Tribunal directs verification of subsidiary investments, remits tax deduction issue for examination. Appeal allowed due to Covid-19.

The Tribunal directed the Ld. AO to verify if investments in subsidiary companies were made from interest-bearing funds and to delete the addition under section 14A if substantiated. Regarding the invocation of section 40(a)(ia) for failure to deduct tax at source on interest payments, the issue was remitted for proper examination as the default status was not verified. The appeal was allowed for statistical purposes due to the Covid-19 pandemic, deviating from the usual time frame for judgment, influenced by a prior case, and pronounced on 24th July 2020.

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Issues:
1. Invocation of provisions of section 14A of the Act leading to an addition of Rs. 1,28,31,825.
2. Invocation of provisions of section 40(a)(ia) of the Act towards payment made on account of interest without deducting tax at source.

Analysis:

Issue 1: Invocation of provisions of section 14A of the Act
The assessee, a Private Limited Company engaged in construction business, filed its return for AY 2013-14, declaring losses under normal provisions and U/s. 115JB of the Act. The Ld. AO observed investments in equity shares and interest expenditure, invoking section 14A as the assessee incurred expenditure towards earning exempt income. The Ld. AO applied Rule 8D and computed a disallowance of Rs. 1,28,31,825. The Ld. CIT (A) upheld this decision, emphasizing the unsecured loans obtained by the assessee and lack of justification for investments from non-interest-bearing funds. The Tribunal noted the submission that dividend income was offered as income and not claimed as exempt under section 10, but held that section 10 mandates exclusion of such income from total income. The Tribunal directed the Ld. AO to verify if investments in subsidiary companies were made from interest-bearing funds and to delete the addition if the claim was substantiated.

Issue 2: Invocation of provisions of section 40(a)(ia) of the Act
Regarding the invocation of section 40(a)(ia) for failure to deduct tax at source on interest payments, the Ld. AR argued that no proceedings were initiated, thus disallowance was unwarranted. However, the Tribunal noted the failure to deduct tax on interest payments, triggering section 40(a)(ia). It highlighted the second proviso to this section, deeming tax deducted if the payee is not in default under section 201. As the AO did not verify the default status, the issue was remitted for proper examination.

The Tribunal allowed the appeal for statistical purposes, considering the extraordinary situation of the Covid-19 pandemic, deviating from the usual time frame for pronouncing the judgment. The decision was influenced by a prior case and was pronounced on 24th July 2020.

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