No disallowance under section 40(a)(ia) even if no deduction of tax at source if Payee has paid tax to Government Account

Short Overview : Second proviso to section 40(a)(ia) is retrospective in nature and in such circumstances, if payee has paid tax to government account then payer cannot be held liable for non-deduction of TDS.

Assessee paid interest to NBFC and debited same under interest in P & L account. Since no tax was deducted, interest paid to NBFC was disallowed under section 40(a)(ia) for failure to deduct tax at source. Assessee’s contention was that amount of interest had been offered to tax recipients and as proof of amount offered, C.A certificates were also filed by assessee.

it is held that Second proviso to section 40(a)(ia) is retrospective in nature and in such circumstances, if payee has paid tax to government account then payer cannot be held liable for non deduction of TDS and no disallowance would be warranted under section 40(a)(ia). Assessee had furnished additional evidences and necessary certificates from C.A. demonstrating that taxes have been paid by payee on amount received as interest from assessee. Thus, matter was restored back to AO to verify payments of taxes made by payee and adjudicate issue after providing reasonable opportunity of hearing to assessee.

Decision: In favour of assessee by way of remand.

Relied: M/s. Hindustan Coca Cola Beverage (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) : 2007 TaxPub(DT) 1452 (SC), Pr. CIT-5 v. Perfect Circle India (P) Ltd. in (Income Tax Appeal No. 707 of 2016, dt. 7-1-2019) : 2019 TaxPub(DT) 1226 (Bom-HC), CIT-1 v. Ansal Land Mark Township (P) Ltd. (2015) 377 ITR 635 (Del) : 2015 TaxPub(DT) 3482 (Del-HC).

IN THE ITAT, PUNE BENCH

ANIL CHATURVEDI, A.M. & PARTHA SARATHI CHAUDHURY, J.M.

Sai Pushpa Sharada Alliance v. ITO

ITA No. 595/PUN/2017

2 May, 2019

Assessee by: Nikhil Pathak

Revenue by: Sudhendu Das

Partha Sarathi Chaudhury, J.M.

This appeal preferred by the assessee emanates from the order of the learned Commissioner (Appeals)-2, Pune dated 20-12-2016 for the assessment year 2012-13 as per the grounds of appeal on record.

2. The assessee has filed grounds of appeal and also additional grounds of appeal. However, the crux of the grievance of the assessee in this appeal is the addition made under section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on account of non deduction of TDS for interest paid to Tata Capital Housing Finance Ltd.

3. The brief facts in this case are that the assessee is a partnership firm and is engaged in the business of construction, developers and builders.

The return was filed on 18-9-2012 showing total income of Rs. 25,32,760.

The assessment under section 143(3) of the Act was completed arriving assessed total income of Rs. 1,11,46,124 by making various additions/disallowances as appearing in the assessment order.

4. That with regard to the disallowance made under section 40(a)(ia) of the Act, at the time of hearing, the learned Authorised Representative of the assessee vehemently argued that the assessing officer as well as the learned Commissioner (Appeals) was not justified in disallowing Rs. 47,39,488 under section 40(a)(ia) of the Act with respect to non deduction of TDS on interest paid to Tata Capital Housing Finance Ltd. The learned Authorised Representative of the assessee further submitted that the second proviso to section 40(a)(ia) of the Act is retrospective in nature and hence, it is applicable to the case of the assessee and therefore, no disallowance is warranted under section 40(a)(ia) of the Act on account of non deduction of tax on the interest paid to the Co-operative credit societies.

5. The facts on record suggests that during the period under consideration, the assessee had paid interest to Tata Capital Housing Finance Ltd. amounting to Rs. 47,39,488 which the assessee has debited under the head interest in the P & L account. During the course of scrutiny proceedings, the assessee was asked whether any TDS has been deducted on the interest paid to Tata Capital Housing Finance Ltd. as the same is an NBFC and if no tax has been deducted, the learned Authorised Representative was asked to explain why the amount of Rs. 47,39,488 paid as interest to NBFC should not be disallowed as per the provisions of section 40(a)(ia) of the Act for failure to deduct tax at source.

It is with regard to this situation, the learned Authorised Representative of the assessee has placed reliance on the decision of Pune Bench of the Tribunal in ITA Nos. 1370 & 1371/PUN/2015 for the assessment years 2009-10 and 2012-13 and ITA Nos. 22 & 23/PUN/2016 for the assessment years 2010-11 and 2011-12 wherein, the Tribunal was faced with similar kind of facts. There was disallowance of expenditure under section 40(a)(ia) of the Act since the assessee has not deducted TDS under section 194A of the Act before making the payment of interest and therefore, the expenditure was disallowed by the assessing officer under section 40(a)(ia) of the Act. However, the assessee’s contention was that the amount of interest paid by the assessee have been offered to tax by the respective recipients and as proof of the amount offered by the respective recipient to tax is also certified by their Chartered Accountants and the necessary C.A certificates were also filed by the assessee.

