Tribunal decision: Revenue appeal dismissed, assessee appeal partly allowed. Interest disallowance remanded for verification.

The Tribunal dismissed the Revenue's appeal on the set-off of losses and partly allowed the assessee's appeal by deleting the disallowance under Section 14A. The Tribunal remanded the issue of interest disallowance under Section 57 for further verification by the AO. The decision was pronounced on 23.6.2015.

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Issues Involved:
1. Sustaining the disallowance under Section 14A of the Income-tax Act, 1961.
2. Disallowance of interest claimed under Section 57 of the Income-tax Act, 1961.
3. Set off of losses suffered in the eligible 80IB unit against the income from non-eligible units.

Detailed Analysis:

1. Sustaining the Disallowance under Section 14A:

The assessee contested the disallowance of Rs. 3,81,18,472 out of the total disallowance of Rs. 5,20,69,680 under Section 14A of the Income-tax Act, 1961. The AO had noted that the assessee had significant investments yielding exempt income and applied Rule 8D of the IT Rules to disallow part of the interest expenditure. The CIT (A) partly agreed with the assessee, reducing the disallowance to Rs. 3,81,18,472. However, the Tribunal held that no disallowance could be made under Section 14A when there was no claim of exempt income during the relevant previous year, referencing the decision in M/s. ASK Brothers Ltd v. DCIT. The Tribunal found that the assessee did not earn any exempt income and thus deleted the disallowance.

2. Disallowance of Interest Claimed under Section 57:

The assessee claimed a deduction of Rs. 1,64,97,300 under Section 57 for interest paid on borrowed funds used to invest in debentures. The AO disallowed this claim, arguing that the interest expenditure could not be allowed under Section 57 if it was not allowable under Section 37. The CIT (A) upheld this disallowance, considering the reduction of interest rate on debentures from 10% to 1% by SUDPL as a colorable device. However, the Tribunal found that the debentures were a legitimate investment and the interest paid on borrowed funds used for such investment should be allowed under Section 57(iii). The Tribunal remanded the issue to the AO to verify the purpose of the loan from HDFC and determine if it was for working investments, in which case the deduction under Section 57(iii) should be allowed.

3. Set off of Losses Suffered in the Eligible 80IB Unit Against Income from Non-Eligible Units:

The Revenue challenged the CIT (A)'s direction to allow the set-off of losses from the 80IB unit against income from non-80IB units. The Tribunal noted that this issue had already been decided in favor of the assessee in the previous assessment year 2008-09, referencing the decision in ITA.487/Bang/2012. The Tribunal reiterated that the provisions of Section 80IA(5) did not restrict the set-off of losses under Section 70(1) of the Act. The Tribunal held that the CIT (A) rightly applied the decision of the Hon'ble Apex Court in Synco Industries Ltd v. AO, allowing the set-off of losses from the 80IB unit against profits from non-80IB units.

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding the set-off of losses and partly allowed the assessee's appeal by deleting the disallowance under Section 14A and remanding the issue of interest disallowance under Section 57 for further verification by the AO. The Tribunal's decision was pronounced in the open court on 23.6.2015.

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