DCIT CIRCLE-7(1), DELHI vs. EMPIRE STOCKS PVT. LTD., DELHI

The only issue to be decided in this appeal is has to whether the ld. CIT(A) NFAC, Delhi was justified in deleting the addition of Rs. 2,43,78,279/- on account of notional interest income in the hands of the assessee, in the facts and circumstances of the case.

We have heard rival submissions and perused the materials available on record. The assessee company is engaged in the business of investment and financing. The ld. AO observed that assessee had paid interest to its directors and related parties at the rate of 12% per annum on the borrowings made from them. The said borrowed funds were utilised for making investment in debentures in M/s R J Corp and M/s Alisha Retails P. Ltd. The investment in debentures with M/s R J Corp yielded interest income to the assessee in the range of 8 to 10 percent. The investment in debentures with M/s Alisha Retails P. Ltd. fetched interest income of 11% to the assessee. The ld. AO observed the M/s R J Corp and M/s Alisha Retails P. Ltd. were related parties to the assessee company having common directors. Accordingly the ld. AO concluded that assessee had made borrowings from related parties at a higher rate of interest, whereas it had made investment in related party concerns yielding lesser rate of interest. Accordingly the ld. AO sought to tax differential interest income in the hands of the assessee on notional basis as under:- Name of the Amount of Interest @ Interest Difference Party Investment in 12% per received (Rs.) Rs. annum (Rs.) (Rs.) M/s R J 600,00,07,000 7,20,00,840 4,81,64,383 2,38,36,457 Corp M/s Alisha 5,41,82,191 65,01,863 59,60,041 5,41,822 Retails Pvt. Ltd. Total 605,41,89,191 7,85,02,703 5,41,24,424 2,43,78,279

The ld. CIT(A) observed that there is no provision in the Act to tax the notional income as was done by the ld. AO. The ld. CIT(A) also accepted the contention of the assessee that interest rate on Compulsory Convertible Debentures (CCDs) which have been invested by the assessee in the instant case would not be comparable with the interest rate prevailing in ordinary loan transaction. The ld. CIT(A) thereafter by placing reliance on the decision of Hon’ble Supreme Court in the case of Godhra Electricity Company Ltd. vs CIT reported in 225 ITR 746 held that only real income could be brought to tax and not the notional income. The Ld. CIT(A) also placed reliance on various other decisions in support of this proposition and granted relief to the assessee. Aggrieved the revenue is in appeal before us.

It is not in dispute that the borrowed funds were used by the assessee for the purpose of its business. It is not in dispute that the investments made in Compulsorily Convertible Debentures (CCDs) in the related party concerns were meant for the purpose of business of the assessee and were made in the normal course of its business of the assessee company. Once the borrowed funds are utilised for the purpose of business of the assessee, the interest paid on the borrowings would become squarely allowable as deduction u/s. 36(1)(iii) of the Act in full. Merely because the investment made out of borrowed funds by the assessee company in the related party concerns had fetched lesser rate of interest to the assessee company than the interest paid on its borrowings, there cannot be any notional interest income that could be brought to tax in the hands of the assessee, as was done by the ld. AO in the instant case. The law is very well settled that the income tax could be levied only one real income of the assessee. As rightly pointed out by the Ld. CIT(A), there is absolutely no provision in the Act, to tax the notional interest income in the manner in which the ld. AO had done it in the instant case, which have been rightly deleted by the ld. CIT(A). We also find that the Ld. CIT(A), as stated supra, had placed reliance on the decision of Hon’ble Supreme Court refer to supra to justify to his conclusion. Hence, we don’t find any infirmity in the order of the ld. CIT(A) granting relief to the assessee in the instant case. Accordingly, the ground raised by the revenue is dismissed.

In the result, appeal of the revenue is dismissed.