Interest payment disallowance under section 40(a)(ia) deleted when recipients paid taxes on received amounts

ITAT Chandigarh upheld CIT(A)'s deletion of disallowance u/s 40(a)(ia) for non-deduction of TDS on interest payments. The tribunal held that when recipients included interest in their income and paid taxes, the assessee cannot be deemed in default. Non-filing of Form 26A attracts penalty but not expenditure disallowance. Regarding section 14A disallowance, the tribunal restricted it to dividend income amount, ruling disallowance cannot exceed total exempt income earned during the year.

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Issues Involved:
1. Condonation of delay in filing Cross Objections.
2. Disallowance u/s 40(a)(ia) for non-filing of Form 26A.
3. Disallowance u/s 14A read with Rule 8D.

Summary:

Condonation of Delay:

The Cross Objection was time-barred by 113 days. The delay was due to negligence of the office staff who forgot to hand over the documents to the concerned department. The Tribunal found sufficient cause for the delay and condoned it.

Disallowance u/s 40(a)(ia):

The AO disallowed Rs. 1,86,96,356/- u/s 40(a)(ia) because the assessee did not file Form 26A before the Director General of Income Tax (Systems). The CIT(A) deleted the disallowance, noting that the recipients had included the interest in their income and paid taxes. The Tribunal upheld this decision, citing that non-filing of Form 26A can result in a penalty but not disallowance of expenditure. The Tribunal relied on precedents from the Cuttack Bench and the Agra Bench, as well as the Delhi High Court's decision in "CIT-1 Vs Ansal Land Mark Township (P) Ltd." and the Punjab & Haryana High Court's decision in "Pr. CIT-2, Chandigarh Vs Shri Shivpal Singh Chaudhary".

Disallowance u/s 14A read with Rule 8D:

The AO made an additional disallowance of Rs. 2,09,78,997/- u/s 14A, over and above the assessee's suo-moto disallowance of Rs. 48,48,048/-. The CIT(A) restricted the disallowance to Rs. 48,48,048/-. The Tribunal held that disallowance u/s 14A cannot exceed the exempt income earned, which was Rs. 7,12,442/-. The Tribunal cited decisions from the Madras High Court in "M/s Marg Ltd. Vs CIT, Chennai", and other supporting judgments, including those from ITAT Bangalore and ITAT Delhi.

Final Decision:

The Department's appeal was partly allowed, and the Cross Objection filed by the assessee was allowed. The disallowance u/s 14A was restricted to Rs. 7,12,442/-.

Order pronounced on 12th April, 2024.

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