Ruling upholds deduction of ancillary borrowing costs and interest on inventory under section 36(1)(iii); section 14A not applicable

ITAT upheld the CIT(A)'s allowance of interest expenditure, holding ancillary borrowing costs (brokerage, processing, registration, stamp duty) as revenue expenses deductible, and treating interest on borrowings for inventory as allowable under section 36(1)(iii). The tribunal found no contrary HC/SC precedent and declined to disturb CIT(A)'s fresh plea consideration. Regarding section 14A, ITAT agreed there was no exempt income in the relevant years, so s.14A did not apply. Revenue's appeal was dismissed.

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Issues Involved:
1. Allowance of interest expenditure despite no income from the project.
2. Violation of Rule 46A by allowing a fresh plea not raised before the AO.
3. Deletion of disallowance under section 14A.

Issue-Wise Detailed Analysis:

1. Allowance of Interest Expenditure Despite No Income from the Project:
The primary issue was whether the CIT(A) was justified in allowing interest expenditure even though the assessee had not offered any income from the project. The revenue argued that the CIT(A) erred in applying judgments from higher courts, which they claimed were not applicable to the facts of this case. The assessee countered by stating that all relevant details and evidence were submitted to the AO, and the interest expenditure was directly attributable to the purchase of lands, which were held as inventory. The tribunal found that the borrowed funds were indeed used for acquiring land, which is considered inventory. They referenced the tribunal order in the case of DLF Limited vs. Addl. CIT, which allowed similar interest expenditure. The tribunal concluded that the interest expenditure was allowable under section 36(1)(iii) of the Act, as it was for the purpose of business and not for acquiring a capital asset. Therefore, the CIT(A)'s decision to allow the interest expenditure was upheld.

2. Violation of Rule 46A by Allowing a Fresh Plea Not Raised Before AO:
The second issue was whether the CIT(A) violated Rule 46A by allowing a fresh plea not raised before the AO. The revenue claimed that the CIT(A) had allowed a fresh plea, thereby violating Rule 46A. The assessee argued that all details and evidence were submitted to the AO, and nothing new was presented before the CIT(A). The tribunal found that there was no violation of Rule 46A since all relevant details were indeed submitted to the AO. The tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had followed applicable judgments and tribunal orders, which were relevant to the facts of the case.

3. Deletion of Disallowance under Section 14A:
The third issue was whether the CIT(A) was right in deleting the disallowance under section 14A. The revenue supported the AO's disallowance, while the assessee argued that there was no exempt income in the relevant years, and therefore, section 14A should not be triggered. The tribunal noted that the assessee's P&L account showed no exempt income and referenced the judgment of the Hon'ble Delhi High Court in the case of Chemiinvest Limited, which held that section 14A cannot be invoked in the absence of exempt income. Consequently, the tribunal upheld the CIT(A)'s decision to delete the disallowance under section 14A.

Conclusion:
The tribunal dismissed both appeals filed by the revenue, upholding the CIT(A)'s decisions on all issues. The tribunal confirmed that the interest expenditure was allowable, there was no violation of Rule 46A, and the disallowance under section 14A was correctly deleted in the absence of exempt income.

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