Section 14A disallowance cannot be invoked in the absence of exempt income. For disallowances under Section 36(1)(iii) regarding interest on borrowed funds, authorities must verify the existence of commercial expediency through detailed factual examination of the business nexus.

आदेश/ORDER

Per Madhusudan Sawdia, A.M.:

This appeal is filed by the Revenue feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-12, Hyderabad (“Ld. CIT(A)”) dated 01.07.2025 for the A.Y.2017-18.

2. The present appeal filed by the Revenue was fixed for hearing on various occasions, i.e., on 26.11.2025, 06.01.2026, 16.02.2026 and finally on 02.04.2026. On all the aforesaid dates, there was no appearance on behalf of the assessee, nor was any adjournment petition filed. Accordingly, we proceed to dispose of the appeal ex parte qua the assessee, after hearing the Learned Departmental Representative (“Ld. DR”) and on the basis of material available on record.

3. The brief facts of the case are that the assessee is a company engaged in the business of development of power projects. The assessee filed its return of income for the Assessment Year 2017–18 on 31.10.2017, declaring loss of Rs.74,58,55,204/-. Subsequently, the assessee filed a revised return of income on 21.08.2018, declaring revised loss of Rs.83,73,51,015/-. The case of the assessee was selected for scrutiny under CASS and accordingly notice under section 143(2) of the Income Tax Act, 1961 (“the Act”) was issued by the Learned Assessing Officer (“Ld. AO”) on 17.08.2018. After considering the submissions of the assessee, the Ld. AO completed the assessment under section 143(3) of the Act on 30.12.2019, making the following additions/disallowances:

(a) Disallowance of Rs.109,27,81,340/- under section 14A of the Act r.w. Rule 8D(2)(i) of the Income Tax Rules, 1962 (“the Rules”) and alternatively under section 36(1)(iii) of the Act.

(b) Disallowance of Rs.7,34,34,710/- under section 14A of the Act r.w. Rule 8D(2)(ii) of the Rules.

(c) Addition of Rs.19,61,010/- on account of interest on income tax refund.

4. Aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) deleted the disallowances of Rs.109,27,81,340/- and Rs.7,34,34,710/- made under section 14A of the Act, but confirmed the addition of Rs.19,61,010/-.

5. Aggrieved by the relief granted by the Ld. CIT(A), the Revenue is in appeal before us raising the following grounds of appeal:

1. Whether on the facts and circumstances of the case the Ld. CIT(A) erred in giving relief u/s.14A r.w. Rule 8D(2)(i) and 36(1)(ii) of the IT Act?

2. Whether on the facts and circumstances of the case the Ld. CIT(A) erred in giving relief u/s. 14A r.w. Rule 8D(2)(ii) of the IT Act?

3. The appellant craves leave to amend, modify, or alter any of the grounds of appeal wherever necessary.”

6. At the outset, the Ld. DR submitted that Ground No. 1 of the Revenue relates to deletion of disallowance of Rs.109,27,81,340/- made by the Ld. AO under section 14A of the Act r.w. Rule 8D(2)(i) of the Rules, which was also alternatively made under section 36(1)(iii) of the Act. Ground No. 2 relates to deletion of disallowance of Rs.7,34,34,710/- under section 14A of the Act r.w. Rule 8D(2)(ii) of the Rules. She further submitted that only two issues are involved out of grounds of appeal of the Revenue i.e. (a) the deletion by the Ld. CIT (A) of the disallowances of Rs.109,27,81,340/- and Rs.7,34,34,710/- made by the Ld. AO under section 14A of the Act and (b) the deletion by the Ld. CIT(A) of the alternate disallowance of Rs.109,27,81,340/- made by the Ld. AO under section 36(1)(iii) of the Act.

7. With regards to the first issue, the Ld. DR fairly submitted that the assessee has not earned any exempt income during the year under consideration. However, she contended that in