2017 (6) TMI 489 - AT - Income Tax

Tribunal grants appeal, emphasizes equitable interpretation for Section 40(a)(ia) compliance

Shri Azmath ulla Versus The Assistant Commissioner of Income Tax, Circle – 6 (2) (1), Bangalore

The Tribunal allowed the appeal for statistical purposes, remitting the issue to the AO for verification of whether NBFCs included interest amounts in ... Tds u/s 194A - interest payment to Non Banking Financial Corporations (NBFCs) - addition u/s. 40(a)(ia) - applicability of the second proviso to section 40(a)(ia) retrospectively - Held that:- Having held that the second proviso to section 40(a)(ia) shall have retrospective effect the question arises that if the recipients of interest in question have already considered the same for computing their income offered to tax then the disallowance u/s. 40(a)(ia) is not attracted. In this case though the assessee did not file the relevant material before the AO in this regard however, it is a fact which existed right from the beginning and the relevant details are available with the revenue regarding the income offered by these NBFCs. Therefore, if the certificates filed in support of the claim that the NBFCs have included this amount of interest in computation of their income offered to tax are found to be correct then the compliance u/s. 40(a)(ia) is deemed to have been made and no disallowance is called for. Therefore this issue is set aside to the record of the AO for verification of the fact that the recipient NBFCs have already taken into account the amount of interest received by them for computing the income in their return of income. Appeal of the assessee is allowed for statistical purposes. Issues Involved:1. Legality of the assessment order.2. Applicability of Section 194A(1) to Non-Banking Financial Corporations (NBFCs).3. Applicability of Section 40(a)(ia) for interest paid without TDS prior to the assessment year 2014-15.4. Compliance with the second proviso to Section 40(a)(ia) by NBFCs.5. Admissibility of additional evidence.Detailed Analysis:1. Legality of the Assessment Order:The appellant contended that the assessment order was 'bad in law and against the fact and circumstances of the case.' However, the judgment did not provide a detailed analysis or ruling specifically on this issue, focusing instead on the substantive grounds of appeal.2. Applicability of Section 194A(1) to NBFCs:The appellant argued that the Assessing Officer (AO) erred in making additions under Section 40(a)(ia) for the interest paid to NBFCs without TDS, asserting that Section 194A(1) is not applicable to NBFCs. The CIT(A) rejected this contention, confirming the AO's disallowance. The Tribunal did not explicitly address this argument in its final decision, focusing instead on the applicability of the second proviso to Section 40(a)(ia).3. Applicability of Section 40(a)(ia) for Interest Paid Without TDS Prior to the Assessment Year 2014-15:The appellant claimed that Section 40(a)(ia) should not apply to interest paid without TDS before the assessment year 2014-15. The Tribunal referenced the Delhi High Court's decision in CIT Vs Naresh Kumar (362 ITR 256), which held that the second proviso to Section 40(a)(ia) is explanatory and remedial in nature, thus applicable retrospectively. This implies that if the recipients of the interest have already included it in their taxable income, the disallowance under Section 40(a)(ia) should not apply.4. Compliance with the Second Proviso to Section 40(a)(ia) by NBFCs:The appellant provided certificates from the auditors of NBFCs (Bajaj Finance Limited, Kotak Mahindra Prime Limited, and Reliance Capital Limited) indicating that these entities had considered the interest amounts in their income computations. The Tribunal noted that if these certificates are verified and found correct, the compliance with Section 40(a)(ia) is deemed to have been made, and no disallowance is warranted. The Tribunal remitted the matter to the AO for verification of these certificates.5. Admissibility of Additional Evidence:The appellant submitted additional evidence (certificates from NBFCs' auditors) at the Tribunal stage. The AO and CIT(A) had not considered these certificates. The Tribunal admitted the additional evidence and remitted the matter to the AO for verification, emphasizing that the relevant details were available with the revenue from the beginning.Conclusion:The Tribunal allowed the appeal for statistical purposes, setting aside the issue to the AO for verification of whether the NBFCs had included the interest amounts in their taxable income. If verified, no disallowance under Section 40(a)(ia) would be required. The judgment emphasized the retrospective applicability of the second proviso to Section 40(a)(ia) and the importance of equitable interpretation to avoid unintended and harsh consequences for the assessee.