2016 (7) TMI 1479 - AT - Income Tax

TDS u/s 194C - addition u/ 40(a)(ia) - recipient have already included the Generator Expenses on which the appellant failed to deduct the tax u/s 194C in its Income Tax return filed under section 139 - Held that - Addition is wholly unjustified. Where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident, such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under section 139 . What is common to both provisos to sections 40(a)(ia) and 201(1) of the Act is that as long as the payee or resident has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the assessee would not be treated as a person in default. The issue is covered in favour of the assessee by the judgement of the Hon ble Delhi High Court in the case of CIT Vs. Ansal Land Mark Township P. Ltd 2015 (9) TMI 79 - DELHI HIGH COURT which is of later dated 26..8.2015. It is well settled law that when two views are possible, the decision in favour of the assessee may be followed. Other conditions are not disputed. We delete the entire addition. - decided in favour of assessee.

Summary

Issues involved:
1. Disallowance under section 40(a)(ia) for failure to deduct tax u/s 194C.
2. Retrospective effect of the second proviso to section 40(a)(ia).
3. Interpretation of law regarding tax withholding lapses and loss to the exchequer.

Issue 1: Disallowance under section 40(a)(ia) for failure to deduct tax u/s 194C:
The appellant contested the disallowance of &8377; 1,75,691/- for not deducting tax u/s 194C on payments made to M/s Aman Dhaba. The argument was based on the recipient already including the amount in their taxable income, thus invoking the second proviso to section 40(a)(ia) to prevent disallowance. The appellant relied on the ITAT Agra Bench's decision, stating the amendment to section 40(a)(ia) is retrospective from 1.4.2005. However, the Ld. CIT(A) held that the second proviso was effective from 1.4.2013 and cited a Kerala High Court decision supporting this view.

Issue 2: Retrospective effect of the second proviso to section 40(a)(ia):
The appellant argued for the retrospective application of the second proviso to section 40(a)(ia) from 1.4.2005, citing the ITAT Agra Bench's decision and the declaratory nature of the amendment. In contrast, the Ld. CIT(A) and the Kerala High Court decision maintained that the proviso was effective from 1.4.2013, thus not applicable to the assessment year in question.

Issue 3: Interpretation of law regarding tax withholding lapses and loss to the exchequer:
The appellant contended that the tax withholding lapses did not result in any loss to the exchequer as the payee had included the income in their tax return, supported by the argument that the amendment to section 40(a)(ia) was curative and retrospective. The appellant relied on the Hon'ble Delhi High Court's judgment in CIT Vs. Ansal Land Mark Township P. Ltd, emphasizing that as long as the payee disclosed the income and paid tax, no disallowance should be made under section 40(a)(ia). The ITAT concurred, citing the Delhi High Court's decision and ruled in favor of the appellant, deleting the entire addition.

In conclusion, the ITAT Chandigarh allowed the appeal, setting aside the lower authorities' order and deleting the disallowance under section 40(a)(ia) based on the retrospective application of the second proviso and the interpretation of tax withholding lapses as not causing any loss to the exchequer.