2022 (2) TMI 1190 - AT - Income Tax

Addition u/s. 40(a)(ia) - interest/finance charges received from the assessee firm in its return of income - HELD THAT - As matter of fact borne from the record that the assessee firm had failed to deduct tax at source on the interest/finance charges that was paid/credited by it to M/s. Magna Finance Ltd.. However, we find that the aforementioned payee M/s. Magna Finance Ltd. (supra.) had duly accounted for the aforesaid interest/finance charges received from the assessee firm in its return of income for the year under consideration and had paid the corresponding taxes on the same. The aforesaid factual position can safely be gathered from the Certificate of Chartered Accountant, dated 09.06.2016(supra.) that has been filed by the assessee before us. Now when the aforesaid payee, viz. M/s. Magna Finance Ltd. (supra.) had duly accounted for the interest/finance charges in its return of income and had paid the corresponding taxes on the same, therefore, as per the '2nd proviso' to section 40(a)(ia) of the Act, the aforementioned amount could not have been brought within the realm of disallowance as contemplated under the aforesaid statutory provision. Apart from that, as stated by the Ld. AR, and rightly so, we find that in the case of M/s. Hindustan Coca Cola Beverages Pvt. Ltd. Vs. CIT 2007 (8) TMI 12 - SUPREME COURT had observed, that in case if the payee of the amount in question had paid the taxes on the same, then, the payer i.e. the assessee cannot be held as an assessee-in-default as regards the said amount for the purpose of enforcing the recovery of the corresponding tax liability u/s. 201(1) of the Act. We are unable to subscribe to the disallowance made by the Assessing Officer u/s. 40(a)(ia) of the Act. Accordingly, we herein set-aside the order of the CIT(Appeals) and vacate the disallowance of ₹ 3,95,301/- made by the Assessing Officer. The Ground of appeal No. 1 is allowed.

Summary

Issues:
1. Disallowance of interest paid to NBFC under Sec. 40(a)(ia).
2. Disallowance of expenses claimed for brick, cement, murum & labor.
3. Delay in filing appeal and condonation request.
4. Admission of additional evidence under Rule 29 of ITAT Rules, 1963.
5. Interpretation of the 2nd proviso to section 40(a)(ia) of the Income-tax Act, 1961.

Analysis:
1. The appeal concerned the disallowance of interest paid to an NBFC under Sec. 40(a)(ia). The assessee, engaged in construction work, had not deducted tax at source on the interest paid to M/s. Magna Finance Ltd. The Assessing Officer disallowed the interest amount, leading to an increased assessment. The CIT(A) upheld the disallowance. However, the ITAT, considering the payee's tax compliance and the 2nd proviso to section 40(a)(ia), allowed the appeal, setting aside the disallowance as the payee had accounted for the interest and paid taxes. The ITAT relied on the Supreme Court's judgment in a similar case to support its decision.

2. The issue of disallowance of certain expenses claimed by the assessee was not pressed by the authorized representative during the appeal hearing, resulting in the dismissal of the related ground of appeal.

3. The delay in filing the appeal was attributed to the death of a partner in the assessee firm, causing a halt in business activities. The ITAT, after considering the reasons for the delay, accepted the request for condonation as the delay was beyond the assessee's control.

4. An application for admission of additional evidence was filed by the assessee, supported by a certificate from a Chartered Accountant. The ITAT admitted the additional evidence as it was deemed to have a substantial impact on the issue under consideration.

5. The interpretation of the 2nd proviso to section 40(a)(ia) was crucial in determining the disallowance of the interest amount. The ITAT emphasized that if the payee had accounted for the interest and paid taxes, the disallowance could not be enforced against the assessee, aligning with the statutory provision and judicial precedents.

In conclusion, the ITAT allowed the appeal, setting aside the disallowance of interest paid to the NBFC, dismissed the unpressed ground related to certain expenses, condoned the delay in filing the appeal, admitted additional evidence, and interpreted the statutory provision to support its decision.