2018 (10) TMI 1130 - HC - Income Tax

Disallowance of expenses u/s 40(a)(ia) - default u/s 201 - assessee in default - scope of amendment - Held that - First proviso to Section 201 stipulates that a person who has failed to deduct tax in accordance with provisions of Section XVII-B shall not be deemed to be an assessee in default, if a certificate is furnished from an accountant in a prescribed form to the effect that resident has furnished return of Income Tax under Section 139 of the Act; has taken into account the sum received for computing income in the return of income tax and has paid tax due on the income declared by him in such return. There is mandatory requirement under Chapter XVII-B of the Act to deduct TDS under certain eventualities and in case of failure to do so, consequences have also been mentioned under Section 201. With the insertion of second proviso to Section 40(a)(ia) and first proviso to Section 201(1) of the Act, exception has been carved that subject to the fulfilment of condition as stipulated in first proviso to Section 201 of the Act, the assessee shall not be treated as assessee in default and the expenses so claimed will be allowed. This Court in Pr. Commissioner of Income Tax-2, Chandigarh Vs. Shivpal Singh Chaudhary 2018 (7) TMI 1850 - PUNJAB & HARYANA HIGH COURT held that the second proviso to Section 40(a)(ia) and first proviso to Section 201(1) of the Act though inserted by Finance Act, 2012, would be applicable retrospectively w.e.f. 01.04.2005. Thus the matter is remanded back to the Assessing Officer to decide the issue of disallowance of expenses under Section 40(a)(ia) afresh

Summary

Issues involved:
1. Disallowance of expenses under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Violation of principles of natural justice by the Income Tax Appellate Tribunal.
3. Interpretation of the term "PAYABLE" in Section 40(a)(ia) of the Act.

Detailed Analysis:
1. The appellant filed an appeal against the order of the Income Tax Appellate Tribunal (ITA) confirming the disallowance of expenses under Section 40(a)(ia) of the Income Tax Act, 1961. The appellant argued that the Tribunal erred in rejecting the appeal without granting sufficient opportunity for a hearing, thereby violating the principles of natural justice. The appellant contended that the Tribunal ignored the principles of consistency by not following their own well-established law regarding the treatment of default in tax deductions. The Tribunal's interpretation of the term "PAYABLE" in Section 40(a)(ia) was also questioned by the appellant.

2. The assessing authority disallowed expenses claimed by the appellant for interest paid without deduction of tax at source (TDS). The appellant challenged this disallowance, and the Commissioner of Income Tax (Appeals) partly allowed the appeal. However, the Tribunal dismissed the appeal without granting an adjournment for the appellant to produce necessary certificates under Section 201(1) of the Act. The appellant later submitted additional evidence, including certificates showing that the payee had accounted for the payments in their Profit & Loss account.

3. The Court referred to the second proviso to Section 40(a)(ia) inserted by the Finance Act, 2012, which deems that tax has been deducted and paid if the assessee is not in default under the first proviso to Section 201(1). The first proviso to Section 201 outlines conditions where a person failing to deduct tax will not be deemed an assessee in default. The Court emphasized the mandatory requirement to deduct TDS under Chapter XVII-B and the consequences of failure to do so. It cited a previous case where the second proviso to Section 40(a)(ia) and first proviso to Section 201(1) were held applicable retrospectively from 01.04.2005.

In conclusion, the Court remanded the matter back to the Assessing Officer to decide the disallowance of expenses under Section 40(a)(ia) after considering the additional evidence and hearing the appellant. The appeals were disposed of accordingly.