2023 (9) TMI 544 - AT - Income Tax

Disallowance of proportionate interest u/s. 36(1)((iii) - loan taken for construction of building for the year under consideration on which the assets were not put to use in terms of proviso to section 36(1)(iii) as per the calculations submitted by the assessee at the time of assessment - HELD THAT - The calculation of interest to be capitalized - details of lease commencement date as per rental invoice have been given. On examination of the same, the lease commencement dates are different, it clearly shows that different units were put to use on different dates which are less than/more than 180 days in a year. Earlier, the assessee itself capitalized the interest in the previous AY for the units which were not completed and/or not put to use. Assessee has treated it as revenue expenditure in the impugned AY which is not correct as per section 36(1)(iii) the proviso is very clear. On going through the facts of the case, the assessee has not satisfied the conditions laid down in proviso of section 36(1)(iii). Accordingly, we find merit in the submission of the ld. DR regarding disallowance of interest claimed as revenue expenditure should be capitalized. In view of the above, ground Nos.1.1 1.2 are rejected. Assessee has claimed that if interest is capitalized, then the assessee is eligible for depreciation on such capitalized portion of interest - We note that 2,35,579 sq.ft. was leased out on different dates as per column 04 of lease commencement and as per col.no.5 of PB page No. 26 , the assessee has raised invoice for rent on different dates, accordingly the assets were put to use for the business of assessee during the year as the date mentioned therein out of 2,35,579sq. ft. the 15075 sq. ft were leased out on 11.07.2017 as per the letter dated 01.09.2023. Therefore the assessee is eligible for depreciation as per section 32(1) r.w.s. 43(1) of the Act. We direct the AO to grant depreciation on interest capitalized as per law and for subsequent years also.We allow ground No.1.3 in the above terms. Disallowance u/s. 14A even when there is no exempt income received by the assessee - We have gone through the financial statements of the assessee at Note No.21, the assessee has not shown any exempt income in the form of dividend or any other exempt income. It is not in dispute that the assessee has paid interest during the year. AR also relied on the various judgments including the judgment of Hon ble jurisdictional High Court in the case of Sterling Developers Pvt. Ltd. 2021 (3) TMI 1422 - KARNATAKA HIGH COURT where it is held that when there is no exempt income, no disallowance can be made. During the year the assessee has not reported any exempt income from the investments made. There is also amendment made by the Finance Act, 2022 w.e.f. 1.4.2022 is not from retrospective effect as decided by the Hon ble Delhi High Court in the case of Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act.

Summary:

Issue 1: Disallowance of Interest under Section 36(1)(iii)

The assessee contested the disallowance of Rs. 3,28,69,300/- as interest on borrowed funds used for bringing into existence a fixed asset, a building. The assessee argued that the let-out part of the building was an existing structure for which interest was already capitalized, and no further interest capitalization was necessary. The assessee also sought depreciation allowance under Section 32 if interest capitalization was upheld.

The Tribunal noted that the Assessing Officer (AO) disallowed the interest paid on loans for constructing the building, as the assets were not put to use per the proviso to Section 36(1)(iii). The AO's calculation of interest to be capitalized was based on the assessee's submission. The Tribunal found that the assessee did not satisfy the conditions laid down in the proviso to Section 36(1)(iii). Thus, the disallowance of interest as revenue expenditure was upheld. However, the Tribunal allowed the assessee's claim for depreciation on the capitalized interest amount of Rs. 3,28,69,300 under Section 32(1) read with Section 43(1).

Issue 2: Disallowance under Section 14A

The assessee challenged the disallowance of Rs. 3,15,06,556 under Section 14A, arguing that no exempt income was earned during the year and that investments were made from surplus funds in prior years. The AO noted significant interest expenditure and additional loans taken during the year, concluding that part of the loan was used for investments to earn exempt income.

The Tribunal observed that the assessee did not report any exempt income in the financial statements. Citing various judicial precedents, including the jurisdictional High Court's ruling in Sterling Developers Pvt. Ltd. v. PCIT, the Tribunal held that no disallowance under Section 14A could be made in the absence of exempt income. The Tribunal also noted that the amendment to Section 14A by the Finance Act, 2022, was not retrospective. Consequently, the disallowance under Section 14A was deleted.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the disallowance of interest under Section 36(1)(iii) but granting depreciation on the capitalized interest amount. The disallowance under Section 14A was deleted due to the absence of exempt income.