Retrospective relief under TDS disallowance proviso prevents section 40(a)(i) disallowance where payee has complied with tax conditions.

The second proviso to section 40(a)(i) of the Income-tax Act, 1961 is treated as a curative amendment and applied retrospectively, on the view that it is pari materia with the corresponding proviso to section 40(a)(ia). Where the non-resident payee has filed its return, included the sum, paid tax, and furnished the accountant's certificate required for the benefit of section 201(1), the disallowance for non-deduction of tax at source is not sustained. On that basis, the assessee is not treated as in default and the disallowance is set aside.

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Issues: Whether the second proviso to section 40(a)(i) of the Income-tax Act, 1961, inserted with effect from 01.04.2020, applies retrospectively so as to delete the disallowance for non-deduction of tax at source where the payee has furnished its return, taken the sum into account, paid tax, and furnished the requisite accountant's certificate under section 201(1) of the Income-tax Act, 1961.

Analysis: The payment in question was made to a non-resident payee whose income, on the record before the Tribunal, was not chargeable to tax in India. The payee had furnished its return of income and the supporting certificate required for the benefit of the first proviso to section 201(1) of the Income-tax Act, 1961. The Tribunal treated the second proviso to section 40(a)(i) as pari materia with the corresponding proviso to section 40(a)(ia), both being introduced to remove an anomaly and to operate as curative provisions. Relying on the judicial view that the analogous amendment in section 40(a)(ia) is retrospective, the Tribunal held that the amendment to section 40(a)(i) must also be given retrospective effect.

Conclusion: The second proviso to section 40(a)(i) of the Income-tax Act, 1961 is retrospective, and the assessee could not be treated as in default for the disallowance. The additional ground was allowed and the disallowance was set aside.

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