2023 (7) TMI 513 - HC - Income Tax

Disallowance u/s 14A r.w.s. Rule 8D - no exempt income earned as per assessee submission - ITAT deleting the disallowance - HELD THAT - We admit the Appeal on the question (a) as under (a)Whether on the facts and circumstances of the case and in law the Hon'ble the ITAT was right, in deleting the disallowance under Section 14A r.w.s. Rule 8D when no exempt income was earned by the Assessee? Addition u/s 36(1)(iii) - assessee was unable to prove the commercial expediency as narrated in the factual legal matrix clearly brought out in assessment order by AO - AO concluded that the difference between income generated and interest paid is not allowable and hence, disallowed difference - HELD THAT - CIT (A) as well as ITAT have accepted that entire interest expenses has to be allowed in toto under section 36(1)(iii) as well as under section 37(1) as being for the purpose of business and the same was undoubtedly and undisputedly taken for the purpose of business. Since these are findings on facts, in our view no substantial question of law arises.

Summary

Issues involved:
The judgment involves three substantial questions of law:
1. Disallowance under Section 14A r.w.s. Rule 8D without properly appreciating the factual and legal matrix by ITAT.
2. Deletion of disallowance under Section 14A r.w.s. Rule 8D without considering expenses related to earning exempt income by ITAT.
3. Addition made under section 36(1)(iii) without proving commercial expediency by ITAT.

Disallowed Expenses Issue:
The appellant questioned the deletion of disallowance of Rs. 8,58,32,156 under Section 14A r.w.s. Rule 8D by ITAT when no exempt income was earned. The respondent had engaged Urban Transport Infrastructure Pvt. Ltd. for intermediary services in land negotiations. Despite receiving compensation of Rs. 8,70,00,000, the Assessing Officer disallowed the difference between income generated and interest paid, totaling to Rs. 3,69,80,822. However, both CIT (A) and ITAT allowed the entire interest expenses of Rs. 12,39,80,822 as business expenses under section 36(1)(iii) and section 37(1), as it was taken for the purpose of business.

Conclusion and Directions:
The High Court admitted the appeal on the disallowance issue under Section 14A r.w.s. Rule 8D. However, on the addition made under section 36(1)(iii), the court found no substantial question of law due to factual findings by CIT (A) and ITAT. The Registry was directed to summon the original record for inspection and ensure the preparation of a complete paper book in accordance with the rules. An intimation of admission of the appeal was to be sent to the Tribunal for further action.