Retrospective benefit of section 40(a)(ia) second proviso upheld where resident payee disclosed income and tax default was cured.

The second proviso to section 40(a)(ia) was treated as curative and beneficial, so it was applied retrospectively where the resident payee had already reported the income and the payer was not an assessee in default under section 201(1). Faced with conflicting High Court views, the interpretation favourable to the assessee was preferred. On that basis, the disallowance was held unsustainable and the relief granted to the assessee was upheld.

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Issues: Whether the second proviso to section 40(a)(ia) of the Income-tax Act, 1961 is retrospective and therefore protects the assessee from disallowance where the resident payee has reflected the amount in its return of income.

Analysis: The sole controversy was the nature of the second proviso to section 40(a)(ia). The provision deems tax to have been deducted and paid where the resident payee has furnished its return and the payer is not treated as an assessee in default under section 201(1). The Court noted the existence of conflicting High Court views, one treating the proviso as declaratory and curative with retrospective effect and the other as prospective. In the absence of any contrary jurisdictional authority, the Court applied the settled principle that where two interpretations are possible, the construction favourable to the assessee should be adopted.

Conclusion: The second proviso to section 40(a)(ia) was treated as retrospective for the purpose of the present dispute, and the disallowance was not sustainable.

Final Conclusion: The Revenue's challenge to the deletion of the disallowance failed, and the assessment relief granted to the assessee was upheld.

Ratio Decidendi: Where a statutory amendment is construed by competing judicial views, the interpretation that is declaratory, curative, and beneficial to the assessee may be preferred, resulting in retrospective application.

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