ITAT rules interest expenditure as allowable business expense under section 36(1)(iii)

The ITAT allowed the appeal, ruling in favor of the assessee, and deemed the interest expenditure allowable under section 36(1)(iii) as business expenses. The ITAT held that disallowance under section 14A was not warranted since no exempt income was earned during the relevant year. The decision was based on precedents from various High Courts, including the Bombay and Delhi High Courts, supporting the allowance of interest expenditure if incurred for business purposes.

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Issues: Disallowance of interest expenditure under section 36(1)(iii) and computation under rule 8D for disallowance under section 14A

Issue 1: Disallowance of interest expenditure under section 36(1)(iii)
The appeal was filed by the assessee against the disallowance of interest expenditure of Rs. 12,24,308 made by the Assessing Officer under section 36(1)(iii) of the Act. The AO disallowed the interest amount as the assessee had taken interest bearing loans used for investment in unquoted equity shares of a subsidiary company. The Ld. CIT(A) directed the AO to compute the disallowance under rule 8D for section 14A instead of section 36(1). The ITAT set aside the issue to the AO, who disallowed the interest expenditure under section 14A, stating that even without exempt income, the provisions applied as the borrowed funds were not used for the business purpose of the assessee. The Ld. CIT(A) upheld the disallowance, considering the expenditure on capital account. However, the ITAT allowed the appeal, citing decisions of the Bombay and Delhi High Courts that such interest expenditure is allowable under section 36(1)(iii) if incurred for business purposes.

Issue 2: Computation under rule 8D for disallowance under section 14A
The AO disallowed the interest payment under section 14A as well, contending that the interest bearing loan was used for non-business purposes. The Ld. CIT(A) upheld this disallowance, but the ITAT overruled it based on decisions by the Delhi High Court and other High Courts that section 14A does not apply if no exempt income is earned during the relevant year. The ITAT concluded that no disallowance was warranted under section 14A, in addition to ruling that the interest disallowance under section 36(1)(iii) was also not justified. The appeal of the assessee was allowed, and the interest expenditure was deemed allowable under section 36(1)(iii) as business expenses.

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