Second proviso to Section 40(a)(ia) is retrospective- No Disallowance for non deduction of TDS if recipient of income paid tax on the same- Relief to Tax Payers as second proviso to Section 40(a)(ia) declared retrospective
Reliance in this regard can be placed on the decision of Hon’ble Tribunal (Agra) in case of Rajeev Kumar Agarwal vs CIT (ITA No. 337/Agra/2013) pronounced on 29th May 2013 wherein the AO disallowed interest payments made without deducting TDS under Section 194A of the Act. The assessee, inter alia, contended that in view of the insertion made by Finance Act, 2012 and in view of the fact that the recipient of interest has already embedded the income in their tax returns and paid tax thereon, hence disallowance should not be invoked in this case. The assessee lost the case in CIT(A) and thus aggrieved by the order, the appeal was made before the Hon’ble Tribunal.
The crux of the amendment made was that if in the situations the assessee has not deducted TDS but there has been no loss to the exchequer then the disallowance under Section 40(a)(ia) should not be made. The Tribunal relied on the decision of the Special Bench of the Tribunal in case of Bharti Shipyard and decision of Hon’ble Delhi High Court in case of Rajinder Kumar wherein the underlying principle was made that:
“any amendment of the substantive provision which is aimed at …… (inter alia) removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively”.
It was held that by the amendment vide Finance Act, 2012 the legislature has cleared an unintended consequence as declining deduction in respect of expenditure relating to payments made on which TDS has not been deducted but there has been no loss to the exchequer was never the intended consequence. In view of the same, the Hon’ble Tribunal held that this proviso shall apply retrospectively.