The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that disallowance under section 36(1)(iii) of the Income Tax Act,1961 is not permissible on the ground of the absence of business-related activity.
Ardor Chemicals Pvt. Ltd, the assessee company filed a return of income on 27.09.2014 declaring a total loss of (-) Rs.36,972/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 accepting the returned income and notice under Section 142(2) of the Act as well as notice under Section 142(1) was issued to the assessee.
The assessee filed the necessary details during the course of the assessment proceedings. After taking cognisance of the submissions and details, the Assessing Officer made disallowance under Section 14A read with Rule 8D amounting to Rs.44,41,425/- under Section 36(1)(iii) of the Act. The CIT(A) partly allowed the appeal of the assessee.
It was submitted that when the addition under Section 14A of the Income Tax Act is made, the Assessing Officer has not taken cognisance that there was no exempt dividend income and in such case Section 14A of the Act will not be applicable. Further submitted that during the year under consideration, business income could not have been earned on account of non-availability of business or lean period.
It was settled law that even if the business during the year under consideration on account of a lean period or non-availability of business order or contract work etc., it is a case of “lull of business” and not the case of “business going out”. It is not necessary that a business to be in existence should work all the time.
A Coram comprising of Ms Suchitra Kamble, Judicial Member observed that though the business was not conducted during the present year, for the smooth running of the business the assessee has borrowed the amount which was reflected duly in the bank account (Profit & Loss account and Balance Sheet of the assessee company).
It was held that since the assessee has also given details related to borrowings and simply on the ground of no activities were related to business, the borrowing should not be allowed and cannot be the sole ground for making disallowance under Section 36(1)(iii) of the Act.
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