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 the second proviso to Section 40(a)(ia) while upholding the disallowance of interest under Section 36(1)(iii) for both years.

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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).

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