Tribunal rules for assessee on disallowance under Section 40(a)(ia) & Employees Group Gratuity Fund payment.

Narasu's Spinning Mills Versus Assistant Commissioner of Income-tax, Circle-I (2), Chennai

Narasu's Spinning Mills Versus Assistant Commissioner of Income-tax, Circle-I (2), Chennai - TMI Issues:
1. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.
2. Disallowance under Section 36(1)(iii) of the Income-tax Act, 1961.
3. Disallowance of payment towards Employees Group Gratuity Fund.

Issue 1: Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961:
The assessee challenged the disallowance of &8377; 71,016 under Section 40(a)(ia) by the Assessing Officer for not deducting TDS on interest payment. The counsel argued that the recipient informed in advance about submitting Form 15H, hence no TDS was deducted. The Tribunal held that since Form 15H was filed before the due date, no disallowance was warranted under Section 40(a)(ia) as there was no requirement for TDS deduction.

Issue 2: Disallowance under Section 36(1)(iii) of the Income-tax Act, 1961:
The second issue pertained to the disallowance of &8377; 3,70,377 under Section 36(1)(iii) for not capitalizing interest on borrowed funds till machinery was put to use. The counsel argued it was an expansion, not an extension, hence the proviso to Section 36(1)(iii) did not apply. However, the Tribunal held that adding a windmill constituted an extension of the existing business, thus disallowance was upheld under Section 36(1)(iii).

Issue 3: Disallowance of payment towards Employees Group Gratuity Fund:
The third issue involved disallowance of &8377; 46,71,233 for payment towards Employees Group Gratuity Fund. The counsel contended that since the funds were paid out of the assessee's control to LIC, it should be allowed under Section 36(1)(v). The Tribunal agreed, citing a similar Apex Court judgment, and ruled in favor of the assessee, deleting the addition made by the Assessing Officer.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the assessee regarding the disallowance under Section 40(a)(ia) and payment towards Employees Group Gratuity Fund, but upholding the disallowance under Section 36(1)(iii) for not capitalizing interest on borrowed funds.