2016 (7) TMI 394 - AT - Income Tax

Disallowance u/s 40(a)(ia) - assessee had failed to deduct tax on payment of interest - Held that - In the present case of the assessee, the amounts of interests had already been paid and the provisions of section 40(a)(ia) are applicable only to the amounts remaining payable. That we also take note of the proviso to section 40(a)(ia) that where the assessee cannot be found in default u/s 201, no disallowance u/s 40(a)(ia) could be made. The assessee has already submitted before the CIT (A) list of all the people to whom interests were paid and it is also not disputed that interests were paid in most of the cases to organizations which are exempt from payment of tax. That considering all the facts in this case in its entirety and the judicial pronouncements as discussed above, we do not find any reason to interfere with the order of the learned CIT (A). The relief granted to the assessee is therefore, sustained. The appeal by the Revenue is dismissed. - Decided in favour of assessee

Summary

Issues:
1. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for failure to deduct tax on payment of interest.
2. Interpretation of the proviso to section 40(a)(ia) regarding default under section 201.
3. Applicability of TDS provisions to payments made to exempt units.

Analysis:

Issue 1: Disallowance under section 40(a)(ia)
The case involved an appeal and cross objection by the Revenue and the assessee against the order of the CIT (A) regarding disallowance of ?4,93,77,480 under section 40(a)(ia) for failure to deduct tax on interest payments. The assessee argued that since the recipients were exempt from tax, no disallowance should be made. The CIT (A) relied on judicial precedents and held in favor of the assessee, leading to the dismissal of the Revenue's appeal.

Issue 2: Interpretation of the proviso to section 40(a)(ia)
The assessee contended that as the interests had already been paid and the recipients were not liable for tax, section 40(a)(ia) should not apply. They cited the proviso to section 40(a)(ia) to support their argument. The ITAT upheld the CIT (A)'s decision, emphasizing that no disallowance could be made if the assessee was not found in default under section 201, and the decision of the Special Bench in a related case was binding on the Tribunal.

Issue 3: Applicability of TDS provisions to exempt units
The assessee raised a cross objection, arguing that TDS provisions should not apply to payments made to exempt units. However, since the main appeal was decided in favor of the assessee, the cross objection was deemed academic and dismissed by the ITAT.

In conclusion, the ITAT upheld the CIT (A)'s order, ruling in favor of the assessee and dismissing both the Revenue's appeal and the assessee's cross objection. The decision was based on the interpretation of relevant provisions of the Income Tax Act and judicial precedents, emphasizing the non-applicability of disallowance under section 40(a)(ia) in the given circumstances.