution was passed by the board of directors of the assessee to this effect. The Assessing Officer brought to tax the notional interest at the rate of 2 per cent. interest on the debentures for the assessment years 2007-08 and 2009-10 on the ground that waiver of interest for the six year period was unbelievable. The Commissioner (Appeals) upheld the order of the Assessing Officer for both the assessment years. On further appeal, the Tribunal held that even in the mercantile system of accounting, income could be regarded as accrued only if there was certainty of receiving it and not when it was waived. Honorable High court upheld the order of the coordinate bench deletion the above addition. The Honourable court approved the finding of the tribunal on mercantile system of accounting stating that accrual means somebody has right to receive and other party has obligation to pay. There has to be reasonable certainty of receipt. The honourable High court approved the following finding of the ITAT:-

“6. On further appeal, the Tribunal by the impugned order takes into account the fact that even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving Page No : 0669 it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering income in following the mercantile system of accounting :

"(A) that merely because the assessee was following the mercantile system of accounting, it could not be held that income had accrued to it. (B) earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides not to charge interest in order to safeguard the principal amount and ensure its recovery, it cannot be said that he has acted in a manner in which no reasonable person can act. (C) The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. (D) Non recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting, when the same is in accordance with ASI notified by the Government. (E) It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. (F) The provisions of section 145(1) are subject to, inter alia, man date of ASI which also prescribes that 'accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies'. In the name of compliance with section 145(1), it cannot be open to anyone to force adoption of accounting policies, which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, the assessee was justified in following the policy of not Page No : 0670 recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanished." The Tribunal further referred to the fact that the various resolutions, which were passed, by the company as well as the Page | 18

communication exchanged between the parties would establish on facts that interest has been waived. Further, on facts it holds that there is no reason to disbelieve the resolution passed by the respondent-assessee waiving interest. The Tribunal further adverted to the fact that subsequently, M/s. Marketing and Brand Solutions (I) Pvt. Ltd. had amalgamated with the respondent-assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which would warrant interference by this court on account of any finding being perverse or arbitrary.”

Mahavir Co. (P.) Ltd.,(1994) 206 ITR 68 (Raj) ]. Therefore on the analysis of the balance sheet it needs to be seen whether the debtor is financially sound or not in impugned case. The learned authorised representative has also produced the agreement 24. dated 14/02/2013 between the assessee and the borrower. In the agreement, it is noted that the borrower is engaged in the business of construction and realistic development activities however it does not speak about the purpose of loan given by the assessee and the reason of giving the loan is earning of interest simply thereon. According to clause number 4 the tenure of the advance is the 2nd anniversary of the effective date meaning thereby that within 2 years from the date of execution of this agreement that is 14th day of February 2013 the loan is repayable. According to clause number 5 the interest shall be calculated annually and sell be payable by the borrower on each anniversary of the effective date after duly deducting applicable withholding taxes. Therefore the interest due date for the assessment year 2014 – 15 would be 14th day of February 2014. In the earlier period in AY 2013 – 14, the assessee was paid interest 446 days whereas in the present A.Y. No interest was received. 25. The assessee has also supported the argument by submitting the copy of the annual result of the borrower for the year ended on 31st of March 2014. According to the annual accounts of the borrower, it is apparent that same are prepared on the basis of going concern assumption. In the profit and loss account the assessee has shown work in progress of Rs. 3280988810/–. With respect to the availability of the land on looking at note number 2 titled as Advance For Land, it is apparent that vide letter dated 3/7/2010, DILL has handed over the possession of 10 acres of alternate lands at the rate of Rs. 11.61 core Per acre. Therefore, it is apparent that assessee has acquired land. But the learned authorised representative submitted that the assessee could not commence the project. The notes on accounts of the borrower and the argument of the learned authorised representative are contradictory. 26. Further, on careful analysis of the independent auditor‟s report in case of the assessee, it is also reported that the rate of interest under the terms and conditions of such loan in opinion of the auditor are not prime facie

prejudicial to the interest of the company. When no interest is paid , the advances are prejudicial to the interest of the company whether there is a stipulation of interest payment. Further looking at the note number 30 of the annual account of the assessee the following note appears:- “The company has given on intercorporate loan amounting to INR 2 14000000 to Red Fort Akbar properties private limited (the borrower). The borrower is facing difficulties in payment of interest and has approached the company for deferment of interest. The company has agreed to defer the accrual and payment of interest by the borrower until the said due date as mutually agreed. Accordingly, the company has not accrued any interest income on said loan. Due to uncertainty of realization, interest accrued during the financial year 2012 – 13 has been provided for.” 27. On careful reading of the above note to accounts, it is apparent that the interest is only deferred by the assessee. Therefore it is not coming out from the facts produced before us that whether the interest on the loan has been deferred or has not accrued at all. Even the interest provided for earlier year as income by the assessee has also been provided is not recoverable. However, the loan amount as been shown as recoverable. 28. Accrual of income is factual aspect. In the present case the facts are not coming out clearly. Acquisition of land by the borrower is evident in the notes on accounts to the balance sheet of borrower and assessee pleads that it has not acquired the land. The value of land acquired is 116 Crore. Balance sheet of borrower is prepared on going concern basis assumption, therefore it cannot be said that borrower does not have liquidity or assets. Resolution of write off speaks about the correspondences , but no such evidences produced before us except a certified copy of resolution. 29. Further, it is not coming out of the facts that whether the interest income has been waived before the accrual i.e. on 14/02/2014 or later on or is waived after its accrual, there is different tax treatment and if the waiver is before the accrual of income there are different judicial precedent. In the present case, it is not known that when the interest accrued and when it is waived.