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Rajeev Kumar Agarwal vs. ACIT (ITAT Agra)
June, 03rd 2014

No s. 40(a)(ia) disallowance for failure to deduct TDS on payment if payee has offered amount to tax. Second Proviso to s. 40(a)(ia) inserted by Finance Act 2013 w.e.f. 1.4.2013 should be treated as curative and to have retrospective effect from 1.4.2005

The assessee incurred expenditure on payment of interest on which TDS u/s 194A was not deducted. The AO applied s. 40(a)(ia) and disallowed the claim for deduction of the expenditure. This was confirmed by the CIT(A). Before the Tribunal the assessee argued that the second proviso to s. 40(a)(ia), inserted by the Finance Act 2012, should be treated as clarificatory & retrospective in nature and that as the recipients of the interest have already offered the interest to income, no disallowance u/s 40(a)(ia) could be made. HELD by the Tribunal allowing the appeal:

The second proviso to s. 40(a)(ia), introduced by the Finance Act 2013 w.e.f. 01.04.2013, read with s. 201, provides that despite failure to deduct TDS, disallowance of the expenditure shall not be made if the resident payee has (i) furnished his return of income u/s 139, (ii) taken into account such sum for computing income in such ROI, (iii) paid the tax due on the income declared by him in such return of income and (iv) furnishes a certificate to this effect from an accountant in the prescribed form. The scheme of s. 40(a)(ia) is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. S. 40(a)(ia), as it 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 effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. Accordingly, it is held that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 (Bharati Shipyard 141 TTJ 129 (SB) applied/ distinguished, Rajinder Kumar 362 ITR 241 (Del) applied)

 
 
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