Form 26A not filed by the assessee – Whether disallowance U/s 40(a)(ia) can be made even if the payee has already offered the income to tax in its ITR

 

An interesting issues arose before ITAT Kolkata as to whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 is sustainable when the assessee failed to deduct tax at source on payment of interest, but the payee has already offered the income to tax in its return, and Form 26A was not filed by the assessee.

The case detail is as under:

ITAT KOLKATA:-MADHU TRANSPORT COMPANY PRIVATE LIMITED VERSUS ITO, WARD-II (1), KOLKATA
No.- ITA No. 1233/KOL/2024
Dated.- April 24, 2025

Let us have a Short Overview of the case:

Facts of the Case:
• Assessee: Madhu Transport Company Private Limited
• AO’s finding: Interest paid to M/s Srei Infrastructure Pvt. Ltd. without deducting TDS.
• CIT(A): Disallowance confirmed due to non-filing of Form 26A as per Section 201(1) read with Rule 31ACB.
• ITAT Kolkata (ITA No. 1233/KOL/2024, dated 24.04.2025): Reversed CIT(A)’s order.

Key Legal Provisions:

a. Section 40(a)(ia):
Provides for disallowance of 30% (earlier 100%) of certain expenditures such as interest, commission, brokerage, etc., if TDS is not deducted or after deduction is not deposited.

b. Proviso to Section 201(1):
Introduced by Finance Act, 2012 w.e.f. 01.07.2012, provides relief to the deductor if:
• Payee has furnished return of income under Section 139.
• Payee has included the said sum in the return.
• Paid taxes due on such income.
• The deductor furnishes Form 26A from a CA certifying compliance.

c. Rule 31ACB and Form 26A:
Prescribes the manner of furnishing the CA certificate. The relevant rule was notified via Income-tax (11th Amendment) Rules, 2012 effective from 12.09.2012.

ITAT Kolkata Ruling Highlights:

a. Recipient Offered Income to Tax:
• Interest was duly offered to tax by M/s Srei Infrastructure Pvt. Ltd.
• This fact was already confirmed by the first appellate authority.

b. Reliance on Supreme Court Judgment:
• Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT (2007) 293 ITR 226 (SC):
The Supreme Court held that tax cannot be recovered from the payer once the payee has paid tax on such income.

c. Form 26A Not Applicable for the Year in Question:
• ITAT held that Form 26A and Rule 31ACB came into force only from 12.09.2012.
• If the assessment year in question falls prior to 12.09.2012, non-filing of Form 26A cannot be a ground for disallowance.

d.  Conclusion of ITAT:
• Since the payee has paid tax, disallowance under Section 40(a)(ia) is not sustainable.
• AO was directed to delete the addition.

It automatically means that if the amount related to prior after 12.09.2012, Form No.26A would be mandatory in nature for allowability.

The copy of the order is as under:

1745486894-wfCP3Q-1-TO