The Tax Publishers2020 TaxPub(DT) 5276 (Del-Trib)

INCOME TAX ACT, 1961

Section 143(3)

Where assessee-company received huge amount of interest free unsecured loan its holding company (O) and invested substantial amount in convertible debentures in a private limited company (I), AO was not justified in alleging that assessee was liable to be assessed for interest income commensurate to the prevailing bank rate; because AO was 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.

Assessment - Additions to income - Assessee-company received substantial amount of interest free unsecured loan its holding company and invested substantial amount in convertible debentures in a private limited company - Addition for notional interest income commensurate to the prevailing bank rate

Assessee-company filed return declaring loss. Its case was selected for scrutiny with the reason 'large increase in unsecured loans'. AO observed that there was huge increase in unsecured loans and, said unsecured loan was received interest-free from assessee's holding company (O). AO further noticed that assessee invested substantial amount in .001% Optimally Convertible Debentures (OCDs) of Rs. 10 each in a private limited company (I). AO alleged that main objects of the assessee were to carry out real estate activities, whereas in actuality, it was only carrying out 'NBFC activities'. Accordingly, AO held that assessee was liable to be assessed for interest income commensurate to the prevailing bank rate; and, accordingly, he took into consideration the total of the amount invested in the OCDs as well as the amount advanced as interest free unsecured loan and computed interest income @ 10% p.a., thereby resulting in an addition (Rs. 21,67,22,122) in hands of the assessee. Rate of interest applied corresponded to the prevailing bank rate.Held: Admittedly, there was no case made out by AO that assessee received or had any right to receive any income qua the amounts invested/advanced to I, which was over and above the amount declared by the assessee. There was no material led by AO to point out that the assessee actually received or accrued any income corresponding to the interest in question. AO was 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 AO, and that too on a hypothetical income, which is a step away from real income. Thus, addition computed by AO was merely hypothetical and notional and was liable to be set aside.

Followed:Shivnandan Buildcon (P) Ltd. Omshiv Buildtech (P) Ltd. v. The CIT & Anr. (2015) 233 Taxman 297 (Del-HC) : 2015 TaxPub(DT) 2199 (Del-HC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13



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