2015 (11) TMI 1731 - AT - Income Tax

Disallowance u/s 40(a)(ia) - liability to deduct tax - Held that - In a case where the deductee/payee has paid tax and as such the person responsible for paying is no longer required to deduct or pay any tax legitimate business expenditure would stand disallowed since the section contemplated by the first proviso viz. deduction and payment of tax in a subsequent year would never come about. Such unintended consequence has been sought to be taken care of by the second proviso inserted in section 40(a)(ia) by the Finance Act 2012. AO while passing an order under section 201(1)/201(1A) of the IT Act for the impugned assessment year 2009-10 took the view that the assessee is not in default in respect of TDS on the payment of Rs. 7, 00, 567/- to M/s. Reliance Capital as the assessee has produced Certificate of the Accountant/declaration that the duty has included the charges received from the assessee in his return and has paid entire taxes on the same. - Decided in favour of assessee.

Summary

Issues Involved: Disallowance under section 40(a)(ia) of the I.T. Act.

Analysis:
The appeal was filed against the order of the ld. CIT (A) regarding the disallowance of a sum under section 40(a)(ia) of the I.T. Act. The provisions of section 40(a)(ia) were amended by the Finance Act, 2012, introducing a proviso to address unintended consequences. The Tribunal in a previous case held that the second proviso is curative and has retrospective effect. The intention of the legislature was to disallow legitimate business expenditure only when tax was not deducted and paid. If the payee has already paid tax, the deduction and payment of tax at source should not result in disallowance. The second proviso was inserted to rectify this issue. The AO in the present case found that the assessee was not in default for TDS on the payment to a party as the party had paid taxes. Therefore, the disallowance under section 40(a)(ia) was deleted, following the decision of the AO. The appeal by the assessee was allowed, and the disallowance was removed.

In conclusion, the Tribunal's decision was based on the retrospective effect of the second proviso to section 40(a)(ia) introduced by the Finance Act, 2012. The judgment emphasized that disallowance should not occur if the payee has already paid taxes, and the deductor is not in default. The decision was in line with previous rulings and aimed to prevent unintended consequences in disallowing legitimate business expenditures.