2017 (10) TMI 1244 - AT - Income Tax

Assessee in default u/s 201 - disallowance u/s 40(a)(ia) - interest on EMIs paid to financial institutions - person responsible for deduction and payment of tax at source - Held that - As decided in assessee s own case that if the payees have admitted the receipt of income, there is no need for the payee to deduct the TDS. Since the provisions of section 201(1) allow such assessee to be not an assessee in default , consequently, the second proviso to section 40(a)(ia) also comes into operation even though the said provision was introduced from 01/04/2013.and the assessee has followed due procedure of submitting the tax compliance before the AO as similar to the findings of previous AY, we dismiss the appeal filed by the revenue.

Summary

Issues Involved:
1. Non-deduction of TDS on interest payments.
2. Applicability of Section 40(a)(ia) of the Income Tax Act.
3. Retrospective application of the second proviso to Section 40(a)(ia).
4. Validity of CIT(A)'s reliance on judicial precedents and CBDT circulars.
5. Revenue's contention on the legal interpretation of the provisions.

Issue-wise Detailed Analysis:

1. Non-deduction of TDS on Interest Payments:
The Assessing Officer (AO) observed that the assessee had borrowed amounts and paid interest to various financial institutions, including M/s. Diwan Housing Finance Ltd and M/s. India Bulls Financial Services Ltd. The AO noted that TDS should have been deducted on these interest payments as per Section 194A of the Income Tax Act. However, the assessee argued that the interest was part of predetermined EMIs paid via post-dated cheques, and they did not have a breakdown of the interest and principal components to facilitate TDS deduction.

2. Applicability of Section 40(a)(ia) of the Income Tax Act:
The AO invoked Section 40(a)(ia) for non-deduction of TDS on the interest payments, leading to disallowance of the interest expenditure. The assessee contended that since the interest was already paid and the financial institutions had paid the tax, there was no loss of revenue, and hence, Section 40(a)(ia) should not apply.

3. Retrospective Application of the Second Proviso to Section 40(a)(ia):
The CIT(A) deleted the addition made by the AO, relying on the second proviso to Section 40(a)(ia) introduced by the Finance Act, 2012. This proviso states that if the payee has filed returns and paid taxes, the payer should not be considered in default for non-deduction of TDS. The CIT(A) treated this proviso as curative and having retrospective effect from 1st April 2005. The revenue contested this, citing that the proviso was effective from 1st April 2013 and should not apply retrospectively.

4. Validity of CIT(A)'s Reliance on Judicial Precedents and CBDT Circulars:
The CIT(A) relied on the decision of the Special Bench in the case of Merilyn Shipping & Transport and other judicial precedents, which held that Section 40(a)(ia) applies only to amounts payable as of 31st March of the relevant year. The revenue argued that this interpretation was contrary to CBDT Circular No. 10/DV/2013, which clarified that the provisions apply to amounts payable at any time during the year.

5. Revenue's Contention on the Legal Interpretation of the Provisions:
The revenue cited several judicial decisions, including the Hon'ble Supreme Court's ruling in Palam Gas Services Vs. CIT, to argue that the provisions of Section 40(a)(ia) should be interpreted literally and that the second proviso should not apply retrospectively. The revenue also referenced the Kerala High Court's decision in Thomas George Muthoot Vs. CIT, where the benefit of the second proviso was denied due to the assessee's intention not to deduct TDS.

Judgment:
The tribunal considered the rival submissions and judicial precedents. It upheld the CIT(A)'s decision, noting that the second proviso to Section 40(a)(ia) is curative and has retrospective effect from 1st April 2005. The tribunal found that the assessee had followed due procedure in submitting tax compliance and dismissed the revenue's appeal.

Conclusion:
The tribunal concluded that the assessee should not be treated as in default for non-deduction of TDS on interest payments, as long as the payee had filed returns and paid taxes. The appeal by the revenue was dismissed, affirming the CIT(A)'s order.

Pronouncement:
The judgment was pronounced in the open court on 27th October 2017.