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Shri BV Nagesh Versus The Income Tax Officer Ward 10 (2) Bangalore

TDS u/s 194C - disallowance u/s. 40(a)(ia) - hire charges payment - whether the second proviso is prospective or retrospective in nature? - Held that:- The second proviso to section 40(a)(ia) has retrospective effect from 01.04.2005 and in case the recipients of the amount have taken into account for computation of their income offered to tax in the return of income then no disallowance can be made u/s. 40(a)(ia). Hence we set aside this issue to the record of the AO for limited purpose of verif .....

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f the recipients in support of the claim however neither the AO nor the CIT(A) have conducted a proper enquiry to verify this fact rather the evidence produced by the assessee was rejected at threshold. Even the decisions relied upon by the assessee before us were also not considered by the authorities below. Therefore we have already set aside the issue of non-applicable of provisions of section 40(a)(ia) by virtue of second proviso to said section we deem fit and proper that this issue of natu .....

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o, Judicial Member The appeal of the assessee was earlier adjudicated by this Tribunal vide its order dated 17.07.2015 however subsequently the said order of the Tribunal was recalled in the MP No. 109/Bang/2015 vide order dated 30.06.2016. Hence this appeal of the assessee was again placed before this Tribunal for adjudication on the issue of disallowance u/s. 40(a)(ia). The assessee is a tour and travel operator and providing vehicles on hire. During the course of assessment proceedings the AO .....

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venue with the other owners of the vehicle. The AO did not accept the contention and explanation of the assessee and made disallowance of the said amount as per the provisions of section 40(a)(ia). The assessee challenged the action of the AO before the CIT(A) and contented that the assessee is in cab sharing arrangement with the cab owners and therefore the provisions of section 194C do not apply on the payments in question which is sharing of revenue. The CIT(A) did not accept the contention o .....

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t the business of providing / supplying vehicles to companies for pick up and drop of their employees and had instead, completely transferred his business using such an arrangement of sharing of revenue. He has pointed out that the assessee made cab sharing arrangement with some parties. The ld. AR has pointed out that the assessee filed seven affidavits of the recipients who have confirmed that they received the amount under the cab sharing arrangement whereby specific cab trips were specifical .....

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IL(JV) dated 13.01.2014 in ITA Nos. 323 to 336/Hyd/2014 2.DCIT Vs Shri Ananda Marakala dated 13.09.2013 in ITA No. 1584/Bang/2012 and CO No. 58/Bang/2013. Thus the ld. AR has submitted that it is not an expenditure but sharing of the revenue at source itself and therefore it does not come under the purview of section 194C. 3. The second flag of this argument is that the recipients of this amounts has already taken into account the same for computing income in their return of income and paid tax .....

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nd curative and therefore has retrospective effect from 01.04.2005. Hence the ld. AR has submitted that the disallowance made by the AO u/s. 40(a)(ia) is not sustainable and the same may be deleted. 4. On the other hand, the ld. DR has submitted that the second proviso to section 40(a)(ia) has been inserted in the statute vide Finance Act 2012 with effect from 01.04.2013. When the legislature has made it clear that the said proviso is applicable only w.e.f. 01.04.2013 then it cannot be applied r .....

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of the assessee regarding the applicability of second proviso to section 40(a)(ia) of the IT act and in case the recipients have already considered the amounts in question for computation of their income offered for tax in the return of income then no disallowance can be made u/s. 40(a)(ia). The only question arises is whether the second proviso is prospective or retrospective in nature. At the outset we note that the Hon ble Delhi High Court while dealing with this question in case of CIT Vs Na .....

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the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under: 'On a conceptual note, primary 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 shou .....

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erent, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from 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 .....

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untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271C, and, section 40(a)(ia) does not add to the same. The provisions 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 .....

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scussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an "intended consequence" to punish the assessees for non-deduction of tax at source by declining the deduction in 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 second proviso to Section 40(a)(ia) is declaratory and cur .....

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. Accordingly, in view of the decision of Hon ble Delhi High Court the second proviso to section 40(a)(ia) has retrospective effect from 01.04.2005 and in case the recipients of the amount have taken into account for computation of their income offered to tax in the return of income then no disallowance can be made u/s. 40(a)(ia). Hence in the facts and circumstances of the case we set aside this issue to the record of the AO for limited purpose of verification of the facts whether the recipient .....

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