2014 (1) TMI 190 - AT - Income Tax

Disallowance of interest u/s 40(a)(ia) - Held that - On perusal of the amendment made by Finance Act, 2012 by inserting the proviso to section 40(a)(ia) of the Act w.e.f.1.7.2013, it is stated that if the payer fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B of the Act on sum paid to a resident or on the sum credited to the account of resident, payer shall not be deemed to be an assessee in default if in respect of on such amount tax has been paid by the payee resident in the return filed by him - The said proviso is applicable from assessment year 2012-13 and accordingly the benefit of the same could not be given to the assessee as the assessment year involved is assessment year 2007-08 - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure for failure to deduct TDS under section 40(a)(ia) of the Income Tax Act.

Analysis:
The appellant, a proprietor of a business, claimed interest expenditure of Rs.2,48,500 for the assessment year 2007-08. The Assessing Officer disallowed this claim as the appellant failed to deduct TDS on the interest payment, invoking section 40(a)(ia) of the Act. The appellant agreed to this disallowance during the assessment proceedings. The appellant contended before the CIT(A) that the recipients had already shown the interest income in their individual tax returns and paid taxes on it, thereby leading to double taxation if TDS was applied. However, the CIT(A) upheld the AO's decision, stating that TDS should have been deducted as per the law, and the appellant's interpretation would render section 40(a)(ia) redundant. The CIT(A) dismissed the ground of appeal, prompting the appellant to appeal further.

During the appeal hearing, the appellant's representative reiterated the arguments made before the CIT(A) and highlighted a proviso inserted in section 40(a)(ia) by the Finance Act, 2012, effective from 1.4.2013. This proviso deemed the tax deducted and paid by the resident payee if the payer failed to deduct TDS but the payee fulfilled certain conditions. The appellant argued that this proviso should be applied retrospectively and that the disallowance made by the AO should be deleted. The appellant also cited a Taxmann's Masterguide article supporting the retrospective application of the proviso.

On the other hand, the Departmental Representative supported the CIT(A)'s order and referenced a decision by the ITAT, Mumbai, emphasizing that disallowance under section 40(a)(ia) could still be made even if the tax had been paid by the deductee. After considering the arguments and the amendment made by the Finance Act, 2012, the Tribunal noted that the proviso to section 40(a)(ia) aimed to align it with section 201(1) of the Act. While acknowledging the remedial nature of the proviso, the Tribunal held that it could only be applied from 1.7.2012 onwards, not benefiting the appellant for the assessment year 2007-08. Thus, the Tribunal confirmed the CIT(A)'s order, upholding the disallowance of the interest expenditure. Consequently, the appeal of the assessee was dismissed.

In conclusion, the Tribunal's decision highlighted the importance of complying with TDS provisions and the limitations of retrospective application of beneficial amendments, ultimately affirming the disallowance of the interest expenditure under section 40(a)(ia) for the relevant assessment year.