2016 (11) TMI 1512 - AT - Income Tax

Disallowance u/s.40(a)(ia) - amendment to provisions of section 40(a)(ia) - Retrospectivity effect of amendment - Held that - Pune Bench of the Tribunal in the case of Radhesham Bherulal Bhandari (2016 (2) TMI 1154 - ITAT, PUNE) while deciding an identical issue has held that the second proviso to provisions of section 40(a)(ia) is clarificatory and therefore retrospective in operation and as a consequence once the payee has discharged its tax obligation in accordance with law, operation of section 40(a)(ia) stands dispensed with - thus restore the issue to the file of the Assessing Officer with a direction to give an opportunity to the assessee to substantiate with evidence to his satisfaction that the payee has already included this income in its return and paid the taxes thereon - Decided in favour of assessee for statistical purposes.

Issues Involved:

1. Confirmation of addition under Section 40(a)(ia) of the Income Tax Act for non-deduction of tax at source on interest payment.
2. Justification of the addition of ?75,420/- less by depreciation of ?11,313/-.

Issue-Wise Detailed Analysis:

1. Confirmation of Addition under Section 40(a)(ia):

The primary issue in this case revolves around the confirmation of an addition of ?6,66,189/- under Section 40(a)(ia) of the Income Tax Act due to the assessee's failure to deduct tax at source on interest payments. The assessee, a partnership firm engaged in the business of stockist/distributor of Nirma Products, had paid interest to Nirma Private Limited without deducting tax at source as mandated by Section 194A. The Assessing Officer (AO) disallowed this interest payment under Section 40(a)(ia) during reassessment proceedings initiated based on directions from the Commissioner of Income Tax (CIT) under Section 263.

The CIT(A) upheld the AO's decision, interpreting the payments as "interest" under Section 2(28A) of the Act, which necessitates tax deduction at source. The CIT(A) noted that the payments were for late payment dues to Nirma Ltd., thus qualifying as interest. Despite the assessee's argument that the payments were not interest but related to trading liabilities and debit notes, the CIT(A) maintained the disallowance, reducing the amount by ?3,500/- which was not in the nature of interest.

The Tribunal, however, considered the argument that the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, which states that disallowance should not be made if the payee has discharged its tax liability, is retrospective. The Tribunal cited precedents from the Pune Bench and other cases, asserting that the proviso is clarificatory and retrospective. Consequently, the Tribunal restored the issue to the AO to verify if the payee had included the income in its return and paid taxes, thereby potentially nullifying the disallowance under Section 40(a)(ia).

2. Justification of the Addition of ?75,420/- Less by Depreciation of ?11,313/-:

The second issue pertains to an addition of ?75,420/- less by depreciation of ?11,313/-. The CIT(A) had confirmed this addition made by the AO. However, during the hearing, the assessee's counsel did not press this ground, and the Departmental Representative had no objection. Consequently, this ground was dismissed as 'not pressed.'

Conclusion:

The Tribunal concluded by partly allowing the appeal for statistical purposes. The issue regarding the addition under Section 40(a)(ia) was remanded back to the AO for verification, while the other ground related to the addition of ?75,420/- was dismissed as not pressed. The Tribunal emphasized the need for the AO to give the assessee an opportunity to prove that the payee had declared the income and paid taxes, potentially negating the disallowance under Section 40(a)(ia). The order was pronounced in the open court on 11-11-2016.

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