2026 (2) TMI 1311 - AT - Income Tax

Show-cause notice compliance upheld, but provisos to section 40(a)(i) require reassessment and factual verification by assessing officer.

Assessee's challenge to an assessment disallowance for non-deduction of tax was rejected on the procedural ground that a specific prior show-cause notice ... Disallowance u/s 40(a)(i) - non-deduction of tax u/s 195 - contended by the AR that as per provisions of section 9(1)(vii), no income accrued or arose in India in this case, and therefore, no tax was deductible - claim of the AR that during the year, the assessee was providing services to only one client situated at USA HELD THAT:- Payment of any interest, royalty, fee for technical services or other sum which is payable outside India or in India to a non-resident would be disallowed in case TDS has not been deducted and deposited by the prescribed due date. Section provides exceptions in terms of the two provisos whereby the disallowance shall not be made if certain conditions are satisfied. Specifically, in the second proviso, it is provided that if the assessee is able to demonstrate that it is not an assessee in default under the first proviso to section 201(1) then it shall be deemed that the assessee had deducted and paid the tax on such sum and the amount would be allowed as deduction in computing the income. Lower authorities have not examined the issue in the light of these provisos to determine whether the impugned amount is allowable to the assessee subject to fulfilment of the prescribed conditions. Restore the matter to the AO for fresh consideration in the light of above provisos of section 40(a)(i) r.w.s. 201(1) - Appeal of the assessee is allowed for statistical purposes. Issues: (i) Whether the impugned disallowance could be sustained when a prior show-cause notice as required by CBDT Instruction No.20/2015 was or was not issued to the assessee; (ii) Whether the disallowance of Rs. 2,03,43,700/- under section 40(a)(i) for non-deduction of tax under section 195 was justified on merits, including the applicability of section 9(1)(vii) exception.Issue (i): Whether the assessment disallowance is vitiated for lack of a proper show-cause notice in accordance with CBDT Instruction No.20/2015.Analysis: The facts show the case was selected for limited scrutiny for non-deduction of TDS on payments to non-residents and notices under sections 143(2) and 142(1) were issued requesting details of such payments. A specific show-cause notice asking why the expenditure should not be disallowed was issued on 22.11.2019 and the assessee filed objections. The authorities thereby afforded the assessee an opportunity to explain the proposed disallowance. The controlling administrative instruction requires prior intimation of proposed additions so the assessee can respond; where such intimation is present and objections are considered, the defect in notice as alleged is not established.Conclusion: Issue (i) decided against the assessee; the ground alleging absence of proper show-cause notice is dismissed.Issue (ii): Whether the disallowance under section 40(a)(i) is sustainable where the assessee claims payments relate to services utilized for earning income from a source outside India and thus no TDS was deductible under section 195, relying on section 9(1)(vii).Analysis: The assessing officer and the appellate authority examined factual material including agreements, ledgers and remand report and found that the assessee did not sufficiently substantiate the factual nexus required under the exception in section 9(1)(vii)(b). Reliance on remittance compliance documents alone (e.g., Form 15CA/15CB) was held insufficient; absence of contemporaneous independent confirmations or work-product linkage and non-application for a certificate under the relevant provision limited the factual foundation. However, the statutory provisos to section 40(a)(i) and section 201(1) provide for deemed allowance where conditions in the provisos are satisfied. The lower authorities did not examine the claim in light of those provisos and the record on whether the assessee could meet those conditions was incomplete. In these circumstances, further consideration by the assessing authority on the provisos and factual compliance is necessary.Conclusion: Issue (ii) is remitted to the assessing officer for fresh consideration in light of the provisos to section 40(a)(i) read with section 201(1), after giving the assessee a reasonable opportunity to comply and produce requisite evidence; no final adverse conclusion on merits is sustained by the Tribunal.Final Conclusion: The appeal is allowed for statistical purposes and the matter is restored to the assessing officer for fresh adjudication on the provisos to section 40(a)(i) read with section 201(1) after affording the assessee an opportunity to comply.Ratio Decidendi: Where a taxpayer has been given prior specific notice and an opportunity to respond regarding proposed disallowance, the procedural requirement of a show-cause notice is satisfied; where statutory provisos may permit deemed allowance, the matter must be remitted to the assessing authority for fresh consideration on factual compliance with those provisos.