2014 (11) TMI 1018 - AT - Income Tax

Retrospectivity of the amendment to Section 40(a)(ia) - Disallowance of payment of professional fees u/s 40(a)(ia) - non deduction of tds - Held that - Undisputed facts of the case that the assessee had made payment of ₹ 2.40 lakhs to his son without deducting tax at source, that the AO had disallowed the said amount invoking the provisions of section 40(a)(ia) of the Act. We find that the Hon ble Karnatake High Court in the case of Santosh Kumar Shetty (2015 (8) TMI 232 - KARNATAKA HIGH COURT ) has held that second proviso to section 40(a)(ia) is retrospective.Therefor, We hold that if the deductee pays the tax no disallowance should be made u/s 40(a)(ia) of the Act. We find that Hon ble Karnataka High Court had referred to the judgment delivered in the case of Om Prakash R. Chaudhary 2015 (2) TMI 150 - GUJARAT HIGH COURT . Considering the fact that son of the assessee had paid the tax on the professional fees and respectfully following the judgment of the High Court of Karnataka (supra), we decide the effective ground of appeal in favour of the assessee.

Summary

Issues:
1. Disallowance of payment of professional fees under section 40(a)(ia).
2. Interpretation of second proviso to Section 40(a)(ia) retrospectively.

Issue 1: Disallowance of payment of professional fees under section 40(a)(ia):

The assessee, a general surgeon, paid professional fees of INR 2.40 Lakhs to his son, also a surgeon, without deducting TDS. The Assessing Officer disallowed this amount under section 40(a)(ia) of the Income Tax Act. The First Appellate Authority upheld the AO's decision, stating that the liability to deduct tax applies to both payable and paid amounts, leading to disallowance. However, the Authorized Representative argued that the son had paid tax on the amount received, and the second proviso to section 40(a)(ia) should be read retrospectively. The ITAT Mumbai, considering the judgment of the Karnataka High Court in Santosh Kumar Shetty, held that if the deductee pays the tax, no disallowance should be made under section 40(a)(ia). As the son had paid the tax, the disallowance was overturned in favor of the assessee.

Issue 2: Interpretation of second proviso to Section 40(a)(ia) retrospectively:

The ITAT Mumbai analyzed the applicability of the second proviso to Section 40(a)(ia) retrospectively. The Authorized Representative argued that the amendment was curative in nature and should be applied retrospectively from the assessment year 2009-10. Citing the case of Santosh Kumar Shetty and the decision of the Karnataka High Court, the ITAT held that the second proviso is retrospective. Referring to the judgment of the Gujarat High Court in the case of Om Prakash R. Chaudhary, the ITAT decided in favor of the assessee, stating that if the deductee pays the tax, no disallowance should be made under section 40(a)(ia). Consequently, the appeal filed by the assessee was allowed.

This detailed analysis of the judgment addresses the issues of disallowance of professional fees under section 40(a)(ia) and the retrospective interpretation of the second proviso to Section 40(a)(ia) comprehensively.