2018 (8) TMI 572 - AT - Income Tax

Disallowance made of interest made u/s 36(1)(iii) - Held that - Investment made in capital work in progress the ITAT, we find, agreed with the CIT(Appeals) that for the purpose of making disallowance of interest on account of investment made in work in progress, it was necessary to show that interest bearing funds had been borrowed specifically for the said purpose, which was not done by the Revenue. The Revenue, in the present case, we find, has not brought out to our notice any distinguishing facts. Even otherwise, assessee has demonstrated the availability of enough own funds for the purpose of making investment in land during the year, which fact has not been controverted by the Revenue before us. Therefore, following the parity of reasoning made in the earlier years by the I.T.A.T., no disallowance of interest on account of investment made in land during the year, we hold, was also warranted. Disallowance made u/s 14A r.w.r. 8D - Held that - In view of the admitted fact that in preceding years the ITAT had held the exclusion of interest paid on specific loans taken for business purposes from the interest disallowable u/s 14A of the Act, we find no reason to interfere in the order of the CIT(Appeals) directing the Assessing Officer to recompute the disallowance in accordance with the said direction of the ITAT. No distinguishing facts have been brought to our notice by the Ld. DR. Therefore the direction of the CIT(Appeals) to follow the order of the ITAT in the preceding year in this respect is upheld.

Summary

Issues Involved:
1. Disallowance under Section 36(1)(iii) related to investment in land and building under construction.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962, concerning expenditure incurred for earning exempt income.
3. Denial of benefit of netting off interest received against interest paid for calculating disallowance under Section 14A.

Detailed Analysis:

Issue 1: Disallowance under Section 36(1)(iii) related to investment in land and building under construction
The Revenue challenged the deletion of interest disallowance amounting to ?14,42,161 by the CIT (Appeals). The Assessing Officer had disallowed the interest on the grounds that the investment in land and capital work in progress was not for business purposes. The CIT (Appeals) deleted this disallowance, following the ITAT's decisions in the preceding years (2010-11 and 2011-12), which were based on identical facts. The ITAT upheld the CIT (Appeals)'s decision, noting that the assessee had sufficient own funds for the investments and that the Revenue failed to show that interest-bearing funds were specifically borrowed for these investments. Thus, the disallowance under Section 36(1)(iii) was not warranted.

Issue 2: Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962
The Revenue contested the CIT (Appeals)'s decision to restrict the disallowance under Section 14A to ?30,85,987 instead of ?73,03,132 as computed by the Assessing Officer. The CIT (Appeals) directed the Assessing Officer to recompute the disallowance following the ITAT's orders in preceding years (2010-11 and 2011-12), which granted partial relief to the assessee by excluding interest paid on specific loans taken for business purposes. The ITAT upheld this decision, noting that the Revenue had not provided any distinguishing facts to warrant a different conclusion from the preceding years.

Issue 3: Denial of benefit of netting off interest received against interest paid for calculating disallowance under Section 14A
The assessee raised a Cross Objection regarding the denial of netting off interest received against interest paid for the purpose of calculating disallowance under Section 14A. The ITAT had previously decided this issue in favor of the assessee for the assessment years 2010-11 and 2011-12, allowing netting off interest. The ITAT found merit in the assessee's contention and directed the Assessing Officer to recompute the disallowance after allowing netting of interest, following the latest decision which applied to the current year as well.

Conclusion:
The ITAT dismissed the Revenue's appeal and upheld the CIT (Appeals)'s decisions on all grounds, including the deletion of interest disallowance under Section 36(1)(iii) and the partial relief granted under Section 14A. The ITAT also allowed the assessee's Cross Objection, directing the Assessing Officer to allow netting off interest for the purpose of disallowance under Section 14A.