2019 (8) TMI 1051 - AT - Income Tax

Disallowance u/s 40(a)(ia) - interest payment made to trust, who claimed exemption u/s 10(23C)(vi) - applicability of second proviso to section 40(a)(ia) - HELD THAT - The recipient had admitted the impugned interest and filed in the return of income. The assessee had also filed acknowledgement of returns for the A.Y. 2008-09 and 2009-10 admitting the said income. This fact was not disputed by the AO. AO s grievance is that the income of the assessee was exempt u/s 10(23C)(vi), therefore, contended that the recipient has not paid the tax, thus not complied with the directions. Irrespective of the payment of tax, the question is it is to be seen whether the recipient had admitted the income representing the interest paid by the assessee or not. If the interest is included and exemption u/s 10(23C)(vi) is allowed, the assessee satisfied the requirement of not to treat the assessee in default for the purpose of section 201(1) of the Act. In the instant case, there is no dispute that the recipient had filed the returns of income by including the interest received from the assessee. Therefore, there is no case for making the addition u/s 40(a)(ia), hence the orders of the lower authorities are set aside and the appeal of the assessee is allowed.

Summary

Issues:
Delay in filing appeal, Addition of interest payment u/s 40(a)(ia) of the Income Tax Act, 1961, Application of second proviso to sec. 40(a)(ia) inserted w.e.f. 01.04.2013, Verification of recipient's accounting of interest income, Compliance with TDS provisions.

Delay in Filing Appeal:
The assessee filed an appeal with a delay of 12 days, attributing it to the absence of an employee who was responsible for handing over appeal papers to the counsel. The delay was deemed unintentional, and after hearing both sides, the delay was condoned.

Addition of Interest Payment u/s 40(a)(ia):
The appeal was against the addition of ?27,29,767 pertaining to interest payment u/s 40(a)(ia) of the Income Tax Act. The AO had made the addition for non-deduction of tax at source. The CIT(A) confirmed the addition, leading to the appeal before the Tribunal.

Application of Second Proviso to Sec. 40(a)(ia):
The Tribunal, in a previous order, directed the AO to verify if the recipient had accounted for interest income and discharged obligations. The second proviso to sec. 40(a)(ia) was considered, which deems TDS deduction if the recipient has accounted for the income. The Tribunal emphasized the importance of recipient's admission of income to avoid double taxation.

Verification of Recipient's Accounting of Interest Income:
The AO disallowed the interest paid despite the recipient admitting the income, citing exemption u/s 10(23C)(vi). The Tribunal observed that the recipient had admitted the interest in their returns, satisfying the requirements to avoid being treated as default under section 201(1) of the Act. The AO's contention on tax payment by the recipient was deemed irrelevant.

Compliance with TDS Provisions:
The Tribunal found that the recipient had included the interest income in their returns, fulfilling the conditions to avoid default under section 201(1) of the Act. As the recipient had filed returns including the interest received, the addition u/s 40(a)(ia) was unwarranted. Consequently, the appeal of the assessee was allowed, overturning the decisions of lower authorities.

In conclusion, the Tribunal emphasized the importance of recipient's accounting of income and compliance with TDS provisions in determining the applicability of the second proviso to sec. 40(a)(ia). The judgment clarified that if the recipient accounts for income, the assessee cannot be deemed in default, thereby avoiding disallowance under section 40(a)(ia) of the Act.