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2017 (11) TMI 1549 - AT - Income TaxDisallowance U/s 40(a)(ia) - non deduction of tax at source on the interest paid to financial institutions and also not admitting the certificate issued by the Chartered Accountant in the case of M/s Religare Finvest Ltd. as per Rule 46A - amount payable or paid during the year - Held that - The issue regarding payable has been decided by the Hon ble Supreme Court in the case of M/s Palam Gas Services Vs CIT in Civil 2017 (5) TMI 242 - SUPREME COURT as held that when the entire scheme of obligation to deduct the tax at source and paying it over to the Central Government is read holistically, it cannot be held that the word payable occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid.therefore, this pleading is dismissed. As far as retrospectivity of amendment in Section 40(a)(ia) of the Act is concerned, hold that it was a substantive change in law. Every substantive change in statute is prospective except where it is expressly made retrospectively. Thus only pleading of ld. A.R. that certificate submitted for M/s Religare Finvest Ltd. was not considered by the ld. CIT(A) is remains to be considered. In view of various decisions of the Courts, this plea is allowed. The certificate produced needs consideration. In the interest of justice and equity, this issue is restored back to the file of the Assessing Officer for verification. The certificate issued by the C.A. in the case of M/s Religare Finvest Ltd. shall be considered by A.O. and of found in order, relief shall be allowed. As regarding the difficulty in submitting certificate from Barclays Investment & Loan (India) Ltd. is concerned, it is of the view that the assessee shall be provided one more opportunity to submit the same. Therefore, this issue is also restored to the file of Assessing Officer. The ground is partly allowed for statistical purposes Disallowance of interest paid on the borrowed funds and also making the interest free advances to M/s Ravi Associates - Held that - Issues needs a fresh look at the level of the Assessing Officer, therefore, in the interest of justice and equity, the issues raised in grounds No. 2 and 3 of the appeal are restored back to the file of the Assessing Officer to be decided de novo.
Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of tax at source on interest paid to financial institutions. 2. Disallowance under Section 36(1)(iii) for interest on borrowed funds used for share application. 3. Disallowance under Section 36(1)(iii) for interest-free advances given to M/s Ravi Associates. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source: The assessee contested the disallowance of ?6,99,639/- under Section 40(a)(ia) due to non-deduction of tax at source on interest paid to Barclays Investment & Loan (India) Ltd. and Religare Finvest Ltd. The CIT(A) upheld the disallowance, noting that the assessee did not deduct tax at source as required under Sections 194A(1) and 194(3)(iii). The CIT(A) referenced the Supreme Court decision in Palam Gas Services CIT, which clarified that Section 40(a)(ia) applies to both amounts payable and paid. The CIT(A) also rejected the Form 26A submitted by the assessee for Religare Finvest Ltd. due to non-compliance with Rule 46A procedures for additional evidence. The CIT(A) did not accept the argument for retrospective application of the amendment limiting disallowance to 30% of the amount, as the amendment was effective from 01.04.2015 and not intended to be retrospective. The ITAT partially allowed the appeal, directing the Assessing Officer (AO) to verify the certificate submitted for Religare Finvest Ltd. and consider any new certificate from Barclays Investment & Loan (India) Ltd. The ITAT emphasized justice over technicalities, allowing the assessee another opportunity to submit the necessary certificate. 2. Disallowance under Section 36(1)(iii) for Interest on Borrowed Funds Used for Share Application: The CIT(A) noted that the assessee had invested ?33.50 lakhs in share application money of M/s Salasar Buildhome Pvt. Ltd. using borrowed funds to the extent of ?11,37,423/-. The CIT(A) disallowed interest of ?1,36,491/- under Section 36(1)(iii), as the investment did not serve a business purpose or commercial expediency. The CIT(A) referenced the Supreme Court decision in S A Builders, which allows disallowance of interest on borrowed funds used for non-business purposes. The ITAT restored this issue to the AO for a fresh look, considering the assessee's argument that the investment was made for commercial expediency and that the interest-free funds available were sufficient to cover the investment. 3. Disallowance under Section 36(1)(iii) for Interest-Free Advances to M/s Ravi Associates: The CIT(A) upheld the disallowance of ?1,42,790/- under Section 36(1)(iii) for interest-free advances to M/s Ravi Associates, a proprietary concern of one of the directors. The CIT(A) found no business transactions or commercial expediency justifying the advances and noted that the assessee's interest-free funds were insufficient to cover the advances. The ITAT restored this issue to the AO for reconsideration, acknowledging the assessee's claim that the advances were due to commercial exigencies and that sufficient interest-free funds were available. General Grounds: Grounds No. 4 and 5 were general and dismissed without requiring adjudication. Conclusion: The ITAT partially allowed the appeal for statistical purposes, directing the AO to re-examine the issues related to the certificates for non-deduction of tax at source and the disallowances under Section 36(1)(iii) for interest on borrowed funds and interest-free advances. The order emphasized justice and equity in the reassessment process. Order Pronouncement: The order was pronounced in the open court on 23/11/2017.
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