2023 (4) TMI 1112 - AT - Income Tax

Tribunal Grants Relief on Interest Expenditure Disallowance

Shri Ravindra Dayanand Sankeshwar Versus The Deputy Commissioner of Income Tax, Circle – 1 (1), Hubli.

Shri Ravindra Dayanand Sankeshwar Versus The Deputy Commissioner of Income Tax, Circle – 1 (1), Hubli. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether expenditure by assessee towards interest is liable to be disallowed under section 40(a)(ia) for failure to furnish Forms 15G/15H to the deductor during the year under consideration. 2. Whether filing of Forms 15G/15H is purely procedural such that absence of contemporaneous filing before the deductor cannot itself justify disallowance under section 40(a)(ia), particularly where payees have declared the amounts in their returns. 3. Whether, in view of the amendment effective from A.Y. 2015-16, disallowance under section 40(a)(ia) is to be restricted to 30% of the relevant expenditure where TDS was not deducted. 4. Whether an addition under the head 'Income from Other Sources' results in double taxation where the returned loss adopted for assessment computation already considered that income, and what verification is required. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Disallowance under section 40(a)(ia) for non-furnishing of Forms 15G/15H Legal framework: Section 40(a)(ia) disallows expenditure in the hands of the payer where tax is required to be deducted at source but is not deducted. Forms 15G/15H are statutory declarations enabling non-deduction of TDS by the payer when furnished to the prescribed authority/deductor. Precedent treatment: The Tribunal relied on decisions of the Karnataka High Court (Sri Marikamba Transport Co.) and a coordinate Bench of this Tribunal (Karnataka Vikas Grameena Bank) holding that where payees furnish Forms 15G/15H, disallowance under section 40(a)(ia) should not follow; and that filing Forms 15G/15H with the prescribed authority is procedural and cannot, in itself, justify disallowance. Interpretation and reasoning: The Court observed that no TDS was in fact deducted by the payer on the interest. The assessee produced Forms 15G/15H (recorded in the paper book) which, if held to pertain to the amounts in issue, negate the statutory requirement for TDS. The Revenue disputed authenticity and temporal nexus (i.e., whether the forms relate to the year/amounts in dispute) and urged verification. The Tribunal accepted the line of precedent that contemporaneous filing is procedural and that the key question is whether the payees were entitled to non-deduction (as evidenced by valid Forms 15G/15H or by the payee's tax position such as returns showing income and tax liability). Given the factual dispute and lack of verification at assessment stage, the Tribunal directed that the Forms 15G/15H be furnished to the Assessing Officer who must verify them, consider the claim, and afford an opportunity of being heard. Ratio vs. Obiter: Ratio - Where valid Forms 15G/15H are furnished and verified to relate to the amounts in question, disallowance under section 40(a)(ia) is not warranted; filing with the prescribed authority is procedural and does not by itself justify disallowance. Obiter - Observations on adequacy of the affidavit submitted by the consultant and on the form particulars as raised by Revenue are factual directions rather than binding legal propositions. Conclusions: The Tribunal allowed the grounds challenging the disallowance under section 40(a)(ia) for statistical purposes and remitted the matter to the Assessing Officer for verification of Forms 15G/15H and appropriate consideration after giving opportunity of being heard. The Tribunal accepted that, if verified, Forms 15G/15H preclude disallowance even if not filed contemporaneously before the AO, following the cited precedents. Issue 3 - Extent of disallowance in view of amendment (30% rule) Legal framework: Amendment effective from A.Y. 2015-16 (Finance Act, 2014) introduced a limiting provision under which 30% of expenditure on which TDS was not deducted may be disallowed, instead of full disallowance. Precedent treatment: The CIT(A) applied the statutory amendment to restrict disallowance to 30% where no TDS was deducted and where Forms 15G/15H were not demonstrated at assessment/appellate stage. Interpretation and reasoning: The Tribunal noted the CIT(A)'s finding that section 40(a)(ia) was amended w.e.f. A.Y. 2015-16 and that, absent substantiation that payees had validly procured exemption from tax deduction, the disallowance ought to be limited to 30% of the relevant expenditure. However, because the Tribunal directed verification of Forms 15G/15H, the 30% computation was not finally adjudicated at Tribunal once verifications could alter entitlement. Ratio vs. Obiter: Ratio - Where TDS has not been deducted and valid exemption/declaration is not demonstrated, disallowance is to be limited to 30% as per the statutory amendment. Obiter - The precise apportionment between items may be fact-sensitive and is dependent on verification steps ordered. Conclusions: The CIT(A)'s restriction of disallowance to 30% of Rs.77,74,626 (i.e., Rs.23,32,387) was treated as appropriate in absence of verified Forms 15G/15H; nonetheless, the Tribunal remitted the factual question of entitlement to non-deduction to the AO for fresh verification, leaving open adjustment based on outcomes of that verification. Issue 4 - Alleged double taxation on 'Income from Other Sources' addition Legal framework: Assessment must reflect incomes and losses as per returns and allowed adjustments; additions should not result in double taxation where returned loss already incorporated the said income. Precedent treatment: The Tribunal did not cite authority but required factual verification by the AO where conflicting computations suggest potential double counting. Interpretation and reasoning: The Tribunal observed that the assessee contended the figure of returned loss used for assessment computation already accounted for the income from other sources; hence, the separate addition was alleged to produce double taxation. Given this factual dispute, the Tribunal directed the Assessing Officer to verify the computation and consider the claim in accordance with law. Ratio vs. Obiter: Ratio - Where an addition duplicates an item already accounted for in the returned computation, the Assessing Officer must verify and correct to avoid double taxation. Obiter - None. Conclusions: The Tribunal remitted the matter to the Assessing Officer for verification of the alleged double taxation and directed consideration in accordance with law; the Tribunal allowed the ground on this issue for statistical purposes pending such verification. Cross-references and Directions - Issues 1-3 are interlinked: entitlement to non-deduction (validated Forms 15G/15H) negates or reduces disallowance under section 40(a)(ia) and interacts with the 30% limitation introduced for A.Y. 2015-16 onward. - The Tribunal mandated that Forms 15G/15H be furnished to the Assessing Officer and that the AO carry out necessary verification, including ascertaining temporal nexus and amounts, and afford the assessee a hearing before finalizing disallowance or relief. - The Tribunal remitted the computation/dispute regarding 'Income from Other Sources' to the Assessing Officer for verification to determine whether double taxation has arisen and to rectify the assessment accordingly.