2025 (7) TMI 1478 - AT - Income Tax

Addition u/s. 40(a)(ia) - assessee has failed to deduct TDS on payment for expenses to creditors u/s 194A - Since it was payment made for the purchases and the assessee was of bona-fide belief that TDS u/s 194A of the Act is not applicable to him - scope of Amendment of section 201 40(a)(ia) HELD THAT - As per amendment the payer assessee would not be deemed to be in default if the recipient of income (payee) has taken into account the amount received from the payer in computing its income and declared it in the return and has paid due tax on the returned income. We note the insertion of second proviso to section 40(a)(ia) of the Act is curative in nature and so has retrospective effect w.e.f. 1 st April 2005 being a date from which Section 40(a)(ia) of the Act was inserted by the Finance (No. 2) Act 2004. We are of the view that this matter needs fresh adjudication in the light of the decisions of the Hon ble Delhi High Court in CIT v. Ansal Land Mark Township Pvt. Limited 2015 (9) TMI 79 - DELHI HIGH COURT wherein as upheld the decision of Rajiv Kumar Agarwal 2014 (6) TMI 79 - ITAT AGRA that the 2nd proviso to section 40(a)(ia) is curative amendment and has retrospective effect from 01/04/2005. We set aside the impugned order of Ld CIT(A) and remand this issue back to assessing officer and the assessing officer is directed to verify the fact regarding the fulfillment of condition as stated above by the recipient payee and if the assessing officer finds that the recipient/payee has included the amount in its total income in its return of income and paid taxes thereon then the disallowance made by the assessing officer by invoking the provisions of section 40(a)(ia) of the Act should be deleted.

Summary

ISSUES:

Whether disallowance of expenses under section 40(a)(ia) of the Income Tax Act, 1961 is justified where Tax Deducted at Source (TDS) was not deducted by the assessee on certain payments.Whether the second proviso to section 40(a)(ia) applies to exempt disallowance if the payee has included the amount in its income and paid tax thereon.Whether additions made under section 143(1) of the Income Tax Act, 1961, based on audit report and non-deduction of TDS, are valid.

RULINGS / HOLDINGS:

The disallowance under section 40(a)(ia) of the Act confirmed by the lower authorities is set aside and the matter is remanded to the Assessing Officer for fresh adjudication to verify if the payee has included the amount in its income and paid taxes thereon, as per the second proviso to section 40(a)(ia).The second proviso to section 40(a)(ia) is a "curative amendment" with "retrospective effect w.e.f. 1st April, 2005," and exempts disallowance where the payee has complied with tax obligations.Additions made under section 143(1) based on audit report and non-deduction of TDS are subject to reassessment upon verification of the payee's tax compliance and cannot be sustained without such verification.

RATIONALE:

The Court applied the statutory framework of sections 40(a)(ia), 143(1), and 201 of the Income Tax Act, 1961, including the amendment introduced by the Finance Act, 2012, which inserted the second proviso to section 40(a)(ia).The Court relied on judicial precedents, notably the decision of the Hon'ble Delhi High Court in CIT v. Ansal Land Mark Township Pvt. Limited, which upheld the Tribunal's view that the second proviso is declaratory and curative with retrospective effect from 1st April 2005.The Court emphasized that the assessing officer must verify the payee's income tax return and tax payment to determine applicability of the proviso, thereby requiring fresh adjudication rather than outright disallowance.No dissent or doctrinal shift was noted; the judgment aligns with established precedent affirming the retrospective and curative nature of the second proviso to section 40(a)(ia).