2025 (3) TMI 618 - AT - Income Tax

Revenue's appeal dismissed on interest deduction, exempt income disallowance, and capitalization under sections 36 and 14A

Asstt. CIT, Panchkula Circle, Panchkula Versus M/s Haryana Vidyut Prasaran Nigam Ltd.

ITAT Chandigarh dismissed revenue's appeal on three grounds. Regarding interest disallowance u/s 36, tribunal upheld CIT(A)'s finding that interest on ... Disallowance of interest u/s 36 - interest payment to NCR Planning Board - HELD THAT:- CIT(A) considering the submission and documentation filed by the assessee recorded her finding wherein she has stated that it is an undisputed fact that the appellant has been following mercantile system of accounting and from the submission alongwith the basis of calculation filed by the appellant, it is observed that the interest amount under consideration represents the interest on installment which accrues till the last date of the F.Y. However the due date of which falls in the subsequent year therefore the interest expenses booked by the assessee is an actual and ascertained liability of the assessee corporation. We find that the findings of the Ld. CIT(A) wherein she has stated that the amount represents the actual and ascertained liability and not the provision remains unrebutted before us. Therefore in light of the same we do not see any infirmity in the findings of the CIT(A) wherein she has allowed the necessary deduction towards the liability in respect of the interest which has accrued during the financial year relevant to the impugned assessment year. In the result ground of appeal so taken by the Revenue is dismissed. Disallowance made u/s 14A - HELD THAT:- Admittedly, the assessee has not earned any exempt income during the financial year relevant to impugned assessment year 2017-18, in such a situation, the question of disallowance of any expenditure under section 14A r.w. Rule 8D does not arise for consideration - the addition so made and upheld by the Ld. CIT(A) is hereby directed to be deleted. Disallowance u/s 36(i)(iii) - amount of interest so capitalized has been done after carrying out the calculation on scientific basis following the well accepted accounting policy which is in consonance with the provision of Section 36(1)(iii) - HELD THAT:- Nothing has been brought on record to rebut the findings of the CIT(A) who has rightly taken into consideration the accounting policy so adopted by the assessee in terms of allocation of interest expenditure, the actual expenditure so allocated by the assessee and further, there is nothing on record to demonstrate the basis of allocation as so determined by the AO which is clearly arbitrary and without any sound basis. In the result, we upheld the findings of the CIT(A) and the ground of appeal so taken by the Revenue is dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the judgment are as follows:i) Whether the Ld. CIT(A) was correct in law in holding that there was no reason for the Assessing Officer to assume jurisdiction in the absence of any fresh tangible material indicating that income chargeable to tax had escaped assessment.ii) Whether re-evaluation of existing material constitutes full disclosure under Section 147 of the Income Tax Act, 1961, despite the explanation to Section 147.iii) Whether the Ld. CIT(A) erred in deleting the addition of Rs. 2,52,48,177/- on account of disallowance of interest payments under Section 36 of the Income Tax Act, 1961.iv) Whether disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962, was appropriate despite the assessee not earning any exempt income.v) Whether the Ld. CIT(A) erred in deleting the addition of Rs. 17,73,52,597/- on account of disallowance under Section 36(i)(iii) of the Act.ISSUE-WISE DETAILED ANALYSISIssue iii: Disallowance of Interest PaymentsThe relevant legal framework involves Section 36 of the Income Tax Act, which pertains to the conditions under which interest payments are deductible. The Assessing Officer (AO) disallowed the interest payment to NCRPB, arguing it was a provision rather than an actual liability. However, the Ld. CIT(A) found that the assessee followed a mercantile system of accounting, making the interest payment an actual liability. The Tribunal upheld this view, noting that the interest was an ascertained liability and not merely a provision, thereby allowing the deduction.Issue iv: Disallowance under Section 14AThe legal framework includes Section 14A, which disallows expenditure incurred in relation to income not includable in total income. The AO applied Section 14A despite the assessee not earning exempt income, citing Circular No. 5/2014. However, the Ld. CIT(A) and the Tribunal referenced precedents from the Punjab and Haryana High Court, which ruled that if no exempt income is earned, Section 14A is not applicable. The Tribunal found no exempt income was earned, thus disallowance under Section 14A was not warranted.Issue v: Disallowance under Section 36(i)(iii)Section 36(i)(iii) allows interest on borrowed capital for business purposes. The AO disallowed a portion of interest, arguing it should be capitalized as the capital was not put to use. The Ld. CIT(A) found that the assessee's accounting policy was consistent with Section 36(i)(iii), and the interest was appropriately capitalized. The Tribunal upheld this finding, noting the AO's determination was arbitrary and unsupported by evidence.SIGNIFICANT HOLDINGSi) The Tribunal upheld the Ld. CIT(A)'s finding that the interest payment was an actual liability, not a provision, allowing the deduction under Section 36.ii) The Tribunal determined that Section 14A disallowance was not applicable as no exempt income was earned, consistent with jurisdictional High Court rulings.iii) The Tribunal concluded that the Ld. CIT(A) correctly deleted the disallowance under Section 36(i)(iii), as the AO's allocation of interest was arbitrary.iv) The Tribunal did not address the issues related to the reopening of the assessment under Section 147, as they became academic after upholding the Ld. CIT(A)'s findings on the merits.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the Ld. CIT(A)'s order on all contested grounds.