Second Proviso to Section 40(a)(ia) Has Retrospective Effect from April 2005, Benefiting Assessees Filing Returns

The HC held that the second proviso to Section 40(a)(ia), inserted by the Finance Act 2012 effective from 1 April 2013, has retrospective effect from 1 April 2005. This proviso creates a legal fiction deeming tax as deducted and paid when the resident payee files their return, provided the assessee is not an assessee in default under Section 201(1). Relying on ITAT Agra's decision, the court ruled that the proviso is declaratory and curative, allowing the assessee to avoid disallowance for failure to deduct TDS on payments made. Consequently, no substantial question of law arose, and the decision was in favor of the assessee.

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Issues:
- Appeal against common order dated 21st July 2014 passed by ITAT for AYs 2008-09 and 2009-10
- Disallowance of payment made by Assessee to APIL under Section 194J
- Retrospectivity of the second proviso to Section 40(a) (ia) of the Act

Analysis:
1. The appeals by the Revenue were against the ITAT's order for AYs 2008-09 and 2009-10. The questions raised by the Revenue concerning the deletion of certain additions were answered in favor of the Assessee in a previous order. Another issue raised was about the retrospectivity of the second proviso to Section 40(a) (ia) of the Act.

2. The main issue was the disallowance of payment made by the Assessee to APIL under Section 194J. The Assessee argued that due to the insertion of the second proviso to Section 40(a) (ia) of the Act, the payment could not have been disallowed. The Assessee relied on a decision by the Agra Bench of ITAT, which held that the second proviso is declaratory and curative in nature and should have retrospective effect from 1st April 2005.

3. The second proviso to Section 40(a) (ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. It introduces a legal fiction where an Assessee failing to deduct tax is not deemed in default under certain conditions. The Court analyzed the provisions of Section 40(a) (ia) and Section 210 (1) of the Act, emphasizing that the intention was not to penalize the Assessee if the payee has filed returns and paid tax on the income.

4. The Agra Bench of ITAT's reasoning on the second proviso was accepted by the Court. It concluded that the proviso is declaratory and curative, with retrospective effect from 1st April 2005. Consequently, the Court found no legal infirmity in the ITAT's order and dismissed the appeal, stating that no substantial question of law arises in the present case.

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