Section 40(a)(ia) disallowance set aside if payee declared income and paid tax under section 194A TDS rules

The ITAT Rajkot set aside the CIT(A) order and remanded the matter to the AO for fresh adjudication regarding TDS non-deduction under section 194A. The tribunal held that under the second proviso to section 40(a)(ia), which has retrospective effect from 01/04/2005, the payer is not in default if the payee has included the payment in its income and paid tax thereon. The AO was directed to verify whether the payee had declared the amount and paid tax; if so, the disallowance under section 40(a)(ia) should be deleted. The decision aligns with the Delhi HC ruling in CIT v. Ansal Land Mark Township Pvt. Ltd. affirming the curative retrospective effect of the proviso.

---

---

ISSUES:

Whether disallowance of expenses under section 40(a)(ia) of the Income Tax Act, 1961 is justified where Tax Deducted at Source (TDS) was not deducted by the assessee on certain payments.Whether the second proviso to section 40(a)(ia) applies to exempt disallowance if the payee has included the amount in its income and paid tax thereon.Whether additions made under section 143(1) of the Income Tax Act, 1961, based on audit report and non-deduction of TDS, are valid.

RULINGS / HOLDINGS:

The disallowance under section 40(a)(ia) of the Act confirmed by the lower authorities is set aside and the matter is remanded to the Assessing Officer for fresh adjudication to verify if the payee has included the amount in its income and paid taxes thereon, as per the second proviso to section 40(a)(ia).The second proviso to section 40(a)(ia) is a "curative amendment" with "retrospective effect w.e.f. 1st April, 2005," and exempts disallowance where the payee has complied with tax obligations.Additions made under section 143(1) based on audit report and non-deduction of TDS are subject to reassessment upon verification of the payee's tax compliance and cannot be sustained without such verification.

RATIONALE:

The Court applied the statutory framework of sections 40(a)(ia), 143(1), and 201 of the Income Tax Act, 1961, including the amendment introduced by the Finance Act, 2012, which inserted the second proviso to section 40(a)(ia).The Court relied on judicial precedents, notably the decision of the Hon'ble Delhi High Court in CIT v. Ansal Land Mark Township Pvt. Limited, which upheld the Tribunal's view that the second proviso is declaratory and curative with retrospective effect from 1st April 2005.The Court emphasized that the assessing officer must verify the payee's income tax return and tax payment to determine applicability of the proviso, thereby requiring fresh adjudication rather than outright disallowance.No dissent or doctrinal shift was noted; the judgment aligns with established precedent affirming the retrospective and curative nature of the second proviso to section 40(a)(ia).

---