Introduction:
In view of the second proviso to section 40(a)(ia) read with proviso to section 201(1) of the Income Tax Act no disallowance of expense u/s 40(a)(ia) can be made unless the assessee has been treated as assessee in default under S.201(1) of the Act for its failure to deduct tax at source from the payment made on account of interest.
In simple words, if the amount paid by payer have been included by the payee in his return of income for relevant Asst. year, filed the return of income u/s 139 and has paid the tax due on the income declared in such return, to the extent the recipient (i.e. payee) from the assessee have so included the sum in his return of income and filed the same, no disallowance u/s.40(a)(ia) of the Act can be made by the AO in view of the second proviso to section 40(a)(ia) read with first proviso to section 201(1) of the Act.
This has been provided in the second proviso to section 40(a)(ia) inserted in the statute by the Finance Act, 2012 with effect from 1.4.2013. Therefore, on furnishing of certificate in form 26A as prescribed under proviso to section 201(1) read with rule 31ACB of the I.T. Rules no disalowance u/s 40(a)(ia) can be made.
However, issue arises as to whether the said amendment can be treated as retrospective so as to be applicable to Asst. years prior to A.Y. 2013-14, and accordingly whether certificate in form 26A can be furnished for earlier Asst. years so as take benefit of saving proviso to section 40(a)(ia) to avoid disallowance?
Judicial Trend:
M/s Visu Iternational Ltd. vs. DCIT (ITA No. 488/Hyd./2013)
Though the second proviso to section 40(a)(ia) has been inserted in the statute by the Finance Act, 2012 with effect from 1.4.2013, it is noted, the same has been treated as retrospectively applicable from 1.4.2005 & accordingly, if it is found on verification that no order under S.201(1) is passed declaring asssessee as assessee in default, the Assessing Officer is directed to delete the disallowance made under S.40(a)(ia) on account of audit fee.
G. Shankar Vs. ACIT (ITA No. 1832/2013/Banglore)
Second proviso to s. 40(a)(ia) inserted w.e.f. 1.4.2013 should be treated as retrospectively applicable from 1.4.2005 and no disallowance for want of TDS can be made if payee has paid tax thereon. Assessee must be given opportunity to file Form 26A.
ITO vs. Dr. Jaideep Sharma [2014] 52 taxmann.com 420 (Delhi)
No disallowance would be made u/s 40(a)(ia), if recepient of payment in question has filed return of income and paid taxes in stipulated time. In view of the second proviso to section 40(a)(ia) having retrospective effect from 01.04.2005, assessing officer should verify whether payees had filed their returns of income & paid due taxes and if they had done so, no disllowance u/s 40(a)(ia) is callled for.
Rajeev Kumar Agarwal Vs. ACIT [2014] 45 taxmann.com 555 (Agra)
Section 40(a)(ia) of the Income-tax Act, 1961 – Business disallowance – Interest, etc., paid to resident without deduction of tax at source (Second proviso) – A.Y. 2006-07 – insertion of second proviso to section 40(a)(ia) with effect from 1-4-2013 is declaratory and curative in nature and it has retrospective effect from 1-4-2005, being date from which sub-clause (ia) of section 40(a) was inserted by Finance (No. 2) Act, 2004 .
Santosh Kumar Kedia vs. ITO (IA No. 1905/Kol/2014 (Kolkata), Mitra Guha Builders Co. vs. DCIT [2016] 65 taxmann.com 243
S. 40(a)(ia) second proviso is curative and retrospective. Legitimate business expenditure cannot be disallowed if the payee has paid tax thereon: The second proviso to section 40(a)(ia) of the Act inserted by the Finance Act, 2012 is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40(a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax. It has for long been the legal position that if the payee has paid tax on his income, no recovery of any tax can be made from the person who had failed to deduct the income tax at source from such amount.
CIT vs. Ansal Landmark Township– 279 CTR 384 (Delhi High Court)
Second Proviso to section 40(a)(ia) is declaratory and curative and it has retrospective effect from 1-4-2005.
Rakesh Tak vs. ITO (ITA No. 888/Jp/2014 (Jaipur)
The second proviso to s. 40(a)(ia) inserted by the Finance Act, 2012 w.e.f. 01.04.13 is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40(a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax, and, therefore, the second proviso although inserted with effect from 1st April, 2013 is curative in nature and has retrospective effect.
Please note that, it is the duty of AO to invoke his powers u/s 133/131 to determine payee’s income and return filing status before disallowance u/s 40(a)(ia) in case of payer. [Abhoy Charan Bakshi vs. DCIT (ITA No.1492/Kol/2015 – A.Y. 2012-13/ Dt. 06.04.16)]
CONTRARY VIEW- in favour of revenue:
Second proviso to sec. 40(a)(ia) is applicable prospectively with effect from 1-4-2013. Fact that recipient has subsequently paid tax, will not absolve payee from consequence of disallowance under section 40(a)(ia) [Thomas George Muthoot vs. CIT [2015] 63 taxmann.com 99 (Kerala)]
Law applicable when there are conflicting judgements of non-jurisdictional High Courts on an issue:
When there are conflicting judgements of non-jurisdiction High Courts, the Tribunal is not permitted to choose based on its perception of what the correct law is because it will amount to sitting in judgement over the High Courts’ views. Instead, it has to follow the view which is in favour of the assessee even if it believes that this view is not the correct law. Second proviso to s. 40(a)(ia) inserted by FA 2013 should be treated as retrospectively applicable from 1st April 2005. [ITAT Raipur in R K P Company vs. ITO (ITA No. 106/RPR/2016 dt. 24.06.16) after considering the contrary judgement of Kerala High Court in Thomas George Muthoot’s case (Supra)]
Guidance can be taken from the judgement of Hon’ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd. [(1972) 88 ITR 192 (SC)]. Hon’ble Supreme Court has laid down a principle that “if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted”. This principle has been consistently followed by the various authorities as also by the Hon’ble Supreme Court itself. In another Supreme Court judgment, Petron Engg. Construction (P) Ltd. & Anr. vs. CBDT & Ors. (1989) 175 ITR 523 (SC), it has been reiterated that the above principle of law is well established and there is no doubt about that.
In view of the above, on furnishing of form 26A as prescribed under proviso to section 201(1) read with rule 31ACB of the I.T. Rules no disalowance u/s 40(a)(ia) can be made for Asst. year even prior to A.Y. 13-14.
