Retrospective relief under section 40(a)(ia) prevents disallowance when the recipient has already paid tax on the income.

The second proviso to section 40(a)(ia) is treated as a curative provision that operates retrospectively to remove hardship where the recipient has already accounted for the interest income and paid tax on it. In that situation, the disallowance for failure to deduct tax at source should not survive. The Tribunal also accepted additional evidence showing possible tax compliance by the payees and remitted the matter for limited verification by the Assessing Officer, with directions to delete the addition if the impugned interest had already been subjected to tax in the hands of the recipients.

---

---

Issues: (i) Whether the second proviso to section 40(a)(ia) of the Income-tax Act, 1961, applied retrospectively so as to relieve the assessee from disallowance where the payee had already accounted for the interest income and paid tax thereon; (ii) whether the assessee's additional evidence could be admitted and the matter restored to the Assessing Officer for verification of the payees' tax compliance.

Issue (i): Whether the second proviso to section 40(a)(ia) of the Income-tax Act, 1961, applied retrospectively so as to relieve the assessee from disallowance where the payee had already accounted for the interest income and paid tax thereon.

Analysis: The disallowance arose from failure to deduct tax at source on interest paid to NBFC payees. The proviso inserted to section 40(a)(ia) was treated as a remedial measure intended to remove undue hardship and to prevent a double hardship where the recipient had already included the sum in its return and paid tax. The Tribunal accepted the line of authority treating the proviso as curative and retrospective in operation.

Conclusion: The second proviso to section 40(a)(ia) was held to be retrospective, and if the payee had offered the interest to tax, the disallowance would not survive.

Issue (ii): Whether the assessee's additional evidence could be admitted and the matter restored to the Assessing Officer for verification of the payees' tax compliance.

Analysis: The assessee produced a chartered accountant's certificate and sought to rely on additional evidence showing that at least one payee had included the interest in taxable income. The Tribunal exercised its power to admit the evidence and found it necessary to restore the matter for verification, including calling for records from both payees, so that the factual foundation for the disallowance could be conclusively tested.

Conclusion: The additional evidence was admitted and the issue was remitted to the Assessing Officer for limited verification, with a direction to delete the addition if the payees had already paid tax on the impugned interest.

Final Conclusion: The appeal was not finally decided on the merits of the disallowance and was sent back for factual verification, with the assessee obtaining partial relief in the form of admission of additional evidence and a conditional path to deletion of the addition.

Ratio Decidendi: A curative proviso inserted to remove undue hardship in a tax deduction disallowance provision is to be applied retrospectively, and no disallowance should stand where the recipient has already accounted for the income and discharged the tax liability.

---