2017 (6) TMI 228 - AT - Income Tax

Disallowance of expenditure u/s 14A read with Rule 8D - Held that - No disallowance can be made u/s.14A in case there is no exempt income. As in the present case it is not in dispute that assessee was not in receipt of any exempt income during the year under consideration, accordingly on this proposition also, no disallowance is warranted u/s.14A r.w.r. 8D - Decided in favour of assessee Disallowance made u/s.36(1)(iii) - difference between the interest expenditure and compensation so received from Urban Transport Infrastructure Pvt. Ltd was disallowed - CIT(A) has deleted the disallowance by recording a finding of fact that amount was borrowed for the purpose of business and utilized for the purpose of business only - expression for the purpose of business interpretation - Held that - All the following three conditions for allowing deduction u/s.36 (1)(iii) was satisfied. (i) The money, i.e., capital has been borrowed by the assessee. (ii) It must has been borrowed for the purpose of business. (iii) The assessee has paid interest on the borrowed amount i.e., he has shown the same as an item of expenditure. Further in the case of CIT v, Dalmia Cement (B) Ltd.(2001 (9) TMI 48 - DELHI High Court ) it has been held that, if all the requisite conditions for allowance of interest are fulfilled, it is not possible and open to the Revenue to make a part disallowance, unless there is a positive finding recorded that a part of the amount borrowed was not used for the purposes of the business. No infirmity in the order of CIT(A) for deleting the disallowance of interest in respect of funds borrowed for the purpose of business.- Decided in favour of assessee

Summary

Issues:
- Disallowance under section 14A r.w.s. Rule 8D
- Addition made u/s.36(I)(iii) of the I.T. Act, 1961

Disallowance under section 14A r.w.s. Rule 8D:
The Revenue appealed against the order of CIT(A) deleting the disallowance of &8377; 8,58,32,156 under section 14A r.w.s. Rule 8D. The CIT(A) based the deletion on the argument that no dividend was received on the investments, which were made in a subsidiary company for business purposes. The CIT(A) relied on the decision in the case of Garware Wall Ropes Ltd. where it was held that investments made with a subsidiary company for business purposes do not fall under section 14A. The Revenue contended that the disallowance should stand, but the ITAT upheld the CIT(A)'s decision, citing that no exempt income was earned, aligning with judicial pronouncements supporting such decisions.

Addition made u/s.36(I)(iii) of the I.T. Act, 1961:
The AO disallowed &8377; 3,69,80,822 under section 36(1)(iii) of the Act as expenditure in respect of investments. The CIT(A) deleted this disallowance after considering that the borrowed funds were used for setting up a Special Economic Zone (SEZ) and intermediary services were engaged for business purposes. The AO disallowed part of the interest expenditure based on compensation received, but the CIT(A) found that the interest was wholly and exclusively for business purposes. The ITAT upheld the CIT(A)'s decision, emphasizing that the expenditure was for the purpose of business and that all conditions for allowing the deduction under section 36(1)(iii) were satisfied, as per legal precedents and judgments.

In conclusion, the ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions to delete the disallowance under section 14A r.w.s. Rule 8D and the addition made u/s.36(I)(iii) of the I.T. Act, 1961. The judgments and legal principles applied in each issue were thoroughly analyzed and supported the final decision pronounced on March 31, 2017.