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2015 (10) TMI 2046 - ITAT HYDERABAD

2015 (10) TMI 2046 - ITAT HYDERABAD - TMI - Disallowance made U/s. 40(a)(ia) - non deduction of TDS on the interest paid - said interest payments have been accounted by the payee in their Books of Accounts and payee has offered as part of their computation in the return of income. - Held that:- No reason to interfere with the well reasoned order of CIT(A) as he has considered the legal principles established by the Co-ordinate Benches and accordingly, decided the issue. Therefore, the order of C .....

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contentions - Decided against revenue.

Credit for Security Transactions Tax - CIT(A) allowed the claim - Held that:- There is a mistake in the direction of CIT(A) to give credit for the Security Transaction Tax as per the provisions of Section 88E. The Ld. CIT(A) failed to notice that vide sub-section 3 of Section 88E, no deduction under this section shall be allowed in or after the assessment year beginning on the first day of April, 2009. Since, the impugned assessment years are af .....

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AYs. 2010-11 and 2011-12 against the orders of Commissioner of Income Tax (Appeals), Tirupati dated 29-01-2015 and 23-02-2015 in respective assessment years. Since common issue is involved in this, we heard these appeals together and decided by this common order. 2. At the outset, these appeals are filed with a delay of 16 days and Assessing Officer (AO) filed an application for condonation of delay stating that the records could not be traced and the appeals were filed with a delay of 16 days. .....

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unds from his current account with the firm and shown to have paid interest of ₹ 1,59,16,750/- in AY. 2010-11 and ₹ 1,59,03,231/- in AY. 2011-12 to the firm. AO noticed that these amounts were paid to the firm without deducting TDS and since assessee is in the business where Books of Accounts are audited, assessee was liable to deduct tax on the interest paid. As assessee has failed in complying with the provisions of Section 40(a)(ia), he made disallowance of interest claim made by .....

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it was submitted that the said interest payments have been accounted by the payee in their Books of Accounts and payee has offered as part of their computation in the return of income. Since newly inserted second proviso to Section 40(a)(ia) of the Act was inserted by the Finance Act, 2013 w.e.f. 01-04-2013, assessee claimed benefit of the said proviso and relied on the following judicial decisions: i. DCIT Vs. Ananda Marakala ITA No. 1584/Bang/2012 and CO No. 58/Bang/2013 dated 13-09-2013; ii. .....

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nt. However, he directed the AO to verify whether the amounts are paid and subject to outcome of such verification, the grounds are treated as allowed. His detailed order is as under: 5.3 Gone through the observations of the Assessing Officer in the assessment order, the submissions of the appellant and the case laws relied upon by the appellant. Briefly stated, the facts of the case indicate that the appellant being a partner in a firm by name M/s.B.V.Reddy & Sons, has overdrawn the amounts .....

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tner, to the firm. However, such argument is found to be not applicable to the facts of the case where the assessee himself is in business and books of account were auditable as per the provisions of Section 44AB of the I.T.Act for the immediately preceding year to the assessment year under reference. Further and alternately, the appellant took the plea that deduction of tax is only one mode of recovery of tax and once income is recovered in other mode, and suffered tax in the hands of payee, ta .....

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in nature and, therefore, should be given retrospective effect from the 1st of April, 2005 being the date from which sub-clause (ia) of Section 40(a) was inserted by the Finance Act, 2004, the appellant relied upon the decisions of ITAT, Bangalore in the cases of DCIT Vs. Ananda Marakala and S.M.Anand Vs. ACIT and decision of ITAT, Delhi in the case of ITO Vs. Dr.Jaideep Kumar Sharma as indicated in the submissions. The appellant has furnished Form No.26A as stipulated by the second proviso to .....

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dicated. However, since this procedure was not applicable at the time of the assessment with the said interpretation not available for the assessee on the retrospective application of the proviso, the same could not be furnished before the Assessing Officer. 5.4 Coming to the issue of the payment of interest by the to the firm where he is a partner, without making TDS, are governed by the facts of the case laws relied upon by the assessee / appellant, wherein, the Hon ble Tribunal of Bangalore a .....

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ule 31ACB of the I. T. Rules, 1962, so as to not to be held as an assessee in default as per the proviso to Section 201 of the Act. As held in the decision of the co-ordinate Bench in the case of S.M. Anand Vs. ACIT(supra), since the assessee in the period under consideration i.e. A. Y. 2005-06 could not have contemplated that such a compliance was to be made, we also in the case on hand, remit the matter to the file of the A.O. Similar was the decision of the Hon ble ITAT, Bangalore in the case .....

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013, the provisions of section 40(a)(ia) of the Act would not be attracted to the payments made by the assessee t.e. Sri G.Shankar of ₹ 2,69,28,500/- and to Shri Ramesh Kotian of ₹ 1,54,75,000/-. This view of our, is in accordance with the decision of the co-ordinate bench of this Tribunal in the case of Ananda Markala (supra) wherein it was held that the insertion of the second proviso to section 40(a)(ia) of the Act should be read retrospectively from 01.04.2005 and not prospective .....

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e Hon ble ITAT, Delhi in the case of ITO Vs. Dr. Jaideep Kumar Sharma runs as under: When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after insertion of the second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to nondeduction of tax at source by the asses .....

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ue-howsoever belated the realisation of unintended and undue hardships to the taxpayers may have been. It seems to proceed on the basis, and rightly so, that seeking tax deduction at source compliance is not an end in itself, so far as the scheme of this legal provision is concerned, but is only a means of recovering due taxes on income embedded in the payments made by the assessee. That is how, as we have seen a short while ago, the Hon ble Delhi High Court has visualised the scheme of things a .....

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tion 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure-particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. As a corollary to this proposition, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an intende .....

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a 8 of the order) On a conceptual note, justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivise not deducti .....

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or not, on a fair, just and equitable interpretation of law-as is the guidance from the Hon ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an intended consequence to disallow the expenditure, due to non-deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowe .....

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ions of section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee s tax withholding lapses did not result in any loss to the exchequer. Now that the Legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effec .....

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x at source by• declining the deduction ln respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of the second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from April 1, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004. (para 9 of the or .....

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Thereby, it is reasonable to hold that provisions of section 40(a)(ia) are not applicable in this case and disallowance cannot be made where the payee admits the income and pays tax. However, since Form 26A was not available to the assessee to be furnished before the Assessing Officer, the Assessing Officer may examine the said details of income offered and taxes paid by the payee and allow the expenses as claimed by the assessee subject to findings of such verification. Thus, on the lines of t .....

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rder of CIT(A) as he has considered the legal principles established by the Co-ordinate Benches and accordingly, decided the issue. Therefore, the order of CIT(A) is upheld and Revenue s ground on this is rejected. In fact the Revenue s ground is that second proviso is effective only from 01-04-2013 and not for the impugned assessment years. Since this issue was already considered and decided that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective .....

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