2016 (3) TMI 922 - AT - Income Tax

Disallowance of interest u/s 40a(ia) - retrospectivity - whether any TDS has been deducted and deposited to the Central Government Account? - Held that - In view of the dicta valid down in CIT Vs. Ansal Land Mark Township P Ltd 2015 (9) TMI 79 - DELHI HIGH COURT the insertion of second proviso to section 40(a)(ia) of the Act is declaratory and curative in nature and it has retrospective effect from 1.4.2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act No. 2 2004. From the operative para 6.7 of the first appellate order it is apparent that the ld. CIT(A) upheld the disallowance by holding that the proviso inserted by Finance Act 2012 w.e.f 1.4.2014 is not applicable to A.Y 2009-10. But in view of proposition rendered by the Hon ble High Court of Delhi it is settled that the proviso to section 40(a)(ia) of the Act being declaratory and curative is applicable from 1.4.2005 which is the date of insertion of sub-section (ia) of section 40(A) of the Act. Hence view taken by the AO for making disallowance and basis on which the same was upheld by the ld. CIT(A) is not sustainable in view of the dicta of Hon ble Jurisdictional High Court. Thus we are inclined to hold that the benefit of the proviso to section 40(a)(ia) of the Act is available for the assessee for A.Y 2009-10 as the AO could not controvert the fact supported by the certificate of the payee M/s Kotak Mahindra Pvt. Ltd stating that the payee has enclosed the said amount in its income in the return filed u/s 139 of the Act and has paid tax due on its income declared in the return. In this factual matrix the proviso to section 40(a)(ia) of the Act having retrospective effect from 1.4.2005 come into play to rescue the defaulter assessee and thus disallowance made by the AO and upheld by the ld. CIT(A) is demolished. - Decided in favour of assessee

Summary

Issues:
- Disallowance of interest under section 40(a)(ia) of the Act
- Adequate opportunity of being heard not provided during assessment proceedings
- Applicability of the proviso to section 40(a)(ia) for A.Y 2009-10

Analysis:

Issue 1: Disallowance of interest under section 40(a)(ia) of the Act
The appeal was filed against the order of the CIT(A) upholding the disallowance of interest payment made by the assessee to Kotak Mahindra due to non-deduction of TDS. The AO disallowed an amount of Rs. 2,08,953 under section 40(a)(ia) of the Act. The CIT(A) dismissed the appeal, stating that the amended provision introduced by the Finance Act, 2012, was not applicable to the assessment year 2009-10. However, the Tribunal, after considering relevant judicial pronouncements, held that the proviso to section 40(a)(ia) of the Act is declaratory and curative in nature, with retrospective effect from 1.4.2005. As the payee had included the amount in its income and paid taxes, the disallowance made by the AO and upheld by the CIT(A) was not sustainable. Therefore, the Tribunal allowed Grounds 1 to 3 of the assessee, overturning the disallowance.

Issue 2: Adequate opportunity of being heard
The assessee contended that the AO passed the assessment order without providing adequate opportunity to be heard. However, the focus of the judgment primarily revolved around the disallowance of interest under section 40(a)(ia) of the Act. The Tribunal's decision to allow the appeal was based on the retrospective applicability of the proviso to section 40(a)(ia), rendering the issue of adequate opportunity of being heard secondary in the final decision.

Issue 3: Applicability of the proviso to section 40(a)(ia) for A.Y 2009-10
The crux of the judgment was the interpretation of the proviso to section 40(a)(ia) of the Act for the assessment year 2009-10. While the CIT(A) held that the amended provision was not applicable, the Tribunal, guided by relevant judicial rulings, determined that the proviso had retrospective effect from 1.4.2005. This retrospective application allowed the Tribunal to overturn the disallowance of interest made by the AO, as the payee had accounted for the income and paid taxes. The Tribunal's decision was influenced by the legal principle that the proviso was curative and aimed at compensating for untaxed income rather than penalizing for TDS lapses.

In conclusion, the Tribunal's judgment in this case centered on the retrospective applicability of the proviso to section 40(a)(ia) of the Act, leading to the allowance of the assessee's appeal against the disallowance of interest. The decision highlighted the importance of legal interpretations and the impact of curative amendments in tax laws on assessment proceedings.