M/S. SRI ENDRASH INVESTMENT & FINANCE (P) LTD.,NEW DELHI vs. ITO, NEW DELHI

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the business was done considering various factors, rules, commercial expediency and as per the privity of contract between the two parties based on their mutual consent. It was further submitted that the assessee had given interest bearing loans to the above two parties so that those trust can further augment their social and philanthropic activities for which those trust required support from the donors and other related parties by way of loans, financial assistance etc. It was also submitted that the documentary evidences clearly indicated this fact that no interest had been charged by the assessee and no interest had been paid by those trust also and that the AO could not have travelled beyond documents produced and draw the inferences as per his suitability. Therefore, based on his surmises and conjectures, the AO could not have added the notional interest from the assessee company, more particularly when the trust had not paid any interest at all. It was stated that the assessee company had not paid any interest for borrowing the money, if any, for giving loans to these trusts and stated that the amount was given out of own resources and no interest had been claimed as expenditure in the books of accounts by the assessee. It was further stated that no interest had been paid since there was no borrowed funds and all the amounts given as loans were out of own funds. Therefore, no addition could have been made on account of notional interest. The reliance was placed on the following case laws: � Tripty Drinks Pvt. Ltd. (1978) 112 ITR 721 (Orissa)

The ld. CIT(A) after considering the submissions of the assessee sustained the addition made by the AO by observing as under: “It is a fact that the nature of the business of the company is of a carrying of business of financing and there is no business connections between the concerns to whom the loans are given and the assessee company. In view of this, I find that the Assessing Officer has correctly charged interest on the said amounts of loan given to two concerns with whom there are no business connections in the light of the fact that the assessee is in the business of giving finances. Accordingly the addition of interest of Rs.18,84,502/- is upheld. Ground raised in appeal is dismissed.”

Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the amount was advanced by the assessee at the fag end of the financial year, out of capital and not out of borrowed funds. Therefore, the addition made by the AO and sustained by the ld. CIT(A) was not justified particularly when the assessee charged the interest in the subsequently year in accordance with the agreement entered between the parties. The reliance was placed on the following case laws: � M/s Shivnandan Buildcon Pvt. Ltd. Vs CIT & Anr. and M/s Omshiv Buildtech Pvt. Ltd. Vs CIT & Anr. in W.P.(C) 6265/2013 and 6326/2013 order dated 30.04.2015 (Del. HC) � CIT Vs DLF Hilton Hotels in ITA 623/2015 order dated 10.05.2016 (Del. HC) � CIT, Central-III Vs M/s Templeton Asset Management ((India) Pvt. Ltd. in order dated 12.09.2011 (Bomb. HC) � CIT-II Vs M/s Shree Vatsa Finance & Leasing Ltd. in ITA No. 585/2012 order dated 07.05.2012 (All. HC) 8. In his rival submissions the ld. DR supported the orders of the authorities below.

I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the assessee had advanced the loan out of surplus funds and not out of borrowed funds. In the instant case, the contention of the assessee that no expenditure on account of interest was debited to the profit and loss account was not rebutted at any stage. In the present case, 6 Sri Endrash Investment & Finance Pvt. Ltd. the assessee had given the loan to M/s Sharda Education Trust and M/s Anand Swaroop Education Trust at the fag end of the year and did not charge any interest for 15 days falling in the period relevant to the assessment year under consideration and from 1st April, 2010, the interest was charged @ 9%, in accordance with agreement entered with the parties to whom loan was given. Therefore, the notional interest charged by the AO and sustained by the ld. CIT(A) was not justified.

On a similar issue the Hon’ble Jurisdictional High Court in the case of Shivnandan Buildcon Pvt. Ltd. Vs CIT & Anr. (supra) in W.P.(C) No. 6265/2013 vide judgment dated 30.04.2015 held that there was nothing to show that the assessee had in fact received interest or that the company to whom the loan was given had in fact paid interest to the assessee. There was also nothing on record to show that the alleged interest was not reflected in the accounts, the only finding recorded was that the assessee ought to have charged interest. The Hon’ble High Court also made a reference to the decision of the Hon’ble Guwahati High Court in the case of Highways Construction Co. Pvt. Ltd. Vs CIT (1993) 199 ITR 702 wherein it has been held as under: "There is no finding of fact to the effect that actually the loan had been granted to the managing director or any other person on interest, or that interest had actually been collected and the collection of the interest was not reflected in the accounts. The finding of the Income Tax Officer is that the assessee ought to have collected interest. In other words, the view of the Income Tax Officer, which has been accepted by the Tribunal, was that the assessee, as a good business concern, should not have granted 7 Sri Endrash Investment & Finance Pvt. Ltd. interest-free loan, or should have insisted on payment of interest. If the assessee had not bargained for interest, or had not collected interest, we fail to see how the Income Tax authorities can fix a notional interest as ' due, or collected by the assessee. Our attention has not been invited to any provision of the Income Tax Act empowering the Income Tax authorities to include in the income, interest which was not due or not collected. In this view, we answer question No. (ii) in the negative, that is, in favour of the assessee and against the Revenue."

In the present case also, the assessee did not pay any interest as there was no borrowed funds, neither the assessee received any interest from the parties nor those parties to whom loan was given, paid any interest to the assessee for the period relevant to the assessment year under consideration. I, therefore, keeping in view the ratio laid down by the Hon’ble Jurisdictional High Court in the aforesaid referred to case, delete the impugned addition made by the AO and sustained by the ld. CIT(A).

In the result, appeal of the assessee is allowed. (Order Pronounced in the Court on 27/12/2016)