ITAT directs AO to verify payees' tax compliance. CIT(A) order set aside. Appeal allowed for stats.

The ITAT held that the CIT(A) should have directed the AO to verify if the payees included the receipts in their returns and paid taxes. The order of the CIT(A) was set aside, and the issue was remanded to the AO for verification. The appeal was allowed for statistical purposes, and the stay application was dismissed as infructuous.

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Issues Involved:
1. Justification of CIT(A) in sustaining the addition made by the AO under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Verification of whether the payees included the receipts in their returns of income and paid taxes on the same.
3. Application of the second proviso to Section 40(a)(ia) retrospectively.

Detailed Analysis:

1. Justification of CIT(A) in Sustaining the Addition:
The primary issue in this appeal is whether the CIT(A) was justified in sustaining the addition of Rs. 1,81,96,525 made by the AO under Section 40(a)(ia) of the Income Tax Act, 1961. The Assessee, a partnership firm engaged in civil contracts, filed its return of income for AY 2012-13 declaring a total income of Rs. 14,00,570. The AO, in the assessment order, determined the total income at Rs. 2,17,39,410, making additions on account of disallowance under Section 40(a)(ia) amounting to Rs. 1,99,30,315 and interest under Section 244A amounting to Rs. 4,08,524.

2. Verification of Receipts by Payees:
The Assessee argued that the AO should verify if the payees had declared the receipts in their returns of income. The Assessee cited the second proviso to Section 40(a)(ia) introduced by the Finance Act, 2012, which states that if the payees have filed their returns showing the receipts, it shall be deemed that the Assessee has deducted and paid the tax. The Assessee managed to collect Form 26A from three parties initially and later from six parties, covering payments of Rs. 1,14,92,300. However, for the remaining payments of Rs. 84,38,015, the Assessee could not collect Form 26A due to non-cooperation from the payees.

3. Application of the Second Proviso Retrospectively:
The CIT(A) accepted the Assessee's contention that the second proviso to Section 40(a)(ia) is curative and retrospective. However, the CIT(A) restricted the disallowance to Rs. 1,81,96,525 as the Assessee had not provided Form 26A for all parties. The Assessee argued that the AO and first appellate authorities have statutory powers under Sections 133(6) and 131 to obtain the necessary information from the payees. The ITAT, in the case of Ramakrishna Vedanta Math v. Income-tax Officer, held that the AO should first ascertain the facts about the payment of taxes directly from the recipients before invoking Section 201(1).

The ITAT Kolkata in Vas Electronics Vs. ACIT also held that the AO should verify whether the recipients included the income in their returns and paid taxes. The Assessee requested that the disallowance be set aside and remanded to the AO for verification. The learned DR argued that the benefit of the second proviso should not be allowed as the TDS was not paid on or before the due date for filing the return under Section 139(1).

Conclusion:
The ITAT concluded that the CIT(A) should have directed the AO to verify whether the recipients included the receipts in their returns and paid taxes. The AO should use statutory powers to obtain information if the payees do not cooperate. The order of the CIT(A) was set aside, and the issue was remanded to the AO for verification. The appeal was allowed for statistical purposes, and the stay application was dismissed as infructuous.

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