Tribunal Decisions on Interest Disallowance & Exempt Income Expenditure

The Tribunal partly allowed the assessee's appeal on interest expenditure disallowance under section 36(1)(iii) of the Act, holding that no disallowance should be made due to the business connection of the loan. The Tribunal upheld the Commissioner (Appeals)'s decision to delete the disallowance under section 14A r/w rule 8D, stating that the disallowance of expenditure attributable to earning exempt income cannot exceed the exempt income earned during the year. The appeal was dismissed, affirming the deletion of the disallowance.

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Issues:
1. Disallowance of interest expenditure under section 36(1)(iii) of the Act.
2. Deletion of disallowance made under section 14A r/w rule 8D by the Assessing Officer.

Issue 1: Disallowance of Interest Expenditure
The appeal arose from an order by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15. The Assessing Officer disallowed interest expenditure of Rs. 88.20 lakh under section 36(1)(iii) of the Act due to a difference in interest rates on borrowed funds and loans advanced by the assessee. The assessee firm had borrowed money at 15.25% interest but lent funds to a sister concern at 10.84% interest, later converted to preferential shares. The first appellate authority confirmed the disallowance. The assessee contended that as a promoter of the borrower, the loan was in connection with business, and interest was charged on loans to subsidiaries. The Tribunal noted that the difference in interest rates was 3.25% and allowed the appeal, stating that since the loan was connected to business, no disallowance should be made under section 36(1)(iii).

Issue 2: Deletion of Disallowance under Section 14A r/w Rule 8D
The Revenue's appeal concerned the deletion of a disallowance made under section 14A r/w rule 8D by the Assessing Officer. The assessee had made investments in shares capable of yielding exempt income. The Assessing Officer computed a disallowance of Rs. 1,97,89,061 under rule 8D(2), but the Commissioner (Appeals) restricted it to the exempt income earned during the year, amounting to Rs. 3,663, deleting the balance. The Departmental Representative argued that the disallowance should not be restricted, citing a Supreme Court decision. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the disallowance of expenditure attributable to earning exempt income cannot exceed the exempt income earned during the year, as per legal principles. The appeal was dismissed, affirming the deletion of the disallowance.

In conclusion, the Tribunal partly allowed the assessee's appeal regarding interest expenditure disallowance and dismissed the Revenue's appeal on the disallowance under section 14A r/w rule 8D. The orders were pronounced on 31.05.2019 by the Tribunal.

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