ITAT Chandigarh: Appeal Allowed, Disallowance Deleted under sec 40(a)(ia). Second proviso retrospective from 1.4.2005.

The ITAT Chandigarh allowed the appeal, overturning the lower authorities' decision and deleting the disallowance under section 40(a)(ia). The court held that the second proviso to section 40(a)(ia) should be applied retrospectively from 1.4.2005, not 2013 as argued by the Ld. CIT(A) and supported by a Kerala High Court decision. The court also emphasized that tax withholding lapses, in this case, did not result in any loss to the exchequer as the payee had disclosed the income and paid taxes, in line with a Delhi High Court judgment.

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Issues involved:
1. Disallowance under section 40(a)(ia) for failure to deduct tax u/s 194C.
2. Retrospective effect of the second proviso to section 40(a)(ia).
3. Interpretation of law regarding tax withholding lapses and loss to the exchequer.

Issue 1: Disallowance under section 40(a)(ia) for failure to deduct tax u/s 194C:
The appellant contested the disallowance of &8377; 1,75,691/- for not deducting tax u/s 194C on payments made to M/s Aman Dhaba. The argument was based on the recipient already including the amount in their taxable income, thus invoking the second proviso to section 40(a)(ia) to prevent disallowance. The appellant relied on the ITAT Agra Bench's decision, stating the amendment to section 40(a)(ia) is retrospective from 1.4.2005. However, the Ld. CIT(A) held that the second proviso was effective from 1.4.2013 and cited a Kerala High Court decision supporting this view.

Issue 2: Retrospective effect of the second proviso to section 40(a)(ia):
The appellant argued for the retrospective application of the second proviso to section 40(a)(ia) from 1.4.2005, citing the ITAT Agra Bench's decision and the declaratory nature of the amendment. In contrast, the Ld. CIT(A) and the Kerala High Court decision maintained that the proviso was effective from 1.4.2013, thus not applicable to the assessment year in question.

Issue 3: Interpretation of law regarding tax withholding lapses and loss to the exchequer:
The appellant contended that the tax withholding lapses did not result in any loss to the exchequer as the payee had included the income in their tax return, supported by the argument that the amendment to section 40(a)(ia) was curative and retrospective. The appellant relied on the Hon'ble Delhi High Court's judgment in CIT Vs. Ansal Land Mark Township P. Ltd, emphasizing that as long as the payee disclosed the income and paid tax, no disallowance should be made under section 40(a)(ia). The ITAT concurred, citing the Delhi High Court's decision and ruled in favor of the appellant, deleting the entire addition.

In conclusion, the ITAT Chandigarh allowed the appeal, setting aside the lower authorities' order and deleting the disallowance under section 40(a)(ia) based on the retrospective application of the second proviso and the interpretation of tax withholding lapses as not causing any loss to the exchequer.

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