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Issues: (i) Whether the assessee could raise and have the matter remanded on the interest disallowance and corresponding interest income additions even though the ground was not pressed before the first appellate authority; (ii) whether the disallowance for non-deduction of tax at source on colour-work payments under section 40(a)(ia) was to be confined to 30% of the expenditure; and (iii) whether the interest expenditure claimed under section 36(1)(iii) was liable to be disallowed as borrowed funds were allegedly diverted away from business purposes.
Issue (i): Whether the assessee could raise and have the matter remanded on the interest disallowance and corresponding interest income additions even though the ground was not pressed before the first appellate authority.
Analysis: The first appellate authority had not recorded any adjudication on the merits of the two connected interest adjustments because the ground was treated as not pressed. The Tribunal held that a concession made under a or mistaken appreciation of law or facts does not prevent the assessee from raising the issue before the higher forum when the relevant facts already emerge from the assessment record and no fresh material is required for decision. In the absence of a substantive finding by the first appellate authority, the matter required reconsideration.
Conclusion: The issue was admitted and restored to the first appellate authority for fresh adjudication.
Issue (ii): Whether the disallowance for non-deduction of tax at source on colour-work payments under section 40(a)(ia) was to be confined to 30% of the expenditure.
Analysis: The Tribunal applied the amended framework of section 40(a)(ia) and treated the proviso inserted by the Finance Act (No. 2) 2014 as curative and retrospective in operation. On that basis, the statutory disallowance could not remain at 100% of the expenditure. The Tribunal also noted that the alternate plea under the second proviso could not succeed because the assessee had not furnished the accountant's certificate in Form 26A, and the burden to establish compliance could not be shifted to the Revenue.
Conclusion: The disallowance was restricted to 30% of the relevant expenditure and the alternate plea was rejected.
Issue (iii): Whether the interest expenditure claimed under section 36(1)(iii) was liable to be disallowed as borrowed funds were allegedly diverted away from business purposes.
Analysis: The Tribunal found that the working adopted by the lower authorities for inferring excessive borrowings was not supported by the balance-sheet figures, and the record showed that the unsecured loans were substantially applied in the project work-in-progress. It was also noticed that the transactions with the sister concern were in a running account and that the additions already made had taken care of the relevant adjustments. Further, a substantial portion of the interest had already been capitalised in closing work-in-progress, so sustaining the addition would result in an impermissible double burden.
Conclusion: The disallowance under section 36(1)(iii) was deleted.
Final Conclusion: The appeal was partly allowed by remanding one connected interest issue for fresh consideration, restricting the TDS-related disallowance, and deleting the disallowance of interest on borrowed funds.
Ratio Decidendi: A curative amendment to section 40(a)(ia) operates retrospectively to limit disallowance, but relief under the second proviso depends on the assessee proving compliance through the prescribed accountant's certificate; interest on borrowings cannot be disallowed where the record shows business use and the proposed addition would duplicate an amount already capitalised in work-in-progress.
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