Revenue loses interest disallowance appeal as tribunal follows Bombay HC precedent favoring investment from interest-free funds availability

ITAT Mumbai-AT dismissed revenue's appeal regarding interest disallowance under section 36(1)(iii), following Bombay HC precedent in Reliance Utilities that presumption favors investment from interest-free funds when sufficient funds available. Assessee's appeal on lease rental disallowance was allowed for statistical purposes, with matter restored to AO for fresh examination after cyber attack prevented document submission. Software expenses appeal succeeded, with ITAT directing AO to treat annual license fees and maintenance as revenue expenses following prior tribunal decision. However, assessee's claim for MFN clause benefits for dividend distribution tax to Dutch shareholders was rejected, as Supreme Court in Nestle case mandated specific notification under section 90/1 for MFN clause application.

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Issues Involved:
1. Disallowance of interest claim under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of lease rental expenditure for the unexpired period of lease.
3. Disallowance of expenditure under Section 40(a)(ia) for non-deduction of TDS.
4. Disallowance of software expenses as capital expenditure.
5. Additional grounds related to Dividend Distribution Tax (DDT) and education cess.

Summary:

Issue 1: Disallowance of Interest Claim under Section 36(1)(iii)
The Revenue challenged the deletion of disallowance of interest claim of Rs. 4,95,57,893 by the CIT(A). The AO had charged notional interest on interest-free loans/advances given by the assessee, which was disallowed as expenditure not incurred for business purposes. The CIT(A) allowed the appeal, noting that the assessee had sufficient interest-free funds. The Tribunal upheld CIT(A)'s decision, citing the Bombay High Court's ruling in Reliance Utilities and Power Ltd., and dismissed the Revenue's appeal.

Issue 2: Disallowance of Lease Rental Expenditure
The AO disallowed lease rental expenditure of Rs. 42,70,000 for the unexpired lease period, as the assessee could not furnish supporting documents. The CIT(A) upheld this disallowance. The Tribunal admitted additional evidence submitted by the assessee, citing a cyber attack that affected record maintenance. The Tribunal restored the issue to the AO for fresh examination and verification of the additional evidence, allowing the assessee's grounds for statistical purposes.

Issue 3: Disallowance of Expenditure under Section 40(a)(ia)
The AO disallowed lease rental expenditure for non-deduction of TDS under Section 194I. The CIT(A) upheld this disallowance. The Tribunal restored the issue to the AO for fresh examination and verification of additional evidence, as the assessee claimed the amount was paid for early vacation of lease premises, not for using land or building.

Issue 4: Disallowance of Software Expenses
The AO treated software expenses of Rs. 17,58,125 as capital expenditure. The CIT(A) upheld this decision. The Tribunal, following its own decision for AY 2014-15, directed the AO to treat software expenses as revenue expenses, allowing the assessee's appeal on this ground.

Additional Grounds: Dividend Distribution Tax (DDT) and Education Cess
The assessee raised additional grounds regarding the application of MFN clause in the India-Netherlands tax treaty for a beneficial DDT rate. The Tribunal, following the Supreme Court's decision in M/s Nestle SA, held that a specific notification under Section 90(1) is necessary for effecting benefit under the MFN clause. Consequently, this additional ground was dismissed. The additional grounds related to education cess were not pressed by the assessee and were dismissed.

Cross Objection by the Assessee
The cross objection related to the disallowance of notional interest was dismissed as infructuous, following the dismissal of the Revenue's appeal on the same issue.

Conclusion
The appeal filed by the Revenue and the cross objection filed by the assessee were dismissed. The appeal filed by the assessee was partly allowed.

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