2015 (6) TMI 1207 - AT - Income Tax

Interest expenditure incurred allowable - Addition u/s 36(1)(iii) or u/s 14A - HELD THAT - Assessee company is engaged in the business of finance and investment in equity shares. The borrowed capital was used for acquiring the equity shares of the subsidiary to have controlling interest. The proposition of law laid down in the case of Phil Corpn. Ltd. 2011 (6) TMI 912 - BOMBAY HIGH COURT is squarely applicable to the case of the assessee. In the case of Eicher Goodearth Ltd. vs. CIT 2015 (5) TMI 685 - DELHI HIGH COURT has held that if the expenditure is incurred for the purpose of promotion of business more specifically to retain control or as part of the strategic investment of the assessee company, such expenses by way of interest out go would have to be treated as allowable under section 36(1)(iii) . The above decision of the Hon ble Delhi High Court is also squarely applicable to the facts of the case of the assessee. Since the interest expenditure incurred by the assessee is allowable under section 36(1)(iii) as business expenses, there is no question of disallowance of the same u/s 14A of the Act on account of investments made in relation to earning of exempt income. The facts on the file clearly reveal that the investment in the shares of the subsidiary company was not made for the purpose of earning of any exempt income rather it was made for gaining controlling interest over the subsidiary which as per the law laid down in the case of CIT, Panaji, Goa vs. Phil Corpn. Ltd. 2011 (6) TMI 912 - BOMBAY HIGH COURT and Eicher Goodearth Ltd. vs. CIT 2015 (5) TMI 685 - DELHI HIGH COURT is held to be for the purpose of promotion of the business of the assessee. Even it is also an admitted fact that the assessee during the year had not earned any exempt income. The AO had made the disallowance under section 14A relying upon the decision of the special bench of the Tribunal in the case of Chem. Investments vs. ITO 2009 (8) TMI 126 - ITAT DELHI-B . However, we find that the said special bench decision of the Tribunal has been overruled by the Hon ble Delhi High Court in the case of Chem. Investments 2015 (9) TMI 238 - DELHI HIGH COURT wherein the Hon ble Delhi High Court has held that the section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Even otherwise, no disallowance is warranted under section 14A of the Act also, in the case of the assessee. Neither any interest disallowance is warranted in this case under section 36(1)(iii) of the Act nor under section 14A of the Act. Appeal of the assessee is hereby allowed.

Summary

Issues: Disallowance of interest expenditure under section 36(1)(iii) and computation under rule 8D for disallowance under section 14A

Issue 1: Disallowance of interest expenditure under section 36(1)(iii)
The appeal was filed by the assessee against the disallowance of interest expenditure of Rs. 12,24,308 made by the Assessing Officer under section 36(1)(iii) of the Act. The AO disallowed the interest amount as the assessee had taken interest bearing loans used for investment in unquoted equity shares of a subsidiary company. The Ld. CIT(A) directed the AO to compute the disallowance under rule 8D for section 14A instead of section 36(1). The ITAT set aside the issue to the AO, who disallowed the interest expenditure under section 14A, stating that even without exempt income, the provisions applied as the borrowed funds were not used for the business purpose of the assessee. The Ld. CIT(A) upheld the disallowance, considering the expenditure on capital account. However, the ITAT allowed the appeal, citing decisions of the Bombay and Delhi High Courts that such interest expenditure is allowable under section 36(1)(iii) if incurred for business purposes.

Issue 2: Computation under rule 8D for disallowance under section 14A
The AO disallowed the interest payment under section 14A as well, contending that the interest bearing loan was used for non-business purposes. The Ld. CIT(A) upheld this disallowance, but the ITAT overruled it based on decisions by the Delhi High Court and other High Courts that section 14A does not apply if no exempt income is earned during the relevant year. The ITAT concluded that no disallowance was warranted under section 14A, in addition to ruling that the interest disallowance under section 36(1)(iii) was also not justified. The appeal of the assessee was allowed, and the interest expenditure was deemed allowable under section 36(1)(iii) as business expenses.