Kayyar Subbanna Shetty Vs ITO (ITAT Bangalore)
Form 26A Is Sufficient to Prevent Section 40(a)(ia) Disallowance-Procedural Filing Default Cannot Defeat Statutory Relief: ITAT Bangalore
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that once an assessee furnishes the prescribed Chartered Accountant’s certificate in Form 26A establishing that the resident payee has declared the relevant income and paid tax thereon, the payer cannot be treated as an assessee in default and no corresponding disallowance can be made under Section 40(a)(ia).
The Tribunal further held that failure to electronically furnish Form 26A before the Director General of Income-tax (Systems), as contemplated under Rule 31ACB, is a procedural lapse that cannot override the substantive relief granted by Sections 201(1) and 40(a)(ia).
Facts of the case
The assessee was an individual carrying on business as proprietor of Akshaya Power Services, Mangaluru.
During the relevant year, the assessee paid interest of ₹2,97,146 on a car loan obtained from Tata Capital. The interest expenditure was debited to the profit and loss account and claimed as a deduction while computing business income.
The assessee was required to deduct tax at source from the interest payment. Since no tax was deducted, the Assessing Officer invoked Section 40(a)(ia) and disallowed the entire interest expenditure of ₹2,97,146.
Assessee’s contention before CIT(A)
The assessee relied upon the first proviso to Section 201(1), inserted by the Finance Act, 2012 with effect from 1 July 2012, and the second proviso to Section 40(a)(ia), effective from 1 April 2013.
Under these provisions, a payer who fails to deduct tax on a payment made to a resident is not treated as an assessee in default if the resident payee:
- has furnished its return of income under Section 139;
- has taken the amount received from the payer into account while computing income in that return; and
- has paid the tax due on the income declared in the return.
The payer is required to furnish a certificate from an accountant in the prescribed form confirming satisfaction of these conditions.
The assessee produced a Chartered Accountant’s certificate in Form 26A and contended that since the payee had already accounted for the interest and discharged the corresponding tax liability, the assessee could not be treated as an assessee in default. Consequently, no disallowance could be made under Section 40(a)(ia).
Reason for rejection by CIT(A)
The CIT(A) did not accept the assessee’s contention.
According to the CIT(A), Rule 31ACB required Form 26A to be furnished to the Director General of Income-tax (Systems) or the person authorised by him. The assessee was unable to confirm whether Form 26A had been furnished in the prescribed electronic manner to the designated authority.
The CIT(A), therefore, held that the procedural requirement under Rule 31ACB had not been demonstrated to have been complied with and confirmed the disallowance made under Section 40(a)(ia).
The assessee carried the matter in appeal before the Tribunal.
Question before the Tribunal
The principal question was whether a Chartered Accountant’s certificate in Form 26A could be accepted as sufficient evidence that the resident payee had included the relevant payment in its return and paid the applicable tax, even though the assessee had not established electronic filing of the form before the Director General of Income-tax (Systems).
Findings of the Tribunal
The Tribunal examined the first proviso to Section 201(1), the second proviso to Section 40(a)(ia) and Rule 31ACB.
The first proviso to Section 201(1) provides substantive relief to a payer who failed to deduct tax where the resident payee has already filed its return, included the relevant receipt in its income and paid the tax due. Once these conditions are fulfilled and certified by an accountant, the payer is not treated as an assessee in default.
The second proviso to Section 40(a)(ia) carries the same principle into the computation of business income. If the payer is not treated as an assessee in default under the first proviso to Section 201(1), it is deemed, for Section 40(a)(ia), that the tax was deducted and paid on the date on which the resident payee furnished its return.
In the present case, the assessee had furnished a Chartered Accountant’s certificate in the prescribed Form 26A. The certificate established compliance with the essential conditions relating to the payee’s return, inclusion of income and payment of tax.
The Tribunal held that the further requirement under Rule 31ACB concerning filing of Form 26A before the Director General of Income-tax (Systems) was procedural in nature. Non-compliance with that filing procedure could not become the basis for denying the substantive statutory relief.
The proviso to Section 201(1) authorised prescription of the form of the accountant’s certificate. It did not authorise the Rules to introduce an additional substantive condition for escaping the consequences of Section 201(1).
The Tribunal emphasised the fundamental principle that Rules cannot override the Act or impose conditions beyond those contemplated by the Act.
Accordingly, the disallowance of ₹2,97,146 under Section 40(a)(ia) was deleted, and the assessee’s appeal was allowed.
Author’s comments
The judgment applies the principle that TDS provisions are intended to secure collection of tax and not to produce a double consequence where the recipient has already declared the income and paid the appropriate tax.
The first proviso to Section 201(1) protects the payer from being treated as an assessee in default. The second proviso to Section 40(a)(ia) extends that protection to the deduction of expenditure. Therefore, both provisions must be read together.
