2018 (10) TMI 2011 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Assessee paid interest on car loan availed - assessee in default u/s 201(1) - whether filing of Form No.26A namely the certificate of the Chartered Accountant as prescribed u/s 201(1) can be taken as a conclusive proof that the recipients of the payment from the assessee has taken into account the sum received from an assessee on which no tax had been deducted at source for computing his income in such return of income? HELD THAT - A reading of the proviso to Sec.201(1) of the Act and Rule 31ACB of the Rules shows that once a declaration in Form No.26A by a Chartered Accountant is furnished then the Assessee cannot be treated as an Assessee in default and consequently no disallowance u/s.40(a)(ia) can be made. Requirement in Rule 31ACB is purely procedural and noncompliance of furnishing Form No.26A before the Director General of Income Tax (Systems) cannot be the basis to make disallowance u/s.40(a)(ia) - Rule 31ACB cannot override or provide for more conditions than what is contemplated by the provisions of proviso to Sec.201(1). The proviso to Sec.201(1) refers to only prescription of particular form and does not authorise laying down any further condition to be satisfied to escape the rigours of Sec.201(1) of the Act. Its fundamental that Rules cannot override the Act. Disallowance u/s.40(a)(ia) in the present case cannot be sustained and the same is directed to be deleted. Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of expenses under section 40(a)(ia) of the Income Tax Act, 1961 for failure to deduct tax at source on interest paid on a car loan.

Detailed Analysis:
1. The appellant, an individual assessee, appealed against the order disallowing the deduction of interest paid on a car loan due to the failure to deduct tax at source. The Assessing Officer invoked section 40(a)(ia) of the Income Tax Act, 1961, for disallowance.
2. The appellant contended that as per the provisos to section 40(a)(ia) and section 201(1) of the Act, if the recipient of the payment furnishes a return of income, takes the sum into account, pays tax on it, and provides a certificate in Form No.26A, no disallowance should be made. The appellant submitted the required certificate and sought deletion of the disallowance.
3. The CIT(A) rejected the appellant's plea citing non-compliance with Rule 31ACB of the Income Tax Rules, which required filing the certificate with the Director General of Income Tax (Systems). The CIT(A) upheld the disallowance under section 40(a)(ia), leading to the appellant's appeal before the Tribunal.
4. The Tribunal deliberated on whether the filing of Form No.26A could conclusively prove that the recipient considered the sum for income computation. The Tribunal analyzed the relevant provisions and rules, emphasizing that the certificate from a Chartered Accountant in Form No.26A, as per the Act, absolves the assessee from default. The Tribunal highlighted that procedural non-compliance with Rule 31ACB cannot warrant disallowance under section 40(a)(ia).
5. The Tribunal concluded that the disallowance under section 40(a)(ia) was unwarranted in the present case, directing its deletion and allowing the appeal of the assessee.

In summary, the judgment addressed the issue of disallowance under section 40(a)(ia) of the Income Tax Act due to the failure to deduct tax at source on interest paid on a car loan. It clarified the significance of the certificate in Form No.26A and ruled that procedural non-compliance with Rule 31ACB does not justify disallowance. Ultimately, the Tribunal allowed the appeal, emphasizing that the rules cannot override the provisions of the Act.