Retrospective second proviso to section 40(a)(ia) limits disallowance where the recipient has already paid tax.

Disallowance of interest under section 40(a)(ia) was considered in light of the second proviso, which was treated as curative and retrospective. Where the recipient has already included the relevant amount in total income and paid tax, the disallowance is not meant to survive in principle. The benefit, however, depends on factual verification, including supporting certificate and confirmation that the recipient offered the interest income to tax. The Assessing Officer was therefore directed to verify those facts and decide the issue accordingly.

---

---

Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 was sustainable in respect of interest paid to an NBFC when the recipient had allegedly offered the amount to tax and whether the second proviso to section 40(a)(ia) applied retrospectively.

Analysis: The appeal turned on the effect of the second proviso to section 40(a)(ia). The Tribunal followed the settled view that the proviso is curative in nature and operates retrospectively. It further noted that where the recipient has already included the relevant amount in its total income and paid tax, the disallowance is not intended to survive. At the same time, as the supporting certificate and factual verification were necessary, the matter required verification by the Assessing Officer before granting the benefit on facts.

Conclusion: The disallowance was not upheld in principle, and the Assessing Officer was directed to verify whether the recipient had offered the interest income to tax and to decide the issue accordingly.

---