TaxTMI 
TaxTMI 
2022 (7) TMI 1637
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....d was demerged into Hical Aerospace Private Limited and the leasing business was retained by the assessee. The scheme also approved change of name of Hical Technologies Ltd renamed as Hical Infra Pvt. Ltd (demerged company and the assessee herein) and Hical Aerospace Pvt. Ltd (resulting company) renamed as Hical Technologies Ltd. [para 7.7 of the scheme - page 118 of the paper book]. 3. The assessee filed the return of income for the year under consideration declaring an income Rs. 1,13,60,920. Subsequently the assessee filed a revised return on 15/03/2018 with a revised income of Rs. 86,62,050. The case was selected for scrutiny and notice u/s. 143(2) was issued and served. 4. The AO passed the assessment order u/s 143(3) dated 28/12/2018 by making disallowance under section 36(1)(iii) of the Income-tax Act, 1961 [the Act] in respect of interest paid amounting to Rs. 78,11,581. The AO also held that out of interest expenditure of Rs. 78,11,581, TDS has not been paid in respect of interest expense of Rs. 67,04,528 and hence 30% of the said expenditure amounting to Rs. 20,11,358 is to be disallowed under section 40(a)(ia). As the entire interest e....
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....nd (b) the assessee had not mentioned any amount in row 6(d) of ITR-6 under the heading 'any amount of interest paid in respect of borrowed capital'; 2.4 On facts and in the circumstances of the case and law applicable, the entire interest expenditure amounting to Rs. 78,11,581 should be allowed as a deduction under section 36(1)(iii). 2.5 Assuming without admitting that the interest expenditure of Rs. 78,11,581 was not allowable under section 36(1)(iii), the same should be allowed as a business loss under section 28. 3.0 Grounds relating to disallowance under section 40(a)(ia) 3.1 The learned CIT (A) has erred in concurring with the learned AO in making protective disallowance of interest expenditure under section 40(a)(ia) amounting to Rs. 20,11,358. 3.2 The learned CIT (A) has erred in disallowance of interest expenditure under section 40(a)(ia) without appreciating that (a) the Form 26A was furnished before the learned AO indicating that Tata Capital Financial Services Limited had paid the taxes due on the impugned interest amount and thus the assessee cannot be treated as an assessee in default as pe....
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....ess Later vide letter 20/12/2018 submitted that the loan was utilized for making additions / repairs to the lease rental building and to this effect there was an inadvertent error in its letter dated 18/12/2018. The AO called on the assessee to produce the evidences supporting the claim that the loan was utilized towards building improvement for which the assessee submitted that the loan was utilized for the building improvement during the FY 2015-16 and 2017-18 and in support of the claim the assessee provided copies of the bank statements and utilization statements of the loan. The AO noting the discrepancies in the letters files and the details of utilization filed by the assessee when compared to the financial statement of the assessee, concluded the assessment disallowing the entire interest claimed u/s. 36(1)(iii). 9. Aggrieved the assessee filed an appeal before the CIT(A). Before the CIT(A), the assessee submitted that the conditions of section 36(1)(iii) namely Capital had been borrowed, interest is paid on the said borrowing, and the borrowing is for the purpose of business is complied with by the assessee. The assessee filed the copies of loan sanction letter and the ....
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....company proposed to be transferred, should remain with the transferor company. Similar provision is absent for deduction under section 36(1)(iii). Therefore, it is evident that there interest expenditure under section 36(1)(iii) cannot be disallowed for the reason that the undertaking where the loan was utilised was not transferred to a resulting company vide the demerger. (iii) The fact that the manufacturing business was transferred in the demerger cannot result in disallowance of interest paid on borrowings. This would be so even if it assumed that the said borrowings are used for the purpose of manufacturing business. Reliance in this regard is placed in the case of Veecumsees v CIT [1996] 220 ITR 185. (iv) Even otherwise, deduction under section 36(1)(iii) is allowable if the capital borrowed is for the purposes of 'business'. It is trite to state that 'business' of an assessee may comprise of one or more undertakings. The common management, unity of control and inter lacing of funds between the various undertakings of the assessee clearly demonstrates that both undertakings constituted the same business of the assessee. Therefore, the fact that particular pa....
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....d. DR submitted that the loan is borrowed for the purpose of manufacturing business and post demerger the interest was paid out of lease rental business thereby not satisfying the conditions us/.36(1)(iii). The ld. DR also argued that as per the loan sanction letter, the assessee was required to file a declaration regarding the end use of the borrowings. 15. In the present case, the assessee carried on the business of manufacturing and had leased the immovable property when the loan was taken during the FY 2012-13. The loan was taken against the future lease rentals of the property. The loan was credited to SBI cash credit account which was used for meeting the expenses of both manufacturing and leasing business. No separate books of account was maintained for manufacturing and leasing business. The business of manufacturing and leasing according to the ld. AR was a composite one with interlacing or mixed funds. It is also contended that the interest paid on said loan was allowed in the earlier years and that subsequent to demerger also, interest paid on said loan was allowed as deduction while passing the assessment order under section 143(3) for the AY 2015-16. Post demerger t....
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....tutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business." 19. The Hon'ble Supreme Court in the case of Veecumsees vs CIT (1996) 220 ITR 185 (SC) while considering the issue of continuing the same business for allowability of interest u/s. 36(1)(iii) held that :- "The fact that the revenue had during the years when the assessee carried on the business of cinematographic films permitted as a deduction under section 36(1)(iii) the interest on loans obtained by the assessee for the purpose of constructing the said theatre shows that at the time when the loans were obtained the said theatre was a part of the business of the assessee. It was interest on these loans, borrowed for the purpose of the business of the assessee, which was being paid in the years in....
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....e i.e. M/s. Tata Capital Financial Services Limited has taken into account the interest paid by the assessee in computing its total income and whether it has filed the return of income or not. The assessee submitted the Form No 26A [page 178 to 180 of the paper book] as per which M/s. Tata Capital Financial Services Limited had taken into account the interest paid by the assessee in computing the total income for AY 2016-17 and had filed the return of income on 30.11.2016. The AO did not accept the explanations of the assessee and held that 30% of the interest expenditure of Rs. 67,04,528 i.e. Rs. 20,11,358 is to be disallowed under section 40(a)(ia). As the entire interest expenditure of Rs. 78,11,581 was disallowed under section 36(1)(iii), it was stated by the AO that the disallowance of Rs. 20,11,358 will be enforced based on the adverse findings (if any) by the appellate authorities at a later stage. 23. On further appeal by the assessee the learned CIT (A) held that mere furnishing the certificate in Annexure A without the declaration in Form 26A by the assessee cannot be said to be compliance of the provision. The CIT (A) further held that as per rule ....
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....mats and standards specified under sub-rule (2), and verified in accordance with the procedures, formats and standards specified under subrule (2). (2) The Director General of Income-tax (Systems) shall specify the procedures, formats and standards for the purposes of furnishing and verification of the Form 26A and be responsible for the day-to-day administration in relation to furnishing and verification of the Form 26A in the manner so specified." 27. Section 40(a)(ia) contains a proviso whereby an assessee is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes section 40(a)(ia) it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso. 28. A combined reading of the above provisions of the Act and the rule, makes it clear that an assessee who is required to deduct tax in accordance with Chapter XVII-B, fails to do so would not be treated as an assessee in default provided the payee has paid tax on the said sum and the assessee has filed the required form in 26A along with a CA certifica....