However, the protection is available only where the payment has been made to a resident payee and all the statutory conditions are established. Mere production of the payee’s PAN, ledger confirmation or general statement that the payee has filed its return would not ordinarily be sufficient. The payer should obtain a properly certified Form 26A confirming that the precise amount in question was included in the payee’s income and that the tax due was paid.
The decision distinguishes between the substantive conditions contained in the Act and the procedural mechanism prescribed by the Rules. Where the substantive conditions are conclusively established through a valid accountant’s certificate, a technical defect in its mode or place of filing should not resurrect the Section 40(a)(ia) disallowance.
Nevertheless, as a matter of present-day compliance, the prescribed electronic procedure should be followed completely. This judgment offers protection against denial of relief for a procedural lapse; it should not be treated as permission to ignore the electronic filing requirement.
The decisive proposition is that once the resident payee has offered the income and paid tax, and this is certified in Form 26A, the payer is deemed compliant for Section 40(a)(ia). A procedural rule cannot impose a harsher consequence than the Act itself.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE
This is an appeal filed by the assessee against the order dated 28.6.2018 of the CIT(Appeals)-10, Bengaluru relating to assessment year 2014-15.
2. The Assessee is an individual. The Assessee paid interest of Rs.3,10,156 (Rs.2,97,146/-) on car loan availed from TATA Capital.
The Assessee was obliged to deduct tax at source on payment of interest. Since the assessee failed to deduct tax at source, the AO disallowed the sum of Rs.2,97,146/- which was claimed as expenses by the assessee in the profit and loss account by invoking the provision of section 40(a)(ia) of the Income Tax Act, 1961 (Act).
3. Before CIT(A), the assessee submitted that as per the second proviso to section 40(a)(ia) of the Act read with proviso to section 201(1) of the Act inserted by Finance Act 2012 w.e.f. 01.04.2013 and 01.07.2012 respectively, if it is established that the person to whom made the payments made are disallowed u/s 40(a)(ia) of the Act has furnished return of income u/s 139 of the Act and has also taken into account the sum received from the assessee in computing in such return of income and if he had paid tax on the income declared by him on such income and furnished the certificate to the above effect to the accountant in Form No.26A, then the assessee cannot be deemed to be ‘an assessee in default’ u/s 201(1) of the Act and no disallowance u/s 40(a)(ia) of the Act should be made. The assessee filed certificate in Form No.26A as required by the proviso to section 201(1) of the Act and prayed that the additions made by the AO may be deleted.
4. The CIT(A) did not accept the plea of the Assessee for the reason that as per Rule 31ACB of the Income Tax Rules, 1962 (Rules), the certificate in Form 26A had to be filed with the Director General of Income Tax (systems) and the Assessee was not in a position to confirm whether there was compliance with Rule 31ACB of the rules. The CIT(A) therefore held that the disallowance u/s.40(a)(ia) of the Act was justified. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal.
5. I have heard the rival submissions. The short point that arises for consideration is as to whether filing of Form No.26A namely the certificate of the Chartered Accountant as prescribed under the proviso to section 201(1) of the Act can be taken as a conclusive proof that the recipients of the payment from the assessee has taken into account the sum received from an assessee on which no tax had been deducted at source for computing his income in such return of income. The proviso to section 201(1) of the Act inserted by the Finance Act 2012 w.e.f. 01.07.2012 reads as follows :-
“Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident –
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the person furnishes certificate to this effect form an accountant in such form as may be prescribed.”
Second Proviso to Sec.40(a)(ia) reads as follows:
“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”
6. In the present case, the assessee has filed a certificate in Form No.26A of a Chartered Accountant, which is the prescribed form as per Rule 31ACB of the Rules. A reading of the proviso to Sec.201(1) of the Act and Rule 31ACB of the Rules shows that once a declaration in Form No.26A by a Chartered Accountant is furnished then the Assessee cannot be treated ‘as an Assessee in default’ and consequently no disallowance u/s.40(a)(ia) of the Act can be made. The further requirement in Rule 31ACB is purely procedural and non-compliance of furnishing Form No.26A before the Director General of Income Tax (Systems) cannot be the basis to make disallowance u/s.40(a)(ia) of the Act. In other words, Rule 31ACB cannot override or provide for more conditions than what is contemplated by the provisions of proviso to Sec.201(1) of the Act. The proviso to Sec.201(1) refers to only prescription of particular form and does not authorise laying down any further condition to be satisfied to escape the rigours of Sec.201(1) of the Act. Its fundamental that Rules cannot override the Act.
7. I am therefore of the view that the disallowance u/s.40(a)(ia) of the Act, in the present case cannot be sustained and the same is directed to be deleted.
8. In the result, the appeal of the Assessee is allowed.
Pronounced in the open court on this 26th day of October, 2018.
