2021 (10) TMI 450 - AT - Income Tax

Appeals partly allowed for 2012-13 & 2014-15, remanded for compliance with tax law, interest disallowance upheld.

The Tribunal partly allowed the appeals for Assessment Years 2012-13 and 2014-15, remanding the matters to the Assessing Officer to verify compliance with ... Disallowance of interest u/s. 36(1)(iii) - partners of the assessee firm had over withdrawn an amount as in excess of what was brought by them in the firm - HELD THAT:- A.R. had tried to dissect the negative balances appearing in the partners capital account. Bypassing the accumulated losses, the ld. A.R. had tried to impress upon us that a cumulative consideration of the net amount of capital introduced by the partners over the years revealed that there was no overdrawing of the respective capital accounts. Explanation of the assessee is devoid and bereft of any reasoning - it is a matter of fact that the partners of the assessee firm had debit balances in their capital accounts at the beginning of the accounting year, which pursuant to the further withdrawals carried out by them during the year had resulted to a 'debit balance' in the capital account at end of the year too - the assessee did not have any interest free advances - now when the partners of the assessee firm had clearly over withdrawn an amount in excess of what was brought by them in the firm, therefore, the lower authorities had rightly concluded that the correlating interest expenditure pertaining to the amount so overdrawn was liable to be disallowed u/s.36(1)(iii) - lower authorities had rightly concluded that the correlating interest expenditure pertaining to the amount so overdrawn was liable to be disallowed u/s. 36(1)(iii) - Decided against assessee. Disallowance of the entire amount of interest expenditure u/s. 40(a)(ia) - Assessee firm had during the year under consideration paid certain amounts to NBFC's for interest, prepayment charges and loan processing fees - benefit of the '2nd proviso' to Sec. 40(a)(ia) - scope of amendment - HELD THAT:- As the assessee would be eligible for the benefit of the '2nd proviso' to Sec. 40(a)(ia) of the Act, though subject to the satisfaction of the conditions therein contemplated. We, thus, in terms of our aforesaid deliberations restore the matter to the file of the A.O. with a direction to reconsider the disallowance u/s. 40(a)(ia) of the aforesaid amounts subject to the satisfaction by the assessee of the requisite conditions contemplated in the '2nd proviso' to Sec. 40(a)(ia) of the Act. At this stage, we may herein observe that the A.O. shall in the course of the set-aside proceedings consider the 'Form No. 26A' that was filed by the assessee with the ITO (TDS)-1(3)(3), Mumbai on 18.07.2019. Post-amended Sec. 40(a)(ia) of the Act the disallowance therein contemplated was liable to be restricted to the extent of 30% of the amount in question as regards which the assessee had defaulted the TDS provision under Chapter XVII-B - We are of the considered view that the claim of the ld. A.R. that the disallowance, if any, u/s. 40(a)(ia) was liable to be restricted to the extent of 30% of the sum payable does not merit acceptance and is accordingly rejected. The Ground of appeal No. 2 is dismissed. Issues Involved:1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.2. Disallowance of interest under Section 40(a)(ia) of the Income Tax Act.Issue-Wise Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii):Assessment Year 2012-13:The assessee firm, engaged in trading readymade garments, fabrics, and imitation jewellery, filed its return for A.Y. 2012-13 declaring a loss. The A.O. disallowed interest expenditure of Rs. 6,58,237 under Section 36(1)(iii) due to partners' overdrawn capital accounts. The CIT(A) upheld this disallowance. The assessee argued that the borrowed funds were utilized for business purposes and that the net capital introduced by partners over two years covered the overdrawn amounts. However, the Tribunal found that the partners had overdrawn Rs. 68,13,621, and the firm had no interest-free advances. Thus, the disallowance was upheld.Assessment Year 2014-15:For A.Y. 2014-15, the assessee faced a similar disallowance of Rs. 74,28,384 under Section 36(1)(iii). The assessee contended that the partners introduced net capital exceeding their withdrawals and that the borrowed funds were used for financing losses and acquiring fixed assets. However, the Tribunal applied the same reasoning as in A.Y. 2012-13 and upheld the disallowance.2. Disallowance of Interest under Section 40(a)(ia):Assessment Year 2012-13:The A.O. disallowed Rs. 62,89,250 under Section 40(a)(ia) for non-deduction of TDS on payments to NBFCs. The CIT(A) upheld this disallowance. The assessee argued that the second proviso to Section 40(a)(ia), which exempts disallowance if the payees have paid taxes, should apply retrospectively. The Tribunal agreed, citing the Bombay High Court's judgment in Pr.CIT-5 Vs. Perfect Circle India Pvt. Ltd., and remanded the matter to the A.O. to verify compliance with the second proviso. However, the Tribunal rejected the assessee's claim to restrict the disallowance to 30%, as the amendment by the Finance (No. 2) Act, 2014, applies prospectively from A.Y. 2015-16, as held by the Supreme Court in Shree Chaudhary Transport Company Ltd. Vs. ITO.Assessment Year 2014-15:For A.Y. 2014-15, the assessee faced a similar disallowance of Rs. 57,14,354 under Section 40(a)(ia). The Tribunal applied the same reasoning as in A.Y. 2012-13, remanding the matter to the A.O. to verify compliance with the second proviso and rejecting the claim to restrict the disallowance to 30%.Conclusion:The appeals for both A.Y. 2012-13 and A.Y. 2014-15 were partly allowed for statistical purposes, with the Tribunal remanding the matters to the A.O. to verify compliance with the second proviso to Section 40(a)(ia) while upholding the disallowance under Section 36(1)(iii).