ITAT Chennai: Appeal Allowed, Disallowances Calculated on Exempt Income Only

The ITAT Chennai allowed the appeal of the assessee, directing the AO to calculate disallowances under Section 14A r.w.r. 8D only on investments yielding exempt income and to delete the disallowance of interest expenditure under Section 36(1)(iii) as the loan was presumed to be extended from non-interest bearing funds.

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Issues:
1. Disallowance under Section 14A r.w.r. 8D of the Rules
2. Disallowance of interest expenditure under Section 36(1)(iii) of the Act

Issue 1: Disallowance under Section 14A r.w.r. 8D of the Rules:

The appellant contested the disallowance of Rs. 9,42,885 under Section 14A r.w.r. 8D of the Rules, arguing that only investment yielding exempt income should be considered for calculating disallowance. The Ld.CIT(A) had confirmed the disallowance, but the ITAT Chennai held that Section 14A of the Act does not apply to investments yielding taxable income. Citing the decision in ACIT & ANR v/s. Vireet Investment PVT.LTD. & ANR, the ITAT directed the AO to compute the disallowance only on investments yielding exempt income.

Issue 2: Disallowance of interest expenditure under Section 36(1)(iii) of the Act:

The AO disallowed interest expenditure of Rs. 13,92,463 under Section 36(1)(iii) of the Act, attributing it to interest-free advances extended by the assessee. The Ld.CIT(A) upheld the disallowance, citing various court decisions. The appellant argued that with substantial interest-free funds, the disallowance was unwarranted. The ITAT agreed, referencing the decision in CIT vs. Hotel Savera and CIT vs. Reliance Utilities & Power Ltd. The ITAT directed the AO to delete the addition, as the interest-free loan was presumed to be extended from non-interest bearing funds.

In conclusion, the ITAT Chennai allowed the appeal of the assessee, directing the AO to calculate disallowances under Section 14A r.w.r. 8D only on investments yielding exempt income and to delete the disallowance of interest expenditure under Section 36(1)(iii) as the loan was presumed to be extended from non-interest bearing funds.

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