Business expenditure – Disallowance u/s. 40(a)(ia) – Payments liable to TDS – Effect of insertion of second proviso to section 40(a)(ia) – Declaratory and curative and applicable retrospectively w.e.f. 01/04/2005 – Payee offering to tax sum received in its return – Disallowance not attracted

42.  Principal CIT
vs. Shivpal Singh Chaudhary; 409 ITR 87 (P&H) Date of order: 5^th July, 2018 A. Y. 2012-13 Sections 37, 40(a)(ia) and 201(1) of ITA 1961

Business expenditure – Disallowance u/s. 40(a)(ia) –
Payments liable to TDS – Effect of insertion of second proviso to section
40(a)(ia) – Declaratory and curative and applicable retrospectively w.e.f.
01/04/2005 – Payee offering to tax sum received in its return – Disallowance
not attracted

For the A. Y. 2012-13, the Assessing Officer had made certain
disallowance u/s. 40(a)(ia) of the Act being amount paid to a construction
company for job work on the ground that tax was not deducted at source. The
assessee had filed confirmation from the payee that the payment made by the
assesse to it had been shown in its return.

The Commissioner appeals held that the second proviso to section
40(a)(ia) is clarificatory and retrospective and deleted the addition. The
Tribunal upheld the decision of the Commissioner (Appeals).

On appeal by the Revenue, the Punjab and Haryana High Court upheld the
decision of the Tribunal and held as under:

“i)   The second proviso to section
40(a)(ia) of the Act was inserted by the Finance Act, 2012 w.e.f. 01/04/2013.
According to the proviso, a fiction has been introduced where an assessee who
had failed to deduct tax in accordance with the provisions of Chapter XVII-B,
but is not deemed to be an assessee in default in terms of the first proviso to
sub-section (1) of section 201 it shall be deemed to have deducted and paid the
tax on such sum on the date of furnishing of return of income by the resident
payee referred to in the proviso.

ii)   From the first proviso to
section 201(1) and the second proviso to section 40(a)(ia) it is discernible
that according to both the provisos, where the payee has filed the return
disclosing the payment received or receivable, and has also paid the tax on
such income, the assessee would not be treated to be a person in default and a
presumption would arise in his favour.

iii)  The rationale behind the
insertion of the second proviso to section 40(a)(ia) was declaratory and
curative and thus, applicable retrospectively w.e.f. 01/04.2005. However, under
the first proviso to section 201(1) inserted w.e.f. 01/07/2012, an exception
had been carved out which showed the intention of the Legislature not to treat
the assessee as a person in default subject to fulfilment of the conditions as
stipulated thereunder. No different view could be taken regarding the
introduction of the second proviso to section 40(a)(ia), which was intended to
benefit the assessee, w.e.f. 01/04/2013 by creating a legal fiction in the
assessee’s favour and not to treat him in default of deducting tax at source
under certain contingencies and that it should be presumed that the assessee
had deducted and paid tax on such sum on the date of furnishing of the return
by the resident payee.

iv)  In view of the above,
substantial question of law stands answered against the Revenue and in favour
of the assessee.”