2016 (8) TMI 252 - AT - Income Tax

AO to Reassess TDS Disallowance Post Court Ruling

The tribunal allowed the appeals for statistical purposes, directing the Assessing Officer to re-evaluate the disallowance under Section 40(a)(ia) for ... Disallowance under section 40(a)(ia) - applicability of the second proviso to section 40(a)(ia) with retrospective effect - declaratory/curative nature of legislative proviso - interaction between proviso to section 40(a)(ia) and proviso to section 201(1) - verification of payees' returns and assessments before making disallowanceDisallowance under section 40(a)(ia) - applicability of the second proviso to section 40(a)(ia) with retrospective effect - verification of payees' returns and assessments before making disallowance - Whether disallowance under section 40(a)(ia) for failure to deduct TDS on freight should be sustained or requires fresh adjudication in the light of the second proviso to section 40(a)(ia) and the payees' tax compliance. - HELD THAT: - The Tribunal noted that the assessee raised for the first time before it the contention that the second proviso to section 40(a)(ia) (inserted by Finance Act, 2012) is clarificatory/curative and should operate so as to preclude disallowance where the payee has returned and paid tax on the sums. The Tribunal examined its earlier decision in the assessee's own case for A.Y. 2007-08 and relevant coordinate-bench decisions which had directed remand to the Assessing Officer to examine the retrospective operation of the proviso. The Tribunal also relied on observations of the Hon'ble Delhi High Court that the proviso is declaratory/curative in nature and, where payees have filed returns and paid tax on the sums, no disallowance under section 40(a)(ia) should be made. Because the contention as to applicability of the proviso and the payees' tax treatment had not been examined by the lower authorities in the years under consideration, the Tribunal, following co ordinate-bench precedent and the Delhi High Court's reasoning, restored the issue to the file of the Assessing Officer. The AO was directed to verify whether the payees had included the amounts in their returns and paid tax (using available powers, including inquiry from payees or their Assessing Officers), afford the assessee opportunity of hearing, and decide afresh in accordance with law; if the payees' incomes include the impugned sums, no disallowance should be made. [Paras 3, 14]Issue restored to the file of the Assessing Officer for fresh adjudication limited to the contention on applicability of the second proviso to section 40(a)(ia) and verification of payees' returns/assessments; if payees have been assessed with the impugned sums, no disallowance to be made.Final Conclusion: The Tribunal partly allowed the appeals for statistical purposes by restoring to the Assessing Officer the question whether the second proviso to section 40(a)(ia) applies (having regard to the payees' returns/assessments); the AO is directed to verify the payees' tax treatment, give the assessee an opportunity of hearing and decide afresh, and where the payees have included and been assessed on the sums, no disallowance under section 40(a)(ia) should follow. Issues Involved:1. Disallowance under Section 40(a)(ia) for failure to deduct TDS under Section 194C on freight payments.2. Retrospective applicability of the second proviso to Section 40(a)(ia).Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) for failure to deduct TDS under Section 194C on freight payments:The primary issue in the appeals is the disallowance made by the Assessing Officer (AO) under Section 40(a)(ia) due to the assessee's failure to deduct TDS under Section 194C on freight payments. The assessee argued that a similar issue had been previously decided in their favor for the assessment year 2007-08 by the Income Tax Appellate Tribunal (ITAT). The assessee requested that the matter be sent back to the AO to be re-evaluated in light of the tribunal's earlier decision and the Hon’ble Delhi High Court's judgment in the case of Ansal Land Mark Township (P) Ltd. The Revenue's representative, while relying on the judgment of the Hon’ble Kerala High Court in Prudential Logistics And Transports v. ITO, did not object to the matter being sent back to the AO for reconsideration.The ITAT noted that the identical issue had been adjudicated in favor of the assessee in the previous year, where the tribunal had accepted the assessee's contention and deleted the disallowance. The tribunal referred to the relevant provisions of Section 40(a)(ia) and Section 201, emphasizing that if the payee had included the payment in their income tax return and paid the due taxes, the assessee should not be deemed in default.2. Retrospective applicability of the second proviso to Section 40(a)(ia):The tribunal discussed the retrospective applicability of the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, effective from April 1, 2013. The assessee argued that this proviso, which states that disallowance should not be made if the payee has included the payment in their income tax return and paid the tax, should be applied retrospectively. The tribunal referenced various judicial pronouncements, including the decisions of the Pune Bench and Cochin Bench of the Tribunal, which had restored similar issues to the AO to examine the assessee's contention regarding the retrospective application of the proviso.The tribunal also cited the Hon’ble Delhi High Court's judgment in the case of Ansal Land Mark Township (P) Ltd., which clarified that the second proviso to Section 40(a)(ia) is declaratory and curative in nature, having retrospective effect from April 1, 2005. The High Court held that as long as the payee had filed their return of income and paid the tax on the income, the assessee should not be treated as a person in default.Conclusion:The tribunal concluded that the AO should re-examine the issue in light of the legal position discussed, including the tribunal's previous order and the Delhi High Court's judgment. The AO was directed to verify whether the payees had included the payments in their income tax returns and paid the taxes. If so, no disallowance should be made under Section 40(a)(ia) for non-deduction of TDS. The appeals were allowed for statistical purposes, with instructions for the AO to provide adequate opportunity for the assessee to present their case and to verify the facts directly from the payees or their respective Assessing Officers if necessary.Order Pronouncement:The appeals filed by the assessee and revenue were partly allowed for statistical purposes, as per the directions discussed. The order was pronounced in the open court on June 24, 2016.