Disallowance u/s 40(a)(ia) not affected even if payee considers the receipt as income and pays tax thereon – ITAT follows Kerala High Court 

Disallowance u/s 40(a)(ia) not affected even if payee considers the receipt as income and pays tax thereon – ITAT follows Kerala High Court 

ABCAUS Case Law Citation:
ABCAUS 2437 (2018) 07 ITAT

The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) in confirming addition made by the Assessing Officer u/s 40(a)(ia) of the Income Tax Act 1961, (the ‘Act’) for non deduction of tax at source.

During the course of assessment proceedings, the AO found that the assessee had not made TDS on interest paid to the various NBFCs. Accordingly, he made a disallowance u/s 40(a)(ia) of the Act.

In appeal, the CIT(A) observed that the NBFcs were not exempt u/s 194A and interest paid to them should have been subjected to TDS. The CIT(A) followed the judgment of the Hon’ble Kerala High Court and held that whether the payee had considered the receipt as income and paid tax thereon did not affect the disallowance u/s 40(a)(ia) of the Act. Thus the CIT(A) confirmed the disallowance made by the AO.

The Tribunal following the judgment of Hon’ble Kerala High Court upheld the disallowance made.

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Note from the Author:
In past also, the ITAT Mumbai had rejected the contention that since the person to whom the payment was made had already offered the same for taxation, hence provisions of section 40(a)(ia) could not be invoked.  The Tribunal held that the judgments of the Hon’ble Supreme Court relied upon by the assessee have been rendered in the context of section 201 and therefore the principles laid down in these two decisions could not be adopted for the purpose of interpreting sec.40(a)(ia).

However, there are conflicting decisions on the issue of  restrospectivity of the second proviso to Section 40(a)(ia). While Hon’ble Delhi High Court has specifically approved the view that no disallowance should be made where the recipient takes into account the payments and offers the same to tax.

The law settled by the Hon’ble Supreme Court is that if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted. In view of the above unless there is an adverse view of the jurisdictional High Court, the disallowance u/s 40(a)(ia) may not be made.