TDS is to be deducted on both amount paid as well as payable Section 40(a)(ia)
Brief of the case
In the case of Shri Thomas George Muthoot vs The Commissioner of Income Tax High court has held that TDS if to be deducted by individual who required to get his accounts audited. A statutory provision, unless otherwise expressly stated to be retrospective or by intendment shown to be retrospective, is always prospective in operation and the language of the Section 40(a)(ia) does not warrant an interpretation that it is attracted only if the interest remains payable on the last day of the financial year.
Facts of the case
1. During various year, the assessee/ appellants has paid interests on amounts drawn by them from partnership firms of which they are Partners, as provided under Chapter XVIIB of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for short).
2. Since, partner has not deducted TDS on the interest paid to firm. Therefore, AO has disallowed whole interest paid in terms of Section 40(a)(ia) of the Act.
3. Aggrieved by the decision of AO , assessee preferred an appeal before CIT(A) who has also conform the decision of AO and further appeals filed before the Tribunal were dismissed by ITAT.
Aggrieved by the decision of tribunal, assessee preferred an appeal before High Court
1. Whether the Appellate Tribunal erred in law in making addition u/s 40(a)(ia) when the payee has included the entire interest paid by the appellant in its total income and filed return of income accordingly?
2. Whether once payee include amount paid in its return of income, no disallowance is call for in term of decision in case of Hon’ble Apex Court in M/s. Hindustan Coca Cola Beverages Pvt. Ltd. (293 ITR 226 (SC)
3. Whether second proviso inserted with effect from 1.4.2013 was intended to remove the unintended consequences and was a beneficial provision for removal of hardship and therefore, retrospective in operation and applicable to the appellant’s case?
1. Section 194A, an individual is excluded from the liability to deduct tax and that therefore, disallowance is without jurisdiction.
2. That second proviso to Section 40(a)(ia) of the Act, introduced by the Finance Act 2012, being retrospective in operation, disallowance could not have been ordered invoking Section 40 (a)(ia) of the Act. Reliance is placed in the judgments in Allied Motor (P) Ltd. v. Commissioner of Income Tax [(1997) 224 ITR 677 (SC)] and Commissioner of Income Tax v. Alom Extrusions Ltd . [(2009) 319 ITR 306].
3. The firms of which they are partners, have already paid tax and that therefore, it is illegal to disallow the interest paid. Reliance is placed on decision of Apex Court in Commissioner of Income Tax v. Hindustan Coca Cola Beverages Pvt. Ltd. [(2007) 293 ITR 226].
4. That the appellants had already paid the amount and therefore, the provisions of Section 40(a)(ia), applicable only in respect of the amount which remains to be payable on the last day of the financial year, is not attracted. Therefore, according to the appellants, disallowance cannot be sustained. Reliance is placed on the judgment in the case of Commissioner of Income Tax v. Vector Shipping Services (P) Ltd. [(2013) 357 ITR 642 (All)].
High Court decision / observations
1. Reading of the provision shows that individuals and Hindu undivided family are excluded in Section 194A (1) and therefore, are not liable to deduct tax at source. However, by virtue of the proviso which was inserted by the Finance Act 2002, the benefit of exclusion is restricted only to those individuals and Hindu undivided families, whose total sales, gross receipts or turnover from business or profession do not exceed the monetary limit specified under Section 44AB(a) or (b).
2. If the appellants are claiming the exemption provided in the Section, the burden is on them to establish that they, being individuals, satisfied the conditions specified in the proviso to the Section. In fact the Tribunal has entered into a specified finding that the assessee exceeded the limit prescribed u/s 44AB of the Act, therefore the assessee, even though an individual is liable to deduct tax while paying interest to the firm u/s 194A(1) of the IT Act”. Therefore, this contention cannot be accepted.
3. Second proviso to section 40(a)(ia) was inserted by Finance Act 2012 and came into force with effect from 01.04.2013. The fact the second proviso was introduced with effect from 01.04.2013 is expressly made clear by the provisions of the Finance Act 2012 itself. This legal position was clarified by this Court in Prudential Logistics And Transports v. Income Tax Officer [(2014) 364 ITR 689 (Ker)].
4. A statutory provision, unless otherwise expressly stated to be retrospective or by intendment shown to be retrospective, is always prospective in operation. Finance Act 2012 shows that the second proviso to Section 40 (a)(ia) has been introduced with effect from 01.04.2013. Reading of the second proviso does not show that it was meant or intended to be curative or remedial in nature, and even the appellants did not have such a case.
5. Section 40(a)(ia) is in very categoric terms and the provision is automatically attracted, on the failure of an assessee to deduct tax on the interest paid by him. Therefore, going by the language of Section 40(a)(ia), once it is found that there is failure to deduct tax at source, the fact that the recipient has subsequently paid tax, will not absolve the payee from the consequence of disallowance.
6. Judgment of Apex Court in the case of Commissioner of Income Tax v. Hindustan Coca Cola Beverages Pvt. Ltd. [(2007) 293 ITR 226]was rendered in the context of section 201(1), the object of which being compensatory in nature, cannot be of any assistance to the appellants to resist a proceeding under Section 40(i)(ia) of the Act.
7. Section 40(a)(ia) makes it clear that the consequence of disallowance is attracted when an individual, who is liable to deduct tax on any interest payable to a resident on which tax is deductible at source, commits default. The language of the Section does not warrant an interpretation that it is attracted only if the interest remains payable on the last day of the financial year. If this contention is to be accepted, this Court will have to alter the language of Section 40(a) (ia) and such an interpretation is not permissible. High Court followed the Judgment in the case of Crescent Exports Syndicate and another [ITAT 20 of 2013] and the Gujarat High Court in the case of Commissioner of Income Tax v. Sikandadarkhan N Tunvar [ITA Nos.905 of 2012 & connected cases]