Tribunal: Disallowed interest, allowed depreciation. Section 14A deletion due to no exempt income.

The Tribunal upheld the disallowance of interest under Section 36(1)(iii) of the Income Tax Act but allowed depreciation on the capitalized interest amount. The disallowance under Section 14A was deleted as there was no exempt income reported, and the recent amendment to Section 14A was found not to be retrospective.

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Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act.

Summary:

Issue 1: Disallowance of Interest under Section 36(1)(iii)

The assessee contested the disallowance of Rs. 3,28,69,300/- as interest on borrowed funds used for bringing into existence a fixed asset, a building. The assessee argued that the let-out part of the building was an existing structure for which interest was already capitalized, and no further interest capitalization was necessary. The assessee also sought depreciation allowance under Section 32 if interest capitalization was upheld.

The Tribunal noted that the Assessing Officer (AO) disallowed the interest paid on loans for constructing the building, as the assets were not put to use per the proviso to Section 36(1)(iii). The AO's calculation of interest to be capitalized was based on the assessee's submission. The Tribunal found that the assessee did not satisfy the conditions laid down in the proviso to Section 36(1)(iii). Thus, the disallowance of interest as revenue expenditure was upheld. However, the Tribunal allowed the assessee's claim for depreciation on the capitalized interest amount of Rs. 3,28,69,300 under Section 32(1) read with Section 43(1).

Issue 2: Disallowance under Section 14A

The assessee challenged the disallowance of Rs. 3,15,06,556 under Section 14A, arguing that no exempt income was earned during the year and that investments were made from surplus funds in prior years. The AO noted significant interest expenditure and additional loans taken during the year, concluding that part of the loan was used for investments to earn exempt income.

The Tribunal observed that the assessee did not report any exempt income in the financial statements. Citing various judicial precedents, including the jurisdictional High Court's ruling in Sterling Developers Pvt. Ltd. v. PCIT, the Tribunal held that no disallowance under Section 14A could be made in the absence of exempt income. The Tribunal also noted that the amendment to Section 14A by the Finance Act, 2022, was not retrospective. Consequently, the disallowance under Section 14A was deleted.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the disallowance of interest under Section 36(1)(iii) but granting depreciation on the capitalized interest amount. The disallowance under Section 14A was deleted due to the absence of exempt income.

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