Section 40(a)(ia) and TDS on partner interest: disallowance can apply during the year, and later proviso is not retrospective.

Partners and partnership firms are treated as distinct assessees, so individual partners paying interest to firms on borrowed funds may be required to deduct tax at source under section 194A where the statutory conditions are met; non-deduction can trigger disallowance under section 40(a)(ia). The second proviso to section 40(a)(ia), inserted by the Finance Act, 2012, is treated as prospective and not available for earlier assessment years absent binding authority to the contrary. Section 40(a)(ia) is also applied to sums payable during the year, not only to amounts outstanding on the last day of the financial year.

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Issues: (i) Whether individual partners, while paying interest to the partnership firms from which they had borrowed, were liable to deduct tax at source under section 194A and whether disallowance under section 40(a)(ia) was justified for non-deduction of tax. (ii) Whether the second proviso to section 40(a)(ia), inserted by the Finance Act, 2012, applied retrospectively to the assessment years in question. (iii) Whether section 40(a)(ia) applied only to amounts outstanding as payable on the last day of the financial year.

Issue (i): Whether individual partners, while paying interest to the partnership firms from which they had borrowed, were liable to deduct tax at source under section 194A and whether disallowance under section 40(a)(ia) was justified for non-deduction of tax.

Analysis: The assessees were assessed as individuals and had paid interest to their respective partnership firms on borrowed loans. Under the Income-tax Act, partners and partnership firms are treated as distinct assessable units. The obligation to deduct tax under section 194A applied because the assessees were individuals whose turnover exceeded the statutory limit under section 44AB. The plea that the firm had already paid tax did not assist the assessees because the disallowance under section 40(a)(ia) operates in a different field from recovery under section 201(1).

Conclusion: The assessees were liable to deduct tax at source, and the disallowance under section 40(a)(ia) was in law and against the assessee.

Issue (ii): Whether the second proviso to section 40(a)(ia), inserted by the Finance Act, 2012, applied retrospectively to the assessment years in question.

Analysis: The Tribunal held that the second proviso created a deeming benefit only from the date of its insertion. Binding jurisdictional precedent had already held that the amendment was not available for earlier assessment years. The assessee therefore could not invoke the later proviso to avoid the disallowance for the years under appeal.

Conclusion: The second proviso to section 40(a)(ia) was held to be prospective and not applicable to the assessees' assessment years.

Issue (iii): Whether section 40(a)(ia) applied only to amounts outstanding as payable on the last day of the financial year.

Analysis: The Tribunal declined to follow the view that the provision was confined to year-end payables. It preferred the reasoned decisions of the Calcutta High Court and the Gujarat High Court, which held that the section covers amounts payable at any time during the year, and rejected the contrary interpretation based on the Special Bench ruling and the non-speaking dismissal of the SLP in the related matter.

Conclusion: Section 40(a)(ia) applies to sums payable during the year as well as those remaining payable at year-end; the assessee's contention was rejected.

Final Conclusion: The additions/disallowances made by the lower authorities were sustained, and all the appeals were dismissed.

Ratio Decidendi: Section 40(a)(ia) disallows expenditure where tax deductible at source has not been deducted or paid, irrespective of whether the amount remains payable on the last day of the year, and the later curative proviso cannot be applied retrospectively to earlier assessment years absent binding authority to that effect.

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