INCOME TAX ACT, 1961

Section 143(3) Section 4

Assessment - Addition to income - Loan advanced by assessee NBFC to sister concern/group at lower rate - Addition for notional interest--Commercial expediency

Assessee, a non-banking financial company (NBFC) was engaged in long-term investments in shares, securities, etc., and giving/taking loans from/to body corporate. Addition for notional interest income was made by the AO. Assessee filed appeal before CIT(A) and the total addition was deleted by CIT(A) observing that the assessee had advanced the money and had received interest ranging from 6.50% to 14% and it was not the case that the assessee had obtained the loan on higher rate and advanced it at lower rate. Revenue's sole grievance has that CIT(A) failed to appreciate that assessee had took loan on higher rate and advanced to its sister/group concerns on lower rate and also did not appreciate the fact that the assessee failed to prove the commercial expediency in such transactions.Held: The allegation of the AO that lower interest rate has charged and higher interest rate was paid was devoid of any merit and therefore the addition for notional interest was uncalled for. It was not the case that interest free loans have been given. Assessee had charged interest at varying rate depending on the market conditions and based on the needs of the concerns taking loan. The interest rate varying from 6.5% to 12% had been charged by the assessee. Similarly interest had been paid on debenture @ 10.5%, whereas funds @6% taken from Infrastructure and Leasing and Financial Services Ltd. So, the transactions carried out were in normal course of business were of commercial expediency. Though it was not necessary that earning of profit is mandatory for the business concern to prove that the transactions entered into by it were for commercial expediency but still if the business concern show profit at the end of the year, it is an added feature which proves that the transactions entered by the concern were for commercial expediency and in the regular course of business. There was no inconsistency in the order of CIT(A) deleting the addition of notional interest made by AO.

Followed:S.A. Builders Ltd. v. CIT(Appeals), Chandigarh (2007) 158 Taxman 74 (SC) : 2007 TaxPub(DT) 833 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2004-05 & 2005-06

SUBSCRIBE FOR FULL CONTENT