2020 (12) TMI 95 - AT - Income Tax

Accrual of income - Notional interest income - deployment of funds by the assessee by way of investment in the OCDs - advancing of interest-free unsecured loan - HELD THAT - Admittedly, there is no case made out by the Assessing Officer that the assessee has received or has any right to receive any income qua the amounts invested/advanced to India Best Buy Pvt. Ltd. which is over and above the amount declared by the assessee. The finding of the CIT(A) in this regard, which we have extracted above, clearly shows that there is no material led by the Assessing Officer to point out that the assessee has actually received or accrued any income corresponding to the interest in question. CIT(A) made no mistake in relying on the case of Shivanndan Buildcon Pvt. Ltd. vs CIT 2015 (5) TMI 192 - DELHI HIGH COURT to say that the AO is not entitled to bring to tax any notional interest income without demonstrating that the assessee had, in fact, received such interest income or that the concern to whom the loan was given had, in fact, paid any such interest to the assessee. It is a trite law that income tax cannot be levied on the ipse dixit of the AO, and, that too on a hypothetical income, which is a step away from real income. Thus, impugned addition computed by the Assessing Officer is merely hypothetical and notional and has been rightly set aside by the CIT(A). As noted by the CIT(A) that the assessee is a wholly owned subsidiary of Oleander Real Estate Private Limited dealing in real estate business. No doubt, the CIT(A) has referred to the investment agreement between the assessee and M/s India Best Buy Private Limited dated 31.3.2011 and such a reference is conspicuous by its absence in the assessment order. Be that as it may, the same does not turn much, inasmuch as the analysis of the nature of the arrangement, being a transaction carried out in the course of the business activity has been consistently canvassed by the assessee, and also noted so by the lower authorities. Thus, the plea of the learned DR to effect that such plea was not before the lower authorities, is not merited. Considering the entirety of circumstances, on this aspect of the matter also, the order of learned CIT(A) is well-founded and does not require any interference from our side. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) regarding unsecured loans and investments.
2. Determination of the nature of the assessee's business activities.
3. Legitimacy of notional interest addition by the AO.
4. Commercial expediency of the investments made by the assessee.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by the AO:
The Revenue appealed against the CIT(A)'s decision to delete an addition of ?21,67,22,122/- made by the AO. The AO had added this amount by presuming interest income based on the unsecured loans and investments made by the assessee. The CIT(A) found that the AO’s addition was based on presumptions without factual support and was not sustainable under any provision of the Income Tax Act.

2. Determination of the Nature of the Assessee's Business Activities:
The AO noted that the assessee, a company incorporated under the Companies Act 1956, had significant unsecured loans and investments in Optimally Convertible Debentures (OCDs) of India Best Buy Pvt. Ltd. The AO concluded that the assessee was not engaged in real estate activities as claimed but was instead carrying out Non-Banking Financial Company (NBFC) activities. However, the CIT(A) found that the assessee was indeed involved in real estate through its holding company and other group companies. The CIT(A) also noted that the assessee did not have any public deposits, which is a characteristic of NBFCs.

3. Legitimacy of Notional Interest Addition by the AO:
The AO computed a notional interest income of ?21,67,22,122/- at a rate of 10% per annum on the investments and unsecured loans advanced by the assessee. The CIT(A) rejected this addition, stating that the AO failed to provide any material evidence that the assessee had actually received or accrued any such interest income. The CIT(A) emphasized that income tax cannot be levied on hypothetical or notional income, aligning with the precedent set by the Delhi High Court in Shivanndan Buildcon Pvt. Ltd. vs. CIT.

4. Commercial Expediency of the Investments Made by the Assessee:
The assessee argued that the investments were made out of commercial expediency to expand its market opportunities in the real estate sector. The CIT(A) accepted this explanation, noting that the investments were made in a company within the same business sector. The CIT(A) found that the investments were made with a future perspective of acquiring ownership in the investee company, which would promote the assessee's real estate business. The CIT(A) also noted that the assessee had consistently maintained this position during the assessment and appellate proceedings.

Final Judgment:
The ITAT affirmed the CIT(A)'s decision, dismissing the Revenue's appeal. The tribunal found no merit in the AO's addition of notional interest income and upheld the CIT(A)'s findings on the nature of the assessee's business activities and the commercial expediency of its investments. The tribunal concluded that the AO's observations were not supported by any factual evidence and were mere assertions. The appeal of the Revenue was dismissed, and the decision was pronounced on 21st August 2020.