2017 (11) TMI 670 - AT - Income Tax

Tribunal: Retrospective Effect of Section 40(a)(ia) Clarified

The Tribunal allowed the appeal of the assessee, holding that the second proviso to Section 40(a)(ia) of the Income Tax Act is declaratory and curative, ... Disallowance of interest paid to NBFCs without deduction of tax u/s 40(a)(ia) - Tax withholding obligations u/s 194A of the Act not discharged - assessee submitted the certificate of the C.A., in prescribed performa, in respect of each company and all these NBFCs are assessed to tax in India on their income - rationale behind the insertion of the second proviso to Section 40(a) (ia) - Held that:- As decided in case of Rajeev Kumar Agarwal vs Addl. CIT [2014 (6) TMI 79 - ITAT AGRA] the net effect of the amendments is that the disallowance u/s 40(a)(ia) shall not be attracted in the situations in which even if the assessee has not deducted tax at source from the related payments for expenditure but the recipient of the monies has taken into account the receipts in computation of income, paid due taxes, if any, on the income so computed and has filed his income tax return u/s 139(1) - it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non-deduction of tax at source by the assessee - section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. A curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced - it cannot subscribe to the view that it could have been an 'intended consequence' to punish the assessees for non-deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax - That will be going much beyond the obvious intention of the section - the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Issues Involved:1. Disallowance of interest paid to NBFCs without deduction of tax under Section 40(a)(ia) of the Income Tax Act, 1961.2. Retrospective application of the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Interest Paid to NBFCs Without Deduction of Tax Under Section 40(a)(ia):The assessee was aggrieved by the order confirming the disallowance of interest paid to NBFCs without deducting tax under Section 40(a)(ia) of the Income Tax Act, 1961. The assessee argued that the issue was covered by the decision of the Agra Bench of the Tribunal in the case of Rajeev Kumar Agarwal vs. Addl. CIT and the Hon’ble jurisdictional High Court in the case of Ansal Land Mark Township Pvt. Ltd. The assessee had submitted a certificate from a Chartered Accountant in the prescribed format, indicating that the NBFCs were assessed to tax in India on their income. The Assessing Officer (AO) had observed that the financial companies were neither banking companies nor financial corporations, and thus, the expenses claimed on account of interest/finance charges amounting to Rs. 53,75,972 were disallowed under Section 40(a)(ia) due to non-deduction of TDS and added back to the returned income. The CIT(A) sustained the addition made by the AO, which was challenged before the Tribunal.2. Retrospective Application of the Second Proviso to Section 40(a)(ia):The Tribunal considered the rival submissions and perused the material on record. The Tribunal referred to the decision of the Agra Bench in the case of Rajeev Kumar Agarwal, where it was held that the second proviso to Section 40(a)(ia), introduced by the Finance Act 2012, is declaratory and curative in nature and should be given retrospective effect from 1st April 2005. The second proviso provides that if the assessee fails to deduct tax but the recipient has furnished their return of income, taken into account the sum for computing income, and paid the tax due, the assessee shall be deemed to have deducted and paid the tax on the date of furnishing the return of income by the resident payee. The Tribunal noted that the legislative amendment aimed to ensure that the disallowance under Section 40(a)(ia) is not attracted if the recipient has included the income in their tax returns and paid the due taxes. The Tribunal emphasized that the provision should not be seen as a penalty for non-deduction of tax but as a compensatory measure for ensuring that the income embedded in the payments is brought to tax.The Tribunal also referred to the Hon’ble Delhi High Court's decision, which affirmed the Tribunal's view that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 1st April 2005. The High Court noted that the provision aims to benefit the assessee and should be interpreted in a fair, just, and equitable manner. The High Court emphasized that the provision should not result in undue hardship to the assessee, especially when the recipient has paid the due taxes on the income.Conclusion:Following the Tribunal's and the Hon’ble Delhi High Court's decisions, the Tribunal allowed the appeal of the assessee. The Tribunal held that the insertion of the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 1st April 2005. Therefore, the disallowance of interest paid to NBFCs without deduction of tax was not warranted, as the recipients had included the income in their tax returns and paid the due taxes. The appeal of the assessee was allowed, and the order was pronounced in the open court in the presence of the representatives from both sides.