ITAT MUMBAI BENCH 'A'

IT Appeal No. 6822 (Mum.) of 2011
[ASSESSMENT YEAR 2008-09]

B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER

K.S. Choksi for the Appellant.
Manoj Kumar for the Respondent.

ORDER

B. Ramakotaiah, Accountant Member - This appeal by the assessee is against the order of CIT(A)-24, Mumbai dated 18.7.2011. Assessee has raised the following grounds :—

"1. (a) The ld. CIT(A) has erred in passing an order by not allowing interest paid to various parties amounting to Rs.530425/- u/s. 40(a)(ia) on the ground that filing of non-deduction forms under rule 29C belatedly without considering the facts that the forms have been filed to the statutory authorities.

(b) The ld. CIT(A) has failed to appreciate that the forms has been filed to the correct authority based on the receipt issued by them and has made a wrong presumption without any evidence that the forms have been obtained later on and filed.

(c) The ld. CIT(A) has failed to appreciate that late filing is merely a procedural delay and has been accepted in the preceding year by CIT(A)."

2. Briefly stated, AO noticed that the assessee claimed an amount of Rs. 5,30,425/- as deduction on account of interest expenditure. AO asked the assessee to explain why the said expenditure should not be disallowed u/s. 40(a)(ia) on failure to deduct tax at source. While furnishing the details the assessee submitted that the assessee had taken loans from various parties in the business of trading in Iron & Steel and those parties were paid interest on regular basis and TDS was also deducted on interest paid to them except in 17 parties from whom form-15G /15H were received. The details were furnished as under :-

2.1 On the reason that the assessee has not filed Form 15H/15G to the CIT as prescribed u/r. 29C, AO invoked provisions of section40(a)(ia) and disallowed entire amount of Rs. 5,30,429/-.

3. The matter was contested before the CIT(A) that disallowance u/s. 40(a)(ia) is entirely different and those provisions can not be invoked for not filing the Forms before CIT as prescribed. It was further submitted that mere technical failure can not lead to disallowance, when the assessee had taken relevant Forms from various persons. Incidentally, it was pointed out that the assessee was not aware about the correct jurisdiction with whom those Forms were to be filed. The ld. CIT(A) however rejected the claims and upheld the disallowance.

3.1 The ld. Counsel reiterated the submissions made before the ld. CIT(A) and further pointed out that the assessee has asked the department about the jurisdiction of CIT to whom the forms are to be correctly filed and reply is still awaited. He submitted that non-submission of Form-15H does not lead to disallowance under section 40(a)(ia). He relied on various case laws.

3.2 The ld. DR however submitted that by not filing the declarations in time, the assessee has committed default. Therefore disallowance u/s. 40(a)(ia) is warranted.

4. We have considered the issue. The provisions of section 40(a)(ia) are as under :-

"40. Amounts not deductible — Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "profits and Gains of business or profession",-
(a) In the case of any assessee—
(i)…….

4.1 As can be seen from above provision, the amount can not be allowed as deduction only in the event when tax is deductible at source under Chapter-XVII-B and such tax has not been deducted or, after deduction has not been paid. In this case, the assessee was to deduct tax under provisions of section 194A. Section 194A is further qualified by the provisions of section 197A(1A) wherein if a person furnishes a declaration in writing in prescribed Form and verified in the prescribed manner to the effect that tax on his estimated total income is to be included in computing his total income will be nil, there is no need to deduct tax The assessee has received such Forms as prescribed from those persons to whom interest was paid/being paid and accordingly no deduction of tax was to be made in such cases. The default for non-furnishing of the declarations to the CIT as prescribed may result in invoking penalty provisions u/s. 272A(2)(f), for which separate provision/ procedure was prescribed under the Act. However, once Form 15G/Form 15H was received by the person responsible for deducting tax, there is no liability to deduct tax. Once there is no liability to deduct tax, it can not be considered that tax is deductible at source under Chapter XVII-B as prescribed u/s. 40(a)(ia). The provisions of section 40(a)(ia) can only be invoked in a case where tax is deductible at source and such tax has not been deducted or after deduction has not been paid. No such default occurred in this case. Accordingly, we are of the opinion that the provisions of section 40(a)(ia) are not applicable to the facts of the case. Both the Assessing Officer and CIT(A) erred in considering that non-filing of form 15H invites disallowance u/s. 40(a)(ia).

