DCIT Circle-7(1), Delhi V. Empire Stocks Pvt. Ltd., Delhi

ITA 1221/DEL/2022

AI Insights

The case revolves around the Deputy Commissioner of Income Tax's appeal against M/s Empire Stocks Pvt. Ltd., concerning the assessment year 2018-19. The primary issue was the addition of Rs. 2,43,78,279 as notional interest income by the Assessing Officer (AO), which was later deleted by the CIT(A). The AO had argued that the assessee company, having invested in related parties at lower interest rates than they paid on borrowings, should be taxed on the differential as notional interest income. The CIT(A) found this addition unjustified, citing the absence of a provision in the Act to tax notional income and supported by precedents that only real income is taxable.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302283 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-04-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-04-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 26-05-2022
• Other Referred Cases: Godhra Electricity Company Ltd. vs CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘B‘ BENCH DELHI BEFORE: SHRI C.M GARG, JUDICIAL MEMBER & SHRI M.BALAGANESH, ACCOUNTANT MEMBER ITA No.1221/Del/2022 (Assessment Year:2018-19) Deputy Commissioner of Income Tax Circle-7(1), New Delhi 110002 Vs. M/s Empire Stocks Pvt. Ltd. F-2/7, Okhla Industrial Area, Phase-1, New Delhi 110010 PAN/GIR No. AAECP 0871 H (Appellant) .. (Respondent) Revenue by Shri Vipul Kashyap, Sr. DR Assessee by Shri Akshat Jain, CA Shri Rajat Jain, CA Shri Divyansh Jain, Adv. Date of Hearing 17/04/2023 Date of Pronouncement 19/04 /2023 O R D E R PER M. BALAGANESH (A.M): This appeal in ITA No.1221/Del/2022 for A.Y. 2018-19 arises out of the order by the ld. Commissioner of Income Tax, NFAC Delhi in appeal No. NFAC/2017-18/10019949 dated 11.03.2022 (hereinafter referred to as ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 02.03.2021 by the ld. Assistant Commissioner of Income Tax, Delhi (hereinafter referred to as ld. AO). ITA No.1221/Del/2022 M/s Empire Stocks Pvt. Ltd. 2 2. 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. 3. 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 Party Amount of Investment in Rs. Interest @ 12% per annum (Rs.) Interest received (Rs.) Difference (Rs.) M/s R J Corp 600,00,07,000 7,20,00,840 4,81,64,383 2,38,36,457 M/s Alisha Retails Pvt. Ltd. 5,41,82,191 65,01,863 59,60,041 5,41,822 Total 605,41,89,191 7,85,02,703 5,41,24,424 2,43,78,279 ITA No.1221/Del/2022 M/s Empire Stocks Pvt. Ltd. 3 4. 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. 5. 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), ITA No.1221/Del/2022 M/s Empire Stocks Pvt. Ltd. 4 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. 6. In the result, appeal of the revenue is dismissed. Order pronounced in the open court on 19/04/2023. Sd/- (C.M Garg) Sd/- (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Delhi; Dated 19/04/2023 NV, sr.ps Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT,Delhi 1. The Appellant 2. The Respondent. 3. The CIT(A), Delhi. 4. CIT 5. DR, ITAT, Delhi 6. Guard file. //True Copy//