Assessee's Appeals Partially Allowed: Disallowance under Sections 14A & 36(1)(iii) Remitted for Fresh Consideration .

The Tribunal partly allowed the assessee's appeals, remitting the disallowance under Section 14A back to the AO for fresh consideration, upholding the disallowance under Section 36(1)(iii) for funds diverted for non-business purposes, and allowing the treatment of interest income from bank deposits as business income in favor of the assessee.

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Issues Involved:
1. Disallowance under Section 14A read with Rule 8D for expenditure incurred to earn exempted income.
2. Disallowance under Section 36(1)(iii) for funds diverted for non-business purposes.
3. Treatment of interest income earned from bank deposits as income from other sources instead of business income.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of Rs. 18,36,878/- under Section 14A read with Rule 8D, arguing that no expenditure was incurred to earn the exempt dividend income of Rs. 40,51,846.68/-. The Assessing Officer (AO) noted that the assessee did not segregate the expenditure related to dividend income and relied on a jurisdictional High Court judgment, applying Rule 8D to compute the disallowance. The CIT(A) upheld the AO's decision, stating that some active and passive expenditure is involved in earning income from investments, even if no specific expenditure was identifiable. The CIT(A) also referenced a CBDT Circular clarifying that disallowance under Section 14A is applicable even when no exempt income was earned. The Tribunal remitted the issue back to the AO for fresh consideration, directing the assessee to furnish a cash flow statement to prove that interest-free funds were used for investments yielding exempt income.

2. Disallowance under Section 36(1)(iii) for Funds Diverted for Non-Business Purposes:
The AO disallowed Rs. 11,27,947/- under Section 36(1)(iii) for interest on funds diverted for non-business purposes. The AO observed that the assessee had taken secured loans and paid interest, but a partner had withdrawn funds for personal use. The CIT(A) upheld the disallowance, stating that interest paid on borrowed capital used for non-business purposes is not deductible. The assessee argued that it followed a cash system of accounting, and notional income could not be assessed. However, the Tribunal found no infirmity in the CIT(A)'s order, noting that the AO disallowed interest paid on borrowings diverted for non-business use, not the notional interest receivable from partners. The Tribunal dismissed the assessee's appeal on this issue.

3. Treatment of Interest Income Earned from Bank Deposits:
The AO treated the interest income from bank deposits as income from other sources, relying on the Supreme Court judgment in Bokaro Steel Ltd. The CIT(A) confirmed this treatment, referencing the Supreme Court judgment in Pandian Chemicals Ltd., which held that interest income from bank deposits is not derived from the business of the assessee. The assessee argued that the deposits were part of its business of money lending and investments, and the interest should be considered business income. The Tribunal agreed with the assessee, stating that money is the stock in trade of the assessee, and any income earned by rotating that money is business income. The Tribunal allowed the assessee's appeal on this issue.

Conclusion:
In conclusion, the Tribunal partly allowed the assessee's appeals for statistical purposes. The issue of disallowance under Section 14A was remitted back to the AO for fresh consideration, the disallowance under Section 36(1)(iii) was upheld, and the treatment of interest income from bank deposits as business income was allowed in favor of the assessee.

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