2017 (12) TMI 464 - AT - Income Tax

Accrual of income - real income - whether the rate of interest by the assessee on the ICD @ 7.5% p.a. could have been enhanced by the AO or not? - Held that - There cannot be any enforceable right to receive the income to the assessee over and above what has been agreed amongst 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 amongst 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

Summary

Issues:
1. Whether the rate of interest on the Inter Corporate Deposit (ICD) could have been enhanced by the Assessing Officer (AO).
2. Whether the addition made by the AO regarding the rate of interest was justified.

Issue 1 Analysis:
The appeal was filed by the revenue against the order passed by Ld. CIT (Appeals) for the quantum of assessment under section 143(3) for the assessment year 2010-11. The primary issue raised was the deletion of the addition of ?6,77,97,413. The assessee, a Non-Banking Finance Company, had extended an ICD to its holding company at a reduced rate of interest of 7.25% per annum based on prevailing market rates. The AO, however, computed the interest at 15% per annum, resulting in the addition. The assessee contended that the income can only be said to have accrued when there is a right to receive it, and the ICD was risk-free as it was given to the holding company. Ld. CIT (A) accepted the assessee's contention and deleted the addition made by the AO.

Issue 2 Analysis:
The main issue for consideration was whether the rate of interest on the ICD could have been enhanced by the AO. The ITAT observed that the agreed rate of interest was 7.25% per annum, and the assessee agreed to the reduction based on prevailing market rates. The AO's argument that the interest rate should be seen from the angle of loans given by banks was rejected. The ITAT held that there was no enforceable right to receive income beyond what was agreed upon. The onus was on the assessee to prove reasonableness, which was discharged by showing lower rates offered by banks. The ITAT concluded that the enhancement of notional income by the AO was not justified, as there was no real income accrued to the assessee. The decision of Ld. CIT (A) to delete the addition was upheld, and the revenue's appeal was dismissed.

In conclusion, the ITAT dismissed the revenue's appeal, upholding the deletion of the addition made by the AO regarding the rate of interest on the ICD extended to the holding company.