TDS non-deduction on interest to NBFCs: three payments accepted as taxed, fourth remitted for verification and possible disallowance

Non-deduction of TDS on interest paid to NBFCs raised disallowance of 30% of interest under disallowance rules for non-withholding; tribunal relied on precedent that where the payee has included the receipt in its return and paid tax, the payer cannot be saddled with disallowance, resulting in deletion of disallowance for three NBFCs as they produced evidence of income inclusion and tax payment. For payments to the fourth NBFC, absence of documentary proof of the payees tax treatment led to remand to the assessing officer to verify whether the payee accounted for and paid tax on the interest; matter partly allowed.

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Issues: (i) Whether expenditure by way of interest can be disallowed under section 40(a)(ia) where the recipients have included such receipts in their returns and paid tax thereon (substantiated by Form 26A); (ii) Whether disallowance under section 40(a)(ia) can be sustained in respect of a recipient for whom the assessee has not furnished Form 26A/ITR or other conclusive evidence of tax having been paid.

Issue (i): Whether interest payments to certain recipients should be disallowed u/s 40(a)(ia) despite production of Form 26A and evidence that recipients included the receipts in their returns and paid tax.

Analysis: The Tribunal examined whether the requirements of the proviso to section 40(a)(ia) are satisfied by production of Form 26A and other documentary evidence showing that recipients included the amounts in their taxable income and paid tax. The Tribunal relied on settled authority holding that where the payee has already paid tax on the income received, the deductor should not be subjected to recovery or disallowance under withholding provisions; it also considered relevant Tribunal decisions applying the principle and procedural provisions (including electronic filing procedures under CBDT Notification No. 11 of 2016) governing Form 26A and related compliance.

Conclusion: In favour of the Assessee. Disallowance u/s 40(a)(ia) cannot be made in respect of interest payments where the recipients have included the receipts in their returns and paid tax thereon, substantiated by Form 26A and supporting documents; the AO is directed to delete such additions and modify the assessment accordingly.

Issue (ii): Whether the disallowance u/s 40(a)(ia) should be sustained in respect of interest paid to a recipient for whom the assessee failed to produce Form 26A/ITR or equivalent conclusive evidence that tax has been paid by the recipient.

Analysis: The Tribunal considered the absence of concrete documentary evidence (Form 26A/ITR) for the specific recipient and the legal requirement that the payee's inclusion and payment of tax be demonstrated to invoke the proviso preventing disallowance. The Tribunal noted that where such evidence is not available, the AO must verify the factual position of whether the recipient has accounted for and paid tax on the receipt before deleting the disallowance.

Conclusion: Against the Assessee on the present record. The issue is remitted to the Assessing Officer for verification of whether the recipient accounted for and paid tax on the interest; the AO shall examine available records and any further documents the assessee may furnish and modify the assessment after giving the assessee an opportunity of hearing.

Final Conclusion: The appeal is partly allowed: disallowances are set aside in respect of payments where the recipients have proved inclusion and payment of tax; the assessment is restored to the AO for verification in respect of the recipient lacking such proof.

Ratio Decidendi: Where a recipient of income has included the amount in its return and paid tax thereon (substantiated by Form 26A or equivalent evidence), the proviso to section 40(a)(ia) precludes disallowance of the corresponding expenditure against the deductor; absent such proof for a particular recipient, the issue must be verified by the Assessing Officer.

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