2020 (12) TMI 178 - AT - Income Tax

TDS u/s 194A - disallowances of finance charges on hire purchase u/s 40(a)(ia) - HELD THAT - There is no dispute that the payment in question was in respect of hire charges paid by the assessee to M/s Tata Capital Ltd. (a NBFC) under the hire purchase agreement. It is also not in dispute that the assessee has not acquired any title for ownership of the asset under the hire purchase agreement but the assessee is under no obligation to buy the asset. Thus, it is only an option with the assessee either to return the goods or to become its owner by payment in full of the hire charges. Therefore, this transaction of payment of hire charges and financial charges do not fall in the ambit of section 194A of the Act. There is no quarrel on the point that the provision to section 194A are not applicable in respect of the payment in question and consequently the claim of deduction cannot be disallowed by invoking the provision to section 40(a)(ia) - AO has invoked the provision to section 194A r.w.s. 40(a)(ia) as specified in the impugned order and hence there is no question of applying the section 194I of the Income Tax Act. Alternative plea of the ld. AR of the assessee, it is noted that the amendment by which the 2nd Proviso to section 40(a)(ia) is brought into Statute and the same is remedial in nature as held in the case of CIT vs. Calcutta Export 2018 (5) TMI 356 - SUPREME COURT . Thus it is settled proposition that the 2nd Proviso to section 40(a)(ia) shall have retrospective effect. Once the recipient of the charges has considered this amount as part of its income and filed the return of income then the question of invoking of section 40(a)(ia) does not arise - Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest and overdue charges paid to Tata Capital Ltd. under section 40(a)(ia) of the Income Tax Act, 1961.
2. Applicability of section 194A for TDS on financial charges under a hire purchase agreement.
3. Retrospective effect of the 2nd Proviso to section 40(a)(ia) regarding non-deduction of TDS.

Detailed Analysis:

1. Disallowance of Interest and Overdue Charges under Section 40(a)(ia):
The primary issue in the appeal is the disallowance of ?773833/- on account of interest and overdue charges paid to Tata Capital Ltd. The Commissioner of Income Tax (Appeals) sustained this addition by invoking section 40(a)(ia) of the Income Tax Act, 1961, which deals with the disallowance of certain expenses if TDS is not deducted.

2. Applicability of Section 194A for TDS on Financial Charges:
The assessee contended that the financial charges paid under the hire purchase agreement do not fall under the ambit of section 194A for TDS purposes. The argument was based on the assertion that the difference between the cash price and the hire purchase price is not considered "interest" under section 2(28A) of the Act. The assessee relied on CBDT Instruction No. OP 275/9/80-IT(B) dated 25.01.1981, which clarified that section 194A is not applicable to hire purchase agreements. Additionally, the assessee cited the decision of the Visakhapatnam Bench of the Tribunal in the case of Kesineni Srinivas Vijayawada vs. ACIT, which supported this view.

The Department's representative argued that the assessee failed to submit relevant documents like the hire purchase agreement, invoices, etc., making it necessary for the AO to determine the true nature of the transaction. The representative also contended that interest paid to NBFCs is liable for TDS under section 194A and that financial charges under hire purchase agreements should be subject to TDS under section 194I.

3. Retrospective Effect of the 2nd Proviso to Section 40(a)(ia):
The assessee alternatively argued that the 2nd Proviso to section 40(a)(ia), inserted by the Finance Act, 2012, is curative in nature and should have retrospective effect. The proviso states that if the recipient has paid taxes on the interest and overdue charges, the payer should not be considered an assessee in default, and no disallowance should be made.

Tribunal's Findings:
The Tribunal considered the arguments and relevant materials. It was established that the payment in question was for hire charges under a hire purchase agreement with Tata Capital Ltd., and the assessee had no obligation to buy the asset, only an option to do so. The Tribunal cited the Hyderabad Bench's decision in the case of ACIT vs. M/s R. Balarami Reddy & Co., which held that payments under hire purchase agreements are not considered interest for TDS purposes under section 194A.

The Tribunal also referred to the Visakhapatnam Bench's decision in Kesineni Srinivas Vijayawada vs. ACIT, which, along with CBDT instructions, clarified that financial charges under hire purchase agreements are not interest and thus not subject to TDS under section 194A. Consequently, the Tribunal concluded that section 194A does not apply to the payments in question, and therefore, the disallowance under section 40(a)(ia) was not justified.

Regarding the retrospective effect of the 2nd Proviso to section 40(a)(ia), the Tribunal noted that the Supreme Court in CIT vs. Calcutta Export held that the proviso is remedial and has retrospective effect. Since Tata Capital Ltd. had considered the financial charges as part of its income and paid taxes accordingly, the disallowance under section 40(a)(ia) was not warranted.

Conclusion:
The Tribunal allowed the appeal, deleting the disallowance of ?773833/- made by the AO under section 40(a)(ia) of the Income Tax Act, 1961. The Tribunal's decision was based on the non-applicability of section 194A to the financial charges under the hire purchase agreement and the retrospective effect of the 2nd Proviso to section 40(a)(ia).

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