Deposit made by subscriber of Inter Corporate Deposit, issued by company on fixed rate of interest, cannot be treated as loan: ITAT

THE ISSUE is - Whether deposit made by the subscriber of the Inter Corporate Deposit, issued by a company on a fixed rate of interest, can be treated as a loan. NO is the answer.

Facts of the case:

The Assessee is a Non Banking Finance Company registered with RBI and is wholly owned subsidiary of Bennett, Coleman & Co. Ltd. (BCCL). During the year under consideration, the assessee had earned interest on Inter Corporate Deposit given to BCCL. The assessee had extended ICD amounting to Rs. 147 lacs to BCCL which was 100% holding company, initially @ 10% per annum for three years vide agreement. However in the late of the year 2009, BCCL proposed for reduction in the rate of interest to 7.25% per annum based on the then prevailing market rates. The assessee agreed to this reduction of rates, w.e.f., 1.1.2010 as it was not possible to obtain a better rate of interest from any safe source such as leading banks. The AO required the assessee to justify the reduction of rate of interest on the ICD from 10% to 7.25% per annum. In response to which, the assessee filed detailed reasons alongwith documents in support justifying the reduction of rate of interest on ICD. However the AO did not accept the assessee’s explanation and observed that rate of interest should be adopted at 15% on loans to BCCL as the charging of interest is not on arm’s length. Accordingly, he proceeded to compute the interest @ 15% per annum at Rs. 17,39,83,561/- thus making an addition of Rs. 6,77,97,413/-. 

And the Tribunal held that,

++ 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 CIT(A) for deleting the addition is upheld.