Tribunal rules interest inclusion as income exempts disallowance

The Tribunal dismissed the Revenue's appeal, affirming that the second proviso to Section 40(a)(ia) applies retrospectively. The deletion of the disallowance by the CIT(A) was upheld, ensuring that no disallowance is made if the recipient has included the interest in their income and paid the corresponding tax.

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Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on interest payment.
2. Applicability of the second proviso to Section 40(a)(ia) retrospectively.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on interest payment:

The Revenue challenged the deletion of disallowance made by the Assessing Officer (AO) under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on interest payments to Religare Finvest Ltd. and Magma Fincorp Ltd., both Non-Banking Finance Companies (NBFCs). The AO disallowed the interest amount of Rs. 54,94,669/- due to non-deduction of TDS. The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that as per the second proviso to Section 40(a)(ia), if the recipient has included the interest in their income and offered it for tax, no disallowance is warranted. The CIT(A) accepted this contention and deleted the disallowance to the extent of Rs. 53,93,858/-, sustaining the remaining disallowance of Rs. 69,364/- for which no certificate was filed. The Revenue appealed against this order.

2. Applicability of the second proviso to Section 40(a)(ia) retrospectively:

The Revenue relied on the Kerala High Court decision in Thoms George Muthoot Vs. CIT, which held that the second proviso to Section 40(a)(ia) was applicable prospectively from 01.04.2013. In contrast, the assessee cited the Supreme Court decision in CIT vs. M/s Calcutta Export Company, which upheld the Delhi High Court's view in CIT vs. Ansal Land Mark Township (P) Ltd., stating that the second proviso is declaratory and curative, hence retrospective from 01.04.2005.

The Tribunal analyzed the relevant material and rival submissions, noting the conflicting views among different High Courts. The Delhi High Court in CIT vs. Ansal Land Mark Township (P) Ltd. emphasized that the proviso, intended to benefit the assessee, should be applied retrospectively. The Tribunal also referenced the Supreme Court's decision in CIT vs. M/s Calcutta Export Company, which supported the retrospective application of the proviso to avoid undue hardship and ensure fairness.

The Tribunal concluded that the second proviso to Section 40(a)(ia) is declaratory and curative, thus applicable retrospectively. Consequently, if the recipient included the interest in their income and paid tax, no disallowance under Section 40(a)(ia) is justified. The Tribunal upheld the CIT(A)'s order, finding no error or illegality.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming that the second proviso to Section 40(a)(ia) applies retrospectively. The deletion of the disallowance by the CIT(A) was upheld, ensuring that no disallowance is made if the recipient has included the interest in their income and paid the corresponding tax. The judgment was pronounced in the open court on 21/05/2018.

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