6. The Pune Bench of the Tribunal in ITA Nos. 1370 & 1371/PUN/2015 and in ITA Nos. 22 & 23/PUN/2016 (supra.) has observed that the Hon’ble Kerala High Court in the case of Prudential Logistics and Transport v. ITO (2014) 364 ITR 689 (Ker) : 2014 TaxPub(DT) 1927 (Ker-HC) has held that amendment made to proviso to section 40(a)(ia) is prospective. On the other hand, the Hon’ble Delhi High Court in the case of CIT v. Ansal Land Mark Township (P) Ltd. (2015) 377 ITR 635 (Del) : 2015 TaxPub(DT) 3482 (Del-HC) has taken a view that second proviso to section 40(a)(ia) is declaratory and curable in nature and has retrospective effect from 1-4-2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. Thus, the Tribunal had remitted the issue back to the file of the assessing officer to verify the contention of the assessee vis-à-vis documentary evidences placed on record namely, certificate of C.A whether the recipients of the interest amount had paid tax so that there is no loss of the Revenue and adjudicate the matter.

7. Reverting to the facts of the present case before us, the learned Authorised Representative of the assessee at the time of hearing submitted the copies of certificate of C.A as additional evidences wherein it is stated that recipients of interest i.e. Tata Capital Housing Finance Ltd. has paid the requisite tax to the Government.

The learned Authorised Representative of the assessee prayed that this issue needs verification by the assessing officer and therefore, the matter may be restored back to the file of the assessing officer. That further, it was submitted by the learned Authorised Representative of the assessee that as on the present date the relevant judgment on the issue has been delivered by the Hon’ble Bombay High Court in the case of Principal Commissioner-5 v. Perfect Circle India (P) Ltd. in Income Tax Appeal No. 707 of 2016 wherein the Hon’ble Bombay High Court has placed reliance on the view taken by the Hon’ble Delhi High Court in the case of CIT v. Ansal Land Mark Township (P) Ltd. (supra.) and has held that the second proviso to section 40(a)(ia) is retrospective in nature with effect from 1-4-2005 i.e. the date when the main proviso to 40(a)(ia) itself was inserted. This view was taken in consonance to the opinion of the Hon’ble Apex Court in the case of Hindustan Coca Cola Beverages (P) Ltd. v. CIT in Appeal (Civil) 3765 of 2007 that even in absence of the second proviso to section 40(a)(ia) if it is noticed that the payee had already paid the tax, under such circumstances, the Court held that the payer/deductor can at best be asked to pay the interest on delay in depositing tax and no further liability is warranted.

8. Per contra, the learned Departmental Representative has submitted that the assessee failed to appear on various dates of hearing before the learned Commissioner (Appeals) for which the learned Commissioner (Appeals) had passed an ex parte order based on materials available on record. The learned Departmental Representative contended that at best, the matter may be restored to the file of the learned Commissioner (Appeals).

9. We have perused the case records and heard the rival contentions. We find that it is an undisputed fact that interest has been paid to Tata Capital Housing Finance Ltd. by the assessee and while doing so TDS was not deducted and therefore, assessee was found in default and addition was made under section 40(a)(ia) of the Act. Now there is second proviso to section 40(a)(ia) of the Act which states that any kind of omission by payer for non deduction of TDS and if the payee pays respective tax on such amount received, to the Government Account, in such scenario Payer will not be held liable for non deduction of TDS any further.

Now the question arises as to from which point of time this proviso will be applicable. Before us, the contention of the assessee is that the second proviso to section 40(a)(ia) of the Act is retrospective in nature starting from 1-4-2005 i.e. the date when the main proviso itself was inserted. Earlier the Hon’ble Kerala High Court in the case of Prudential Logistics and Transport v. ITO (supra.) has held that this proviso is prospective in nature. However, we find that thereafter, the Hon’ble Delhi High Court in the case of CIT v. Ansal Land Mark Township (P) Ltd. (supra.) as well as the Hon’ble Bombay High Court in the case of Principal Commissioner-5 v. Perfect Circle India (P) Ltd. (supra.) have taken a view that the second proviso to section 40(a)(ia) of the Act has retrospective effect from 1-4-2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. Further, the Hon’ble Supreme Court has held in the Hindustan Coca Cola Beverages (P) Ltd. v. CIT (supra.) that even in absence of second proviso to section 40(a)(ia) if it is noticed that the payee had already paid the tax, on the amount received under such circumstances, the Court held that the payer/deductor can at best be asked to pay the interest on delay in depositing tax and no further liability is warranted in the hands of the payer/deductor.

10. In the present case before us, the learned Authorised Representative submitted the necessary certificates from C.A showing that the amounts of interest paid by the assessee have been offered to tax by the respective recipients and had requested the matter may be remitted to the file of the assessing officer for proper verification on this count. The learned Departmental Representative on the other hand, was of the opinion that since its an ex parte order was passed by the learned Commissioner (Appeals) based on materials available on record, at best the matter may be restored back to the file of the learned Commissioner (Appeals). However, since we have come across the judicial pronouncements wherein majority view is that the second proviso to section 40(a)(ia) is retrospective in nature and in such circumstances, on application of that proviso if the payee has paid the tax to the government account then the payer cannot be held liable for non deduction of TDS and no disallowance would be warranted under section 40(a)(ia) of the Act. The learned Authorised Representative has placed before us the additional evidences and necessary certificates from C.A. demonstrating that the taxes have been paid by the payee on the amount received as interest from assessee. These facts needs to be verified and established therefore, we set aside the order of the learned Commissioner (Appeals) and restore the matter back to the file of the assessing officer to verify the payments of taxes made by the payee and adjudicate the issue after providing reasonable opportunity of hearing to the assessee.

11. In the result, appeal of the assessee is allowed for statistical purposes.