Second proviso to section 40(a)(ia) is curative and has retrospective effect, Appeal allowed

Brief summary and decision

The appeal was filed by the assessee against the order of CIT(A) confirming the disallowance of payment to sub-contractor without deduction of TDS u/s 194C of the Act invoking the provision of section 40(a)(ia) related to assessment year 2008-09.

Ld. Counsel of the assessee submitted before the tribunal that the second proviso to section 40(a)(ia) of the Act, would apply in case of the assessee. He relied on the decision of coordinate bench in case of Santosh Kumar Kedia Vs. ITO in ITA No.1905/Kol/2014 for A.Y. 2007-08 wherein it was decided-

Second proviso to section 40(a)(ia) provides that where the assessee is not deemed to be 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. It shows that the legislature was not in favour of creating undue hardship for assessee and that clause (ia) should not be construed as creating such hardship. Second proviso to sec. 40(a)(ia) of the Act is curative and it has retrospective effect w.e.f. 1st April, 2005, being a date from which Sec. 40(a)(ia) of the Act was inserted by the Finance (No. 2) Act, 2004.

In view of this, that matter needs fresh adjudication in the light of the fact that the AO will carry out necessary verification in regard to related payments having been taken into account by the recipient in computation of its income and verification of payment of taxes in respect of such income and also filing of income tax return by the recipient. In term of the above, the second aspect argued by Ld. counsel is restored back to the file of the AO and assessee will provide all the details in terms of second proviso to sec. 40(a)(ia) of the Act.”

Since the issue was identical and no contradictor material has been brought out by Ld. Sr. DR, following the decision cited supra, tribunal restored the issue back to the file of AO for fresh adjudication interms of the above directions. Appeal of assessee is allowed for statistical purposes.