2022 (1) TMI 881 - AT - Income Tax

Addition u/s 14A - Assessee's former substantive ground that it has not derived any exempt income in the impugned assessment year so as to set section 14A r.w. Rule 8D in motion - HELD THAT - Case Law Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT , CIT Vs. Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT and CIT Vs. CIT Vs. Chettinad Logistics Pvt. Limited. 2017 (4) TMI 298 - MADRAS HIGH COURT holds that the impugned disallowance is attracted only in case an assessee derives exempt income and not otherwise. We thus accept the assessee's instant former substantive grounds for this precise reason alone and make it clear that it shall be very much open for the Assessing Officer to examine the issue afresh in the year of the assessee's deriving actual exempt income in light of all the corresponding financial as per law. This first and foremost substantive ground is accepted in foregoing terms. Interest disallowance u/s36(1)(iii) - HELD THAT - CIT(A) has rightly invoked the impugned disallowance as the assessee could not prove the impugned expenditure to have been incurred wholly and exclusively for the purpose of its own business. The assessee's case on the other hand, quoted hon'ble apex court's landmark decisions in SA Builders 2006 (12) TMI 82 - SUPREME COURT and Hero Cycles Pvt. Ltd. 2015 (11) TMI 1314 - SUPREME COURT that commercial expediency is not merely restricted to assessee's own business but also includes its subsidiaries' business activities as well. Be that as it may, we note that CIT(A)'s order has simply brushed aside the assessee's contentions without examining the clinching commercial expediency in the impugned interest expenditure. We therefore deem it appropriate to restore the instant latter issue back to the Assessing Officer for his afresh factual adjudication of assessee's business expediency element in the impugned advances to its sister concerns to be decided within three effective opportunities of hearing.

Summary

Issues:
1. Disallowance of expenses under section 14A r.w. Rule 8D.
2. Disallowance of interest expenses under section 36(1)(iii).

Analysis:

Issue 1: Disallowance of expenses under section 14A r.w. Rule 8D:
The appellant contested the disallowance of ?137,73,184 under section 14A r.w. Rule 8D by the Assessing Officer, arguing that the expenses were incurred for business purposes and no exempt income was earned. The Tribunal referred to case law to establish that disallowance under section 14A is applicable only when an assessee earns exempt income. Consequently, the Tribunal accepted the appellant's grounds, emphasizing that the Assessing Officer can re-examine the issue in the year when exempt income is earned. The Tribunal allowed the appellant's appeal on this ground.

Issue 2: Disallowance of interest expenses under section 36(1)(iii):
The appellant challenged the disallowance of ?5,88,09,983 under section 36(1)(iii) for interest expenses related to investments in subsidiaries. The CIT(A) upheld the disallowance, stating that the investments were not made for the appellant's business purpose. The Tribunal noted the CIT(A) did not adequately consider the commercial expediency aspect raised by the appellant, citing relevant case law. Consequently, the Tribunal decided to remand this issue back to the Assessing Officer for a fresh examination of the business expediency element in the advances to subsidiaries within three hearings.

In conclusion, the Tribunal partially allowed the appellant's appeal, accepting the grounds related to disallowance under section 14A and remanding the issue of interest expenses disallowance under section 36(1)(iii) for further assessment.