No Disallowance of expense under S. 40(a)(i) for payment of Expense to American Resident without deduction of Tax

Provisions of section 40(a)(i) as it existed prior to it’s amendment  by Finance Act, 2003, with “effect from 1-4-2004 provided for disallowance of payment made to a non-resident only where tax is not deducted at source’ on such payment at source. A similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source, Thus a non- resident left with a choice of dealing with’ a resident for a non-resident in business would opt to deal with a resident rather than anon-resident owing to the provisions of section 40(a)(i).

To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident, Thus this clause in.  DTAA neutralizes the rigour of the provisions of section 40(a)(i). By virtue of the provisions of section 90(2) the law which is beneficial to the assessee to whom the DTAA applies should be followed. We therefore hold that In view of Article 26(3) of Indo – US DTAA, the Assessing Officer cannot seek to invoke the provisions of section 40(a)(ia) of the Act to disallow the claim of the assessee for deduction even on the assumption that the sum in question is chargeable to tax in India.

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘’ NEW DELHI)

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER

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