2016 (7) TMI 1408 - AT - Income Tax

Disallowance invoking the provisions of section 40(a)(ia) - retrospectively amended provisions of second proviso to S. 40(a)(ia) - assessee contended that the cooperative societies from whom the loan was taken, was engaged in the banking business and since the loan was taken for carrying on business purpose, the provisions of section 40(a)(ia) were not applicable - Held that - There is merit in the claim of assessee in this regard. In case, the amount is payable to a credit cooperative society, who in turn, has included the same as part of its receipts, then irrespective of the fact whether any tax has been paid by the payee and applying the ratio laid down in Hindustan Coca Cola Beverage Pvt. Ltd. Vs. CIT (2007 (8) TMI 12 - SUPREME COURT OF INDIA) as per the amended provisions of the Act, no tax is to be deducted out of such payments, where the payee has included the said receipts as part of its income. Merely because the net income in the hands of such an entity is exempt from tax does not mean that since no tax has eventually been paid by the payee, the said second proviso to section 40(a)(ia) of the Act is not attracted. - Decided in favour of assessee.

Summary

Issues Involved:
Appeals against CIT(A) orders for assessment years 2006-07 and 2007-08 under sections 143(3) r.w.s. 147 and 143(3) of the Income-tax Act, 1961; Disallowance under section 40(a)(ia) of the Act for non-deduction of tax at source; Applicability of second proviso to section 40(a)(ia) inserted by Finance Act, 2012; Exemption of income of credit cooperative societies under section 80P(2)(a)(i) of the Act.

Detailed Analysis:
The appeals were filed against CIT(A) orders confirming additions made under section 40(a)(ia) of the Act for non-deduction of tax at source. The Assessing Officer had reopened the assessment due to the assessee's failure to deduct tax on interest paid to a credit cooperative society. The assessee argued that since the income of the society was exempt under section 80P(2)(a)(i) of the Act, no tax deduction was required. The issue revolved around the applicability of the second proviso to section 40(a)(ia) inserted by the Finance Act, 2012.

The Tribunal noted that the second proviso clarified that if the payee had paid taxes on the receipts, the payer could not be held in default for non-deduction of tax. Courts held that this amendment was retrospective and would apply to pending assessments. The Tribunal emphasized that if the payee included the receipts in its income and was exempt from tax, no disallowance could be made in the payer's hands to avoid double taxation. Referring to Hindustan Coca Cola Beverage Pvt. Ltd. Vs. CIT, the Tribunal ruled that no tax deduction was required if the payee included the receipts as income, even if the payee's net income was tax-exempt.

The Tribunal directed the assessee to provide confirmation that the income of the credit cooperative society was not taxable and taxes had been paid. The Tribunal allowed the appeal, requiring the Assessing Officer to decide the issue after affording the assessee a hearing. The decision in one appeal was applied to another identical appeal. Ultimately, both appeals were allowed in favor of the assessee.

In conclusion, the Tribunal's decision centered on the interpretation of the second proviso to section 40(a)(ia) and the exemption of income of credit cooperative societies under section 80P(2)(a)(i) of the Act. The Tribunal emphasized the retrospective application of the amendment and the principle of avoiding double taxation when the payee's income was exempt. The Tribunal's ruling highlighted the importance of providing necessary confirmations to support claims and ensuring a fair opportunity for the parties involved in tax disputes.