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2019 (8) TMI 570 - HC - Income TaxTDS u/s 195 - Tribunal upholding the direction of CIT (A) not to disallow u/s.40(a)(i) of the Act particularly when royalty payments are hit by section 195 - HELD THAT - At the very outset, we have to say that the reliance on the Circular by the D.R. is misplaced as that Circular refers to the decision of the Tribunal Special Bench, Vishakhapatanam in the case of Merilyn Shipping Transports Vs. Addl. CIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM . The Circular also refers to the decision of the Hon'ble High Court of Gujarat, High Court of Allahabad which all relates to the issue relating to paid or payable whereas the issue before us relates to the amendment of second proviso to Section 40(a)(ia) which has been held to have a retrospective effect by the Hon'ble High Court of Delhi in the case of Ansal Landmark Township Pvt. Ltd. 2015 (9) TMI 79 - DELHI HIGH COURT However, in the interest of justice and fair play, we restore this issue to the files of the A.O. The assessee is directed to furnish necessary evidences to show that the payee has filed returns and offered the sum received to tax. The A.O. is directed to verify the same and decide the issue in the light of the ratio laid down by the Hon'ble High Court of Delhi (supra).
Issues:
1. Interpretation of Section 40(a)(i) of the Income Tax Act regarding disallowance of royalty payments. 2. Application of Section 40(a)(ia) of the Act on interest expenses. Analysis: 1. The first issue in this case revolves around the interpretation of Section 40(a)(i) of the Income Tax Act concerning the disallowance of royalty payments. The appellant failed to deduct TDS on a provision made for royalty, leading to a disallowance under Section 40(a)(i) by the Assessing Officer. The appellant argued that the provision was for identified parties and based on agreements, hence not contingent. The High Court observed that TDS provisions apply even if the liability is not credited, citing the case of IBM India (P) Limited Vs ITO. The Assessing Officer's addition for non-deduction of TDS was upheld, but the appellant's claim of deducting TDS on royalty payment was accepted, directing verification and allowance of the expenditure in subsequent years if not claimed earlier. 2. The second issue pertains to the application of Section 40(a)(ia) of the Act on interest expenses. The Assessing Officer disallowed interest expenses for failure to deduct tax at source under Section 194A. The CIT(A) relied on a Delhi High Court decision, holding that the second proviso to Section 40(a)(ia) is retrospective. The matter was remitted back to the AO to allow the expense if the recipients had offered the payments as income. The appellate tribunal considered a similar issue and directed the AO to verify if the payee had filed returns and offered the sum received to tax. The tribunal restored the issue to the AO for further examination based on the retrospective effect of the second proviso to Section 40(a)(ia). The High Court upheld the actions of the CIT(A) and the tribunal, dismissing the appeal. In conclusion, the High Court upheld the decisions of the lower authorities on both issues, emphasizing the importance of complying with TDS provisions and considering the retrospective application of relevant sections of the Income Tax Act.
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