Tribunal remands matter to verify tax payment by creditors, potential exemption from disallowance.

The Tribunal allowed the appeal for statistical purposes, remanding the matter to the Assessing Officer for verification of whether the creditors had paid the due tax on interest income. If confirmed, the disallowance under Section 40(a)(ia) would not apply, aligning with the second proviso to the section. The decision was based on the Delhi High Court's reasoning in a similar case and was pronounced on 22/08/2016.

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Issues Involved:
1. Applicability of Section 40(a)(ia) of the Income Tax Act, 1961 on interest payments made without TDS deduction.
2. Interpretation of the term "payable" in Section 40(a)(ia) and its applicability to amounts paid during the year.
3. Retrospective application of the second proviso to Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) on Interest Payments Made Without TDS Deduction:

The assessee appealed against the order of the CIT(A)-II, Jaipur, which sustained the addition of Rs. 8,36,376/- made under Section 40(a)(ia) of the Income Tax Act due to non-deduction of TDS on interest payments to financial institutions. The Assessing Officer observed that the assessee made interest payments to NBFCs like India Bulls Credit Service Ltd., Tata Capital Ltd., Bajaj Finserve, and Magma Fincorp Ltd. without deducting TDS, thereby invoking Section 40(a)(ia) to disallow the expenses.

2. Interpretation of the Term "Payable" in Section 40(a)(ia):

The CIT(A) upheld the Assessing Officer's order, citing multiple judicial precedents. The CIT(A) referenced the Special Bench decision in Merilyn Shipping & Transports v. Addl. CIT, which initially held that Section 40(a)(ia) applied only to amounts payable at the end of the financial year. However, this decision was under interim suspension by the Andhra Pradesh High Court. The CIT(A) further cited judgments from the Calcutta High Court and Gujarat High Court, which held that Section 40(a)(ia) covered amounts payable at any time during the year, not just at the year-end. The intention of the legislature was to disallow expenses if TDS was not deducted, irrespective of whether the amount was paid or payable.

3. Retrospective Application of the Second Proviso to Section 40(a)(ia):

The assessee's counsel argued that the second proviso to Section 40(a)(ia) should be applied retrospectively, as it is declaratory and curative in nature. This proviso states that if the payee has paid the due tax, the disallowance under Section 40(a)(ia) should not apply. The counsel cited the Delhi High Court's decision in CIT v. Ansal Land Mark Township P. Ltd., which supported this view. The Tribunal noted that the Punjab & Haryana High Court in PMS Diesels v. CIT and other High Courts had discussed the issue of "paid" versus "payable," concluding that TDS deduction is mandatory, and non-deduction leads to disallowance under Section 40(a)(ia).

Tribunal's Decision:

The Tribunal acknowledged the conflicting judicial views but chose to follow the Delhi High Court's reasoning in CIT v. Ansal Land Mark Township P. Ltd. The Tribunal remanded the matter back to the Assessing Officer for verification of the assessee's claim that the creditors had already paid the due tax on the interest income. If verified, the benefit of the amended Section 40(a)(ia) should be extended to the assessee.

Conclusion:

The appeal was allowed for statistical purposes, with the matter remanded to the Assessing Officer for factual verification. If the creditors had indeed paid the due tax, the disallowance under Section 40(a)(ia) would not apply, in line with the second proviso to the section. The order was pronounced in the open court on 22/08/2016.

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