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2015 (7) TMI 810 - HC - Income TaxAddition invoking Sec.40(a)(ia) - whether Tribunal erred in law in making addition u/s 40(a)(ia) when the payee has included the entire interest paid by the appellant in its total income and filed return of income accordingly? - whether under Section 194A, an individual is excluded from the liability to deduct tax and that therefore, disallowance is without jurisdiction? - Held that - In the light of the proviso to Section 194A(1), if the appellants are claiming the exemption provided in the Section, the burden is on them to establish that they, being individuals, satisfied the conditions specified in the proviso to the Section. From the orders impugned, we find that no such contention was urged before the statutory authorities. In fact the Tribunal has entered into a specified finding that - in this case, business income of the assessee exceeded the limit prescribed u/s 44AB of the Act, therefore the assessee, even though an individual is liable to deduct tax while paying interest to the firm u/s 194A(1) of the IT Act . No material whatsoever has been supplied by the appellants to contradict this specific factual finding recorded by the Appellate Tribunal. Therefore, this contention cannot be accepted. Whether second proviso to Section 40(a)(ia) of the Act, introduced by the Finance Act 2012, being retrospective in operation, disallowance could not have been ordered invoking Section 40 (a)(ia) of the Act? - Held that - Going by the language of Section 40(a)(ia), once it is found that there is failure to deduct tax at source, the fact that the recipient has subsequently paid tax, will not absolve the payee from the consequence of disallowance. In so far as the judgment in Hindustan Coca Cola case (2007 (8) TMI 12 - SUPREME COURT OF INDIA ) is concerned, that was rendered in the context of section 201(1), the object of which being compensatory in nature, cannot be of any assistance to the appellants to resist a proceeding under Section 40(i)(ia) of the Act. This contention, therefore, is only to be rejected. Section 40(a)(ia) makes it clear that the consequence of disallowance is attracted when an individual, who is liable to deduct tax on any interest payable to a resident on which tax is deductible at source, commits default. The language of the Section does not warrant an interpretation that it is attracted only if the interest remains payable on the last day of the financial year. If this contention is to be accepted, this Court will have to alter the language of Section 40(a) (ia) and such an interpretation is not permissible. This view that we have taken is supported by judgments of Crescent Exports Syndicate and another 2013 (5) TMI 510 - CALCUTTA HIGH COURT and Commissioner of Income Tax v. Sikandadarkhan N Tunvar 2013 (5) TMI 457 - GUJARAT HIGH COURT , which have been relied on by the Tribunal. - Decided against assessee.
Issues Involved:
1. Sustaining addition under Section 40(a)(ia) for non-deduction of tax at source. 2. Applicability of Section 40(a)(ia) when the payee has included the interest in its income. 3. Applicability of the principle laid down in Hindustan Coca Cola Beverages Pvt. Ltd. case. 4. Retrospective application of the second proviso to Section 40(a)(ia). 5. Applicability of the judgment in CIT Vs. Vector Shipping Services. 6. Validity and sustainability of the Tribunal's order. Issue-wise Detailed Analysis: 1. Sustaining Addition under Section 40(a)(ia) for Non-Deduction of Tax at Source: The appellants, partners in firms, paid interest without deducting tax as required under Section 194A of the Income Tax Act, 1961. Consequently, the interest paid was disallowed under Section 40(a)(ia). The Tribunal upheld this disallowance, noting that the appellants' business income exceeded the limit prescribed under Section 44AB, making them liable to deduct tax. The Court found no material to contradict this finding, thus sustaining the addition. 2. Applicability of Section 40(a)(ia) When the Payee Has Included the Interest in Its Income: The appellants argued that since the payee included the interest in its income and filed returns accordingly, the disallowance under Section 40(a)(ia) should not apply. However, the Court held that Section 40(a)(ia) is explicit in disallowing expenses where tax has not been deducted at source, irrespective of the payee's actions. The Court rejected this contention, emphasizing the automatic nature of the disallowance provision. 3. Applicability of the Principle Laid Down in Hindustan Coca Cola Beverages Pvt. Ltd. Case: The appellants contended that the principle from the Hindustan Coca Cola case, which states that the payer is not liable for short/non-deduction if the payee has paid the tax, should apply. The Court differentiated this case, noting that Hindustan Coca Cola dealt with Section 201(1), which is compensatory, unlike Section 40(a)(ia), which mandates disallowance for non-deduction. Therefore, this principle was deemed inapplicable. 4. Retrospective Application of the Second Proviso to Section 40(a)(ia): The appellants argued for the retrospective application of the second proviso to Section 40(a)(ia), introduced by the Finance Act 2012, which they claimed was remedial. The Court clarified that statutory provisions are prospective unless expressly stated otherwise. The second proviso, effective from 01.04.2013, was not intended to be curative or remedial. Citing Prudential Logistics And Transports v. Income Tax Officer, the Court held it to be prospective, rejecting the appellants' argument. 5. Applicability of the Judgment in CIT Vs. Vector Shipping Services: The appellants relied on the Vector Shipping Services judgment, which suggested that Section 40(a)(ia) applies only to amounts payable at the end of the financial year. The Court refuted this interpretation, stating that the statutory language does not support such a restriction. The Court's view was consistent with judgments from the Calcutta High Court and Gujarat High Court, which the Tribunal had also relied upon. 6. Validity and Sustainability of the Tribunal's Order: The Court found no merit in the appellants' contentions and upheld the Tribunal's findings. It concluded that the Tribunal's order was legal, valid, and sustainable, thereby dismissing the appeals. Conclusion: The High Court dismissed the appeals, holding that the disallowance under Section 40(a)(ia) was justified due to the appellants' failure to deduct tax at source. The Court rejected arguments for retrospective application of the second proviso and the applicability of the Hindustan Coca Cola principle and Vector Shipping Services judgment. The Tribunal's order was affirmed as legally valid and sustainable.
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