Disallowance under section 40(a)(ia) on payments by charitable trust: tribunal deletes disallowance where income is from other sources

Prior to 01.04.2018, provisions disallowing expenses for failure to deduct tax at source could not be applied to amounts taxed under the head income from other sources; the Finance Act 2017 amendment (Section 58(1A)) made these disallowance provisions applicable to such income only prospectively. Applying that principle, the tribunal found the assessing officer erred in invoking disallowance for honorarium and computer fees paid by a charitable trust whose receipts were assessed as income from other sources, and deleted the disallowance. The tribunal relied on its earlier similar precedent to allow the assessee's appeal.

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Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 can be made for payments in respect of a charitable trust whose receipts are assessed under the head 'income from other sources' for Assessment Year 2011-12.

Analysis: The appeal concerns a registered charitable trust not engaged in business or profession, with income shown under the head 'income from other sources'. An amendment introduced by the Finance Act, 2017 (effective 01.04.2018) and reflected in section 58(1A) renders the provisions corresponding to disallowance for non-deduction of tax at source applicable to 'income from other sources' only from A.Y. 2018-19 onwards. Prior to that effective date, the disallowance provisions did not apply to amounts chargeable as income from other sources. Applying this legal framework to the facts of A.Y. 2011-12 leads to the conclusion that the assessing authority lacked jurisdiction to make the impugned disallowance under section 40(a)(ia) in respect of payments of honorarium and computer fees made by the charitable trust.

Conclusion: Disallowance under section 40(a)(ia) cannot be made for the charitable trust's payments in A.Y. 2011-12 where the income is chargeable under 'income from other sources'; the impugned disallowance of Rs. 17,65,000 is set aside and the assessee's grounds of appeal are allowed.

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