2020 (12) TMI 1279 - AT - Income Tax

Disallowance u/s 40(a)(ia) - no tax was deducted on the interest expenses - AR submits that one of the recipient i.e. India Bulls has shown interest expenses as their income and have offered the same for taxation as assessee has obtained certificate of Accountant and the provisions of section 201(1) of Income Tax Act, certifying that they have paid the tax on such interest income. Thus, the condition of second proviso of section 40(a)(ia) have been fulfilled - HELD THAT - As the second provision the section is applicable and that no disallowance interest expenditure can be made in the hand of assessee and that various benches of Tribunal has taken a view that the second proviso is curative and declaratory in nature. The ld. AR of the assessee has also placed on record the certificate of Chartered Accountant under section 201(1) of the Act, certifying the facts that India Bulls (one of the recipients) has included the said interest income in their income and has paid tax thereon. We are in the agreement, the submission of assessee that in case the recipient (India Bulls) has included the interest paid by assessee, in their income and have paid tax therein, no disallowances can be made in the hand of assessee. Therefore, we direct the Assessing Officer to verify the fact and allow appropriate relief to the assessee in accordance with law. The assessee also directed to supervise necessary evidence to the Assessing Officer.

Summary

Issues:
1. Disallowance of interest expenses under section 40(a)(ia) for non-deduction of tax at source.
2. Applicability of the second proviso to Sec. 40(a)(ia) of the Income Tax Act.
3. Interpretation of the second proviso's retrospective effect.

Issue 1: Disallowance of Interest Expenses under Section 40(a)(ia):
The appellant's appeal was against the order of the Commissioner of Income Tax (Appeals) confirming the assessment order passed by the Assessing Officer under section 143(3) of the Income Tax Act for the Assessment Year 2012-13. The Assessing Officer disallowed interest expenses of ?34,49,439/- under section 40(a)(ia) due to non-deduction of tax at source on payments made to NBFCs. The appellant contended that the interest recipients had included the income and paid tax on it. The Tribunal directed the Assessing Officer to verify this fact and allow relief accordingly.

Issue 2: Applicability of the Second Proviso to Sec. 40(a)(ia):
The appellant argued that the second proviso to Sec. 40(a)(ia) is declaratory and curative in nature, with retrospective effect from April 1, 2005. The Commissioner of Income Tax (Appeals) held that the second proviso is applicable from April 1, 2013, and dismissed the appellant's appeal. However, the Tribunal noted that if the recipient had included the interest income and paid tax on it, no disallowance could be made in the hands of the assessee.

Issue 3: Interpretation of the Second Proviso's Retrospective Effect:
The appellant contended that the second proviso to Sec. 40(a)(ia) should have retrospective effect from April 1, 2005. The Tribunal observed that various benches had considered the second proviso as curative and declaratory in nature. The Tribunal directed the Assessing Officer to verify if the recipient had included the interest income, and if so, no disallowance should be made. The Tribunal upheld the disallowance of ?3,689/- related to interest payment to L & T Finance Ltd. as the appellant did not contest it.

This detailed analysis of the judgment addresses the issues of disallowance of interest expenses, the applicability of the second proviso to Sec. 40(a)(ia), and the interpretation of its retrospective effect. The Tribunal's decision to direct the Assessing Officer to verify the recipient's tax payments and provide relief accordingly demonstrates a thorough consideration of the legal and factual aspects of the case.