Tribunal permits interest deduction for associate company investments, justifies COVID-19 delay.

The Tribunal allowed the assessee's appeal, permitting the interest expenditure under Section 36(1)(iii) for investments in associate companies, deeming them commercially expedient. The revenue's appeal was dismissed due to the low tax effect, falling below the prescribed limit. The delay in pronouncing the order beyond 90 days due to the COVID-19 lockdown was considered justified, aligning with guidelines. The assessee's appeal succeeded while the revenue's appeal and cross-objection were rejected.

---

---

Issues Involved:

1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.
2. Commercial expediency and business rationale of investments in associate companies.
3. Tax effect and maintainability of the revenue's appeal.
4. Procedural compliance regarding the pronouncement of the order beyond 90 days due to COVID-19 lockdown.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 36(1)(iii):

The assessee filed its original and revised returns for AY 2013-14, declaring substantial losses. The case was selected for scrutiny, and the Assessing Officer (AO) disallowed interest expenditure on the grounds that the assessee received exempt income. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition but issued an enhancement notice, observing that the assessee's investments in shares exceeded its interest-free funds. The CIT(A) held that the funds invested in associate companies were not used for business purposes but for making investments in other concerns or mutual funds, thus disallowing the interest expenditure under Section 36(1)(iii).

2. Commercial Expediency and Business Rationale of Investments:

The assessee argued that the investments in Chennai Network Infrastructure Ltd (CNIL) and GTL Infrastructure Ltd (GIL) were made for business purposes, citing commercial expediency. The assessee relied on the Supreme Court's decision in S. A. Builders vs. CIT, which allows interest expenditure if the borrowing satisfies the test of commercial expediency. The assessee demonstrated that the investments were made to boost its own revenues through operational business from these associate companies. The CIT(A) rejected this contention, stating that the funds were used for investments in other concerns and mutual funds, not for business purposes.

3. Tax Effect and Maintainability of Revenue's Appeal:

The revenue's appeal was dismissed as the tax effect of the relief granted by the CIT(A) was below Rs. 50 lakhs, making it non-maintainable as per CBDT Circular No. 17 of 2019. The Departmental Representative (DR) conceded that the appeal fell under the monetary limit prescribed by the CBDT.

4. Procedural Compliance Regarding Pronouncement of Order Beyond 90 Days:

The order was pronounced beyond 90 days from the date of hearing due to the COVID-19 lockdown. The Tribunal relied on the decision in JSW Ltd and the exceptional circumstances caused by the pandemic, which justified the delay. The Tribunal noted that the lockdown period should be excluded when computing the 90-day period for pronouncement of orders, aligning with the guidelines issued by the Hon'ble Supreme Court and Bombay High Court.

Conclusion:

The Tribunal concluded that the investments made by the assessee in its associate companies were for commercial expediency, allowing the interest expenditure under Section 36(1)(iii). The revenue's appeal was dismissed due to the low tax effect, and the procedural compliance regarding the delayed pronouncement was justified given the COVID-19 lockdown. The appeal filed by the assessee was allowed, and the revenue's appeal and cross-objection were dismissed.

---