Assessee wins on interest losses, DG set write-off, and Section 36(1)(iii) disallowances using mixed funds doctrine

ITAT Chennai allowed assessee's appeal on multiple grounds. Interest and exchange fluctuation losses on abandoned projects were held allowable as revenue expenditure following abandonment for commercial expediency, citing Madras HC precedents. DG set write-off was partly allowed as depreciation on block of assets under Sec. 32(1)(iii). Interest disallowances under Sec. 36(1)(iii) on sister concern advances and inter-corporate deposits were deleted, applying mixed funds doctrine where own funds sufficed for investments. Net interest computation was upheld over gross interest following SC precedent in ACG Associated Capsules. Interest relief verification was remanded to AO for proper documentation.

---

---

Issues Involved:
1. Disallowance of interest and foreign exchange fluctuation loss on project being capital losses.
2. Disallowance of Diesel Generator (DG) set written-off.
3. Disallowance of proportionate interest expenditure.
4. Addition of interest waiver on Corporate Debt Restructuring (CDR) package.

Summary:

1. Disallowance of Interest and Foreign Exchange Fluctuation Loss:
The assessee contended that the interest and foreign exchange fluctuations were either capitalized or charged off as revenue expenditure in the respective years. The CIT(A) noted that the forex fluctuation loss should be added to the cost of acquisition of the capital asset in the year of repayment. Since the projects were abandoned, the loss was considered capital loss and not allowable as revenue expenditure. However, the Tribunal found that the provisions of Sec.43A were inapplicable as no capital asset was imported. The loss was deemed a business loss and allowable as per commercial expediency. The Tribunal directed the AO to delete the disallowance.

2. Disallowance of DG Set Written-Off:
The assessee claimed the loss of Rs. 202.42 Lacs as revenue expenditure under Sec. 32(1)(iii). The CIT(A) held that since the asset was not demolished, destroyed, sold, or discarded, the provisions of Sec. 32(1)(iii) were not applicable. The Tribunal agreed with the CIT(A) but allowed the depreciation claim on the block of assets.

3. Disallowance of Proportionate Interest Expenditure:
The CIT(A) upheld the disallowance of Rs. 129.94 Lacs for interest-free advances to sister concerns due to insufficient non-interest-bearing funds during the relevant years. The Tribunal found that the advances were made from mixed funds, and the presumption was that interest-free funds were used unless the AO established a nexus with borrowed funds. The Tribunal deleted the disallowance following the decision in Reliance Industries Ltd. Regarding the additional disallowance of Rs. 24.80 Lacs, the Tribunal held that only net interest expenditure should be considered, thus deleting the disallowance.

4. Addition of Interest Waiver on CDR Package:
The CIT(A) directed the AO to verify if the interest was accounted at reduced rates as per the CDR package. The Tribunal upheld this direction, noting that the assessee failed to provide requisite documents. No further directions were deemed necessary.

Conclusion:
The appeal was partly allowed, with directions to delete certain disallowances and uphold others based on the provided evidence and legal precedents.

---