2019 (11) TMI 640 - AT - Income Tax

Tribunal upholds CIT(A) decision on interest expenditure disallowance, citing direct business connection.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance of interest expenditure totaling Rs. 25,30,80,822. ... Addition u/s 14A - interest expenditure disallowable u/s.36(1)(iii) or u/s.57(iii) - CIT(A) deleted the addition - whether the funds borrowed by the assessee were utilized for the purpose of investment and as such the disallowance of interest on funds used for investments was merited as per the provision of section 14A? - HELD THAT:- Assessing Officer has finally made the addition u/s.14A read with Rule 8D. It is an admitted fact that no dividend income has been earned by the assessee neither in this year nor in the subsequent years. Thus, in view of the judgment of Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. vs. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] no disallowance u/s.14A can be made. Moreover, the Tribunal in assessee’s own case has held that the ‘interest income’ and ‘interest expenditure’ were directly linked to the business of the assessee Thus, when there is a direct nexus between the direct earning and direct investment, no disallowance u/s.36(1)(iii) can be made. In so far as Section 57(iii) is concerned, admittedly it is not in dispute that the ‘interest expenditure’ has been assessed as ‘business income’, therefore, no disallowance u/s.57(iii) can be made. Issues Involved:1. Disallowance of interest expenditure under Section 14A of the Income Tax Act.2. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.3. Disallowance of interest expenditure under Section 57(iii) of the Income Tax Act.Issue-Wise Detailed Analysis:1. Disallowance of Interest Expenditure under Section 14A:The Revenue appealed against the deletion of an addition of Rs. 25,30,80,822 by the CIT(A), arguing that the funds borrowed by the assessee were used for investments, meriting disallowance of interest as per Section 14A, irrespective of dividend declaration. The Assessing Officer (AO) noted that the assessee's investments were funded by short-term interest-bearing borrowings, establishing a direct nexus between borrowed funds and investments. The AO disallowed the interest expense, citing that the investment would result in capital gains or exempt income. The AO referenced the Delhi Special Bench of ITAT's decision in Cheminvest Ltd. v ITO, which held that disallowance under Section 14A applies irrespective of earning exempt income.The CIT(A) reversed this disallowance, noting that the assessee did not earn any exempt income during the year, referencing the Delhi High Court's decision in Cheminvest Ltd. vs. CIT, which held that Section 14A disallowance does not apply in the absence of exempt income. The Tribunal upheld the CIT(A)'s decision, emphasizing the lack of exempt income and referencing the Tribunal's previous ruling in the assessee's favor for the Assessment Year 2011-12.2. Disallowance of Interest Expenditure under Section 36(1)(iii):The AO argued that the interest expense was not related to the assessee's business, as it was not an NBFC and its business activity was consultancy in financial matters. The AO disallowed the interest expense, stating that it was not allowable under Section 36(1)(iii) since the borrowed funds were used for investments.The CIT(A) held that the assessee's funds were used for both forwarding loans and investments, which did not yield dividend income during the year. The CIT(A) noted that the AO did not discuss the treatment of interest income as business income and did not quantify the disallowable interest under Section 36(1)(iii). The Tribunal upheld the CIT(A)'s decision, noting a direct nexus between interest income and business activities, and referencing the Tribunal's previous ruling that the interest income and expenditure were directly linked to the assessee's business.3. Disallowance of Interest Expenditure under Section 57(iii):The AO disallowed the interest expense under Section 57(iii), arguing that the assessee was not entitled to deduction of expenses against income from other sources, as the interest expense was not expended towards earning interest income.The CIT(A) held that Section 57(iii) was not relevant as the assessee had not shown income as 'income from other sources'. The Tribunal upheld this view, emphasizing that the interest expenditure was assessed as business income, making Section 57(iii) inapplicable.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of the disallowance of Rs. 25,30,80,822. The Tribunal found no basis for disallowance under Sections 14A, 36(1)(iii), or 57(iii), given the direct nexus between the interest income and the assessee's business activities, and the absence of exempt income. The Tribunal's decision was consistent with its previous rulings in the assessee's favor for earlier assessment years.