The assessee in the case on hand has claimed an expense of Rs.21,62,634/- under the head interest on finance. The assessee incurred such expense without deducting TDS u/s 194A r.w.s. 40(a)(ia) of the Act. Therefore, the disallowance was made by the AO on account of non-deduction of TDS. However, the assessee before the learned CIT(A) among other things claimed that L&T Finance Ltd. had included the bill discounting charges in its income tax return. Therefore, no disallowance on account of non-deduction of TDS can be made. However, the learned CIT(A) disregarded the contention of the assessee on the ground that the assessee was liable to deduct the TDS u/s 194A r.w.s. 40(a)(ia) of the Act.
Similarly, the learned CIT(A) also observed that the amendment brought u/s 40(a)(ia) of the Act is prospective and not applicable for the year under consideration. Thus, the view taken by the AO was confirmed by the learned CIT(A).
At this juncture we find important and relevant to reproduce the provision of Section 2(28A) of the Act, which reads as under:
(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;)
From the above provisions, it is revealed that discounting charges are outside the purview of interest expenses, therefore, in our considered view, the question of making any disallowance on account of non-deduction of TDS on such discounting charges does not arise. In holding so, we find support and guidance from the judgment of Hon’ble Delhi High Court in the case of PCIT vs. M. Sons Gems N. Jewellery Pvt. Ltd. reported in 69 Taxmann.com 373 (Delhi). The relevant extract of the order is reproduced as under:
“7. The Court first notes that under Section 194A of the Act, the obligation to deduct tax at source is on the ‘payer’ of interest. In the instant case, the Assessee has permitted factoring and discounting charges to be deducted upfront by GTFL. In response to a query raised by the AO during assessment proceedings, the Assessee by its letter dated 12th September 2011 clarified as under:
“The assessee company had paid discount to M/s. Global Trade Finance Ltd. (GTF) for availment of Factoring facility and not interest. This fact is very clear as per the sanction letter given by the GTF which was filed before your goodself vide our letter dated 02.09.2011. The assessee company had discounted its sales invoices from GTF on a discount and it had not taken any amount in the nature of loan or debt. The factoring facility is known as synonymous for bill discounting facility. As per section 2(28A) of the Income Tax Act, 1961, discounting charges are not covered under the definition of interest.”
8. Further the Court finds that the term sheet issued by the GTFL showed that the interest at 13% pa will be charged in the event of repayment of any borrowings. This is different from the factoring charges @0.10% payable to GTFL. As a matter of fact, the Assessee has debited the above sum to its P&L account towards ‘factoring/discounting charges”. In light of the above factors, there was no factual basis for the AO to have disbelieved the Assessee’s explanation and simply treat the entire amount as interest. The question of disallowing the entire amount under Section 40(a)(ia) on the ground that the TDS was not deducted in terms of Section 194A of the Act did not arise.”
From the above, there remains no doubt that the discounting charges paid by the assessee are not akin to interest on finance expenses. Therefore, no disallowance on account of non-deduction of TDS u/s. 194A r.w.s. 40(a)(ia) of the Act can be made.
We also find force in the alternate argument raised by the Learned AR that L&T Finance Ltd. has paid the taxes on the discounting charges received from the assessee. Indeed The said proviso though inserted by the Finance Act 2012 w.e.f. 1-4-2013 has been held to be retrospective in operation by recent decision of the Hon’ble Delhi High Court in the case of CIT v. Ansal Land Mark Township (P) Ltd. (2015) 61 taxmann.com 45 (Del) wherein the question raised before the court and the decision rendered thereon is reproduced herein below for the sake of clarity:‑
“Question: Whether the second proviso to Section 40(a)(ia) (inserted by the Finance Act, 2012), which states that TDS shall be deemed to be deducted and paid by a deductor if resident recipient has disclosed the amount in his return of income and paid tax thereon, is retrospective in nature or not?”
Held: Section 40(a)(ia) was introduced by the Finance (No.2) Act, 2004 to ensure that an expenditure should not be allowed as deduction in the hands of an assessee in a situation where income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee.
Hence, section 40(a)(ia) is not a penalty provision for tax withholding lapse but it is a provision introduced to compensate any loss to the revenue in cases where deductor hasn’t deducted TDS an amount paid to deductee and, in turn, deductee also hasn’t offered to tax income embedded in such amount
The penalty for tax withholding lapse per se is separately provided under section 271C and, therefore, section 40(a)(i) isn’t attracted to the same. Hence, an assessee could not be penalized under section 40(a)(ia) when there was no loss to revenue.
The Agra Tribunal in the case of Rajiv Kumar Agarwal-vs-ACIT  45 taxmann.com 555 (Agra – Trib) had held that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(8) was inserted by the Finance No.(2) Act, 2004, even though the Finance Act, 2012 had not specifically stated that proviso is retrospective in nature.
The High Court affirmed the ratio laid down by the Agra Tribunal and held that said provisos is declaratory and curative in nature and ha retrospective effect from 1st April, 2005.”
In view of above, we are inclined to reverse the order of authorities below. Hence, the ground of appeal of the assessee is allowed.