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2021 (12) TMI 254 - AT - Income TaxDisallowance of interest as per provisions of Section 36(1)(iii) pertaining to interest free advances made treating the same to be not for the purpose of business of the assessee - assessee contended that since the year in which the advance was given, it was found that the advances had been made from interest free funds, there was no reason to make any disallowance of interest u/s 36(1)(iii) - HELD THAT - It is not denied that identical disallowance of interest on the said advance to M/s Temptation Foods had been made in the preceding assessment year also and after various rounds of litigation, when the issue had been restored to the AO by the ITAT directing him to determine the nature of funds used for the purpose of making the advance, it was found by the AO that no interest bearing funds had been used and infact interest free funds in the current account of the assessee had been used for the purpose of making the advance. This conclusive finding of fact, therefore, puts an end to all dispute vis- -vis the issue of disallowance of interest on the advance given to M/s Temptation Foods, since it has been factually found by the department that interest free funds had been used for the purpose of making the advance. No occasion arises, therefore, for making any disallowance of interest u/s 36(1)(iii) of the Act with regard to the same. The reliance placed by the Revenue on the decision of the ITAT in A.Y 2014-15, is of no relevance since the ground was not adjudicated being not pressed by the assessee. Deemed dividend as per the provisions of Section 2(22)(e) - HELD THAT - Since in the present case the assessee is not a shareholder of M/s Punjab Metalics Limited from which it has received the impugned advance and the same though qualifies as deemed income u/s 2(22)(e) of the Act, but is not taxable in the hands of the assessee. The addition so made is, therefore, directed to be deleted. Disallowance on account of tax deducted at source - HELD THAT - We find that the contention of the assessee that the amount disallowable u/s 40(a)(ia) has been mistakenly reported by the tax auditor at a higher figure cannot be simply discarded. Assessee has made certain factual contentions while explaining the mistaken reporting, to the effect that while the assessee had deducted taxes @ 10% on the contractual payments to be disallowed of ₹ 7,88,680/-, amounting to ₹ 78868/-, the auditor had assumed tax deducted @ 2% and calculated the amount disallowable basis this rate of TDS, which amounted consequently to ₹ 39,24,228/-. The explanation of the Ld.Counsel for the assessee is not outrightly perverse or unbelievable, but the facts we find, as pointed out by him need to be verified. Therefore agreeing with the plea of the Ld.Counsel for the assessee, we restore this issue to the AO to examine it afresh in the light of the contentions made by the Ld.Counsel for the assessee before us as aforestated, duly verifying all relevant facts and thereafter decide the issue in accordance with law. Needless to add the assessee be granted due opportunity of hearing. Addition u/s 43B in respect of service tax and PF Payable - HELD THAT - Assessee had attempted demonstrating the compliance with the requirements of section 43B of the Act vis a vis the issue of PF payable, but had failed to file clinching third party evidence for which he has sought further opportunity. In the interest of justice therefore we consider it fit to give the assessee adequate opportunity to substantiate its claim and accordingly restore the issue of allowance of PF as per the provisions of section 43B of the Act to the AO to examine it afresh and thereafter decide it in accordance with law. Needless to add the assessee be given due opportunity to produce all evidences it seeks to rely upon in support of its claim.
Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act. 2. Treatment of an amount as deemed dividend under Section 2(22)(e) of the Income Tax Act. 3. Disallowance under Section 40A(ia) for tax deducted at source. 4. Disallowance under Section 43B for service tax and PF payable. Detailed Analysis: 1. Disallowance of Interest under Section 36(1)(iii): The issue pertains to the disallowance of interest amounting to ?3,15,616 under Section 36(1)(iii) of the Income Tax Act, related to interest-free advances given to M/s Temptation Foods. The assessee argued that the advance was made in the preceding year and was found to be from interest-free funds. The ITAT had previously remanded the matter to the AO, who concluded that no interest-bearing funds were used for the advance. The AO's findings were that the advances were from the current account and that sufficient interest-free funds were available. The Revenue's reliance on a similar disallowance in AY 2014-15 was dismissed as the ground was not pressed by the assessee due to the insignificant amount involved. Consequently, the disallowance was deleted, and the ground of appeal was allowed. 2. Treatment of Amount as Deemed Dividend under Section 2(22)(e): The issue involves the treatment of ?27,20,000 received from M/s Punjab Metallics as deemed dividend under Section 2(22)(e). The AO and CIT(A) upheld the addition based on the substantial shareholding of the MD in both companies. However, the assessee contended that the deemed dividend could only be taxed in the hands of the shareholder, not the company. The ITAT followed the jurisdictional High Court's ruling in CIT Vs Sharman Woolen Mills Ltd., which stated that deemed dividend is taxable only in the hands of the shareholder. The Supreme Court's referral to a larger bench in the National Travel Services case was deemed irrelevant as it pertained to a different aspect of Section 2(22)(e). Therefore, the addition was deleted, and the ground of appeal was allowed. 3. Disallowance under Section 40A(ia) for Tax Deducted at Source: The issue concerns the disallowance of ?39,24,228 under Section 40A(ia) due to incorrect TDS computation by the tax auditor. The assessee argued that the disallowance should be restricted to ?7,88,680, as the auditor mistakenly reported a higher figure. The CIT(A) did not accept this explanation due to the lack of an affidavit from the auditor. The ITAT found the assessee's explanation plausible and restored the issue to the AO for verification. The ground of appeal was allowed for statistical purposes. 4. Disallowance under Section 43B for Service Tax and PF Payable: The issue relates to the disallowance of ?1,64,846 under Section 43B for service tax and PF payable. The assessee did not press the issue of service tax but contended that the PF payable was deposited in the succeeding year, as evidenced by the ledger account. The CIT(A) found the ledger account insufficient. The ITAT restored the issue to the AO for further verification, allowing the assessee an opportunity to substantiate its claim with documentary evidence. The ground of appeal was partly allowed for statistical purposes. Conclusion: The appeal was partly allowed for statistical purposes, with specific issues remanded to the AO for further verification and adjudication. The ITAT emphasized the need for adequate opportunity for the assessee to substantiate its claims.
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