2015 (9) TMI 323 - AT - Income Tax

Disallowance of payment of interest u/s 40(a)(ia) for non deduction of tax - Held that - Section 40(a)(ia) would cover not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirement of the said provision exist. By following the judgments of the Calcutta High Court in Crescent Export Syndicate (2013 (5) TMI 510 - CALCUTTA HIGH COURT) and the Gujarat High Court in Sikandarkhan N Tunvar (2013 (5) TMI 457 - GUJARAT HIGH COURT), this Tribunal is of the considered opinion that the decision of the Special Bench of this Tribunal in the case of M/s Merilyn Shipping & Transports 2012 (4) TMI 290 - ITAT VISAKHAPATNAM and the judgment of the Allahabad High Court in Vector Shipping Services (P) Ltd (2013 (7) TMI 622 - ALLAHABAD HIGH COURT ) are not applicable to the facts of the case under consideration whereas the judgments of the Calcutta High Court in Crescent Export Syndicate (supra) and the Gujarat High Court in Sikandarkhan N Tunvar (supra) are squarely applicable to the facts of the case. We do not see any infirmity in the orders of the lower authorities. Accordingly, the orders of the lower authorities are confirmed. - Decided against assessee.

Issues Involved:
1. Disallowance of interest payment under Section 40(a)(ia) for non-deduction of TDS.
2. Applicability of Section 194A to individual partners paying interest to partnership firms.
3. Impact of the recipient firm already paying tax.
4. Retrospective or prospective application of the second proviso to Section 40(a)(ia).
5. Applicability of Section 40(a)(ia) to amounts already paid during the financial year.

Detailed Analysis:

1. Disallowance of Interest Payment under Section 40(a)(ia) for Non-Deduction of TDS:
The assessing officer disallowed the payment of interest under Section 40(a)(ia) due to the non-deduction of tax at source (TDS). The representative for the assessee argued that partners and the partnership firm are considered one entity, thus transactions between them should not be subjected to TDS. Additionally, it was contended that since the recipient had already paid the tax, no deduction should be necessary. The representative cited the judgment in CIT vs Hindustan Coca Cola Beverages P Ltd (2007) 293 ITR 226(Del).

2. Applicability of Section 194A to Individual Partners Paying Interest to Partnership Firms:
The tribunal examined whether individual partners paying interest to partnership firms are liable to deduct tax under Section 194A. Section 194A(1) mandates that any person, excluding individuals or Hindu Undivided Families (HUFs), responsible for paying interest, must deduct income tax at the rates in force. However, individuals or HUFs whose business income exceeds the limits specified under Section 44AB are required to deduct tax. Since the assessees' business income exceeded the prescribed limit, they were liable to deduct tax while paying interest to the firm under Section 194A(1).

3. Impact of the Recipient Firm Already Paying Tax:
The tribunal found no merit in the contention that since the recipient firm had already paid the tax, the assessee should not be required to deduct TDS. The judgment in Hindustan Coca Cola Beverages (P) Ltd was rendered in the context of Section 201, which deals with the recovery of tax from the assessee who defaults in making the deduction. Section 40(a)(ia) aims to compel the assessee to deduct tax at source as a precondition for claiming the expenditure. Therefore, the provisions of Section 40(a)(ia) and Section 201 operate in different fields, and the judgment in Hindustan Coca Cola Beverages (P) Ltd is not applicable in this context.

4. Retrospective or Prospective Application of the Second Proviso to Section 40(a)(ia):
The second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, states that if an assessee fails to deduct tax but is not deemed to be in default under Section 201(1), it shall be deemed that the assessee has deducted and paid the tax on the date of furnishing the return of income by the resident payee. The tribunal noted that some benches of the tribunal had considered this proviso to be retrospective. However, the jurisdictional High Court in Prudential Logistics & Transports (ITA No. 01 of 2014) ruled that the second proviso is not applicable to earlier assessment years. Thus, the tribunal concluded that the second proviso is not applicable for the assessment years under consideration.

5. Applicability of Section 40(a)(ia) to Amounts Already Paid During the Financial Year:
The assessee contended that Section 40(a)(ia) applies only to amounts payable on the last day of the financial year, citing the Special Bench decision in Merilyn Shipping & Transports vs AddlCIT and the Allahabad High Court judgment in CIT vs M/s Vector Shipping Services (P) Ltd. However, the tribunal noted that the dismissal of the SLP by the Supreme Court does not constitute a declaration of law. The Gujarat High Court in CIT vs Sikandarkhan N Tunvar and the Calcutta High Court in Crescent Exports Syndicate & Another disagreed with the Merilyn Shipping decision, ruling that Section 40(a)(ia) applies to amounts payable at any time during the year. The tribunal preferred these judgments over the Allahabad High Court decision, concluding that Section 40(a)(ia) covers amounts payable at any time during the year.

Conclusion:
The tribunal confirmed the orders of the lower authorities, disallowing the interest payments under Section 40(a)(ia) due to the non-deduction of TDS. The appeals filed by the assessees were dismissed. The judgment emphasized the distinct treatment of partners and partnership firms under the Income-tax Act, the non-applicability of the second proviso to earlier assessment years, and the comprehensive applicability of Section 40(a)(ia) to amounts payable throughout the financial year.

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