2018 (11) TMI 1485 - AT - Income Tax

TDS u/s 194A - payment towards interest to Non-Banking Financial Corporation (NBFC) without deducting TDS - Held that - The assessee company has made payment towards interest to Non-Banking Financial Corporation (NBFC) without deducting TDS thereon and the loans were raised in the name of the assessee s company itself which was utilized for business purpose only. In dispute that the companies are well-known finance companies engaged in the business of financing and as such are financial institutions. It is the case of the assessee that interest was paid to well-known finance companies who are NBFCs except two companies. No doubt, the assessee has not filed detail of any such material if the recipient of interest in question accounted for the interest received in their account and paid due liabilities of the income-tax, but taking the contentions raised by assessee on its face value as all the companies except two are well-known NBFC, the issue in question is remanded back to the AO to verify the contentions raised by the assessee and in case, he is satisfied that the concerned NBFCs have included this income in computation of their income offered to tax, then it would be deemed to comply with the provisions contained u/s 40(a)(ia). In case NBFCs are found to have shown the interest received in their books of account and paid due liabilities of the income-tax for computation of income then no disallowance can be made u/s 40(a)(ia). Appeal filled by assessee is allowed for statistical purposes.

Summary

Issues:
Disallowance of finance cost under section 40(a)(ia) for non-deduction of TDS on interest payment to financial institutions.

Analysis:

Issue 1: Disallowance of finance cost under section 40(a)(ia) for non-deduction of TDS on interest payment to financial institutions

Facts: The appellant, a chemical trading company, incurred finance costs towards interest without deducting TDS. The AO disallowed a specific amount for non-compliance with section 194A of the Income-tax Act, 1961.

Arguments: The appellant contended that the loans were utilized for business purposes, and the interest was paid to well-known finance companies. They argued that these companies likely filed returns and paid income tax, thus no disallowance should occur. The appellant relied on precedents and the retrospective effect of section 40(a)(ia).

Decision: The Tribunal noted that the interest was paid to Non-Banking Financial Corporations (NBFCs) without TDS deduction. The case highlighted that the companies were established financial institutions. Despite the lack of evidence regarding tax compliance by the recipient companies, the Tribunal remanded the issue to the AO for verification. If the NBFCs had included the interest in their income tax calculations, no disallowance under section 40(a)(ia) should be made. The appeal was allowed for statistical purposes, emphasizing the importance of verifying tax compliance by the recipient companies.

This judgment provides clarity on the applicability of section 40(a)(ia) regarding TDS deduction on interest payments to financial institutions, emphasizing the need for verification of tax compliance by the recipients to determine the disallowance.