4.2 Similar issue was considered by the co-ordinate Bench in the case of Vipin P. Mehta (supra) where in it was held:.

"Section 194A, read with sections 197A and 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Interest other than Interest on securities - Assessment year 2006-07 - Assessee was carrying on business of manufacture and printing of packaging materials - He made payment of interest to 34 parties in excess of Rs. 5000 without deducting tax at source - In response to show cause notice, assessee submitted that all payees to whom interest was paid, had furnished declarations in Form No. 15H/15G, as the case may be, before date on which tax ought to have been deducted and, therefore, assessee was not liable to deduct tax - Assessee also submitted that by oversight he did not submit copies of declarations in Form No. 15G/15H to office of Commissioner (TDS) -Assessing Officer took a view that it was only when he proposed disallowance of interest by invoking section 40(a)(ia) then assessee filed declarations claimed to have been submitted to him by payees of interest, in office of Commissioner (TDS) as required by sub-section (2) of section 197A - Accordingly, Assessing Officer invoked section 40(a)(ia) and disallowed interest payments - Commissioner (Appeals) confirmed disallowance made by Assessing Officer - On instant appeal, it was seen that apart from aforesaid inference, there was no other evidence in possession of revenue authorities to hold that declarations were not submitted by payees of interest to assessee at time when payments were made - Moreover, Assessing Officer had not recorded any statements from payees of interest to effect that they did not file any declarations with assessee at appropriate time or to effect that they filed declarations only at request of assessee -Whether in absence of any direct evidence produced by revenue authorities, assessee's claim that he had declarations of payees in prescribed form before him at time when interest was paid, and, thus, he was not liable to deduct tax at source under section 194A, was to be accepted - Held, yes- Whether, consequently, impugned disallowance made by authorities below was to be deleted - Held, yes

In the instant case, the claim of the assessee was that at the time of paying the interest to the 34 persons mentioned in the assessment order, he had before him the appropriate declarations in the prescribed form from the payees stating that no tax was payable by them in respect of their total income and therefore, tax need not be deducted from interest under section 194A, and in the light of these declarations he had no option but to make the payment of interest without any fax deduction. If the claim was true then the contention must be accepted because under sub-section (IA) of section 197A, if such a declaration is filed by the payee of interest, no deduction of tax be made by the assessee. The revenue authorities had doubted the assessee's version because according to them it was only when the Assessing Officer proposed the disallowance of the interest by invoking the section 40(a )(ia) in the course of the assessment proceedings that the assessee filed the declarations claimed to have been submitted to him by the payees of the interest, in the office of the Commissioner (TDS) as required by sub-section (2) of section 197A. Apart from this inference, there was no other evidence in their possession to hold that the declarations were not submitted by the payees of the interest to the assessee at the time when the payments were made. Without disproving the assessee's claim on the basis of other evidence, except by way of inference, it would not be fair or proper to discard the claim. The Assessing Officer had not recorded any statements from the payees of the interest to the effect that they did not file any declarations with the assessee at the appropriate time or to the effect that they filed the declarations only at the request of the assessee in September/October, 2008. In the absence of any such direct evidence, the assessee's claim could not be rejected. The Assessing Officer had stated in the assessment order that he found that some of the loan creditors were having taxable income but still the assessee had submitted declarations from them in form No. 15G. Unless it was proved that these forms were not in fact submitted by the loan creditors, the assessee could not be blamed because at the time of paying the interest to the loan creditors, he had to perforce rely upon the declarations filed by the loan creditors and he was not expected to embark upon an enquiry as to whether the loan creditors really and in truth had no taxable income on which tax was payable. That would be putting an impossible burden on the assessee. That apart section (1A) of section 197A merely requires a declaration to be filed by the payee of the interest and once it is filed the payee of the interest has no choice except to desist from deducting tax from the interest. The sub-section uses the word shall which leaves no choice to the assessee in the matter. The sub-section does not impose any obligation on the payer to find out the truth of the declarations filed by the payee. Even if the assessee had delayed the filing of the declarations with the office of the Commissioner /Chief Commissioner (TDS) within the time-limit specified in sub-section (2) of section 197A, that was a distinct omission or default for which a penalty is prescribed Section 273B provides that no penalty shall be imposed under any of the clauses of sub-section (2) of section 272A for the delay, if the assessee proves that there was reasonable cause for the same. Further, under sub-section (4) of section 272A, no penalty can be imposed unless the assessee is given an opportunity of being heard. All these provisions indicate that the failure on the part of the assessee, who was the payer of the interest, to file the declarations given to him by the payees of the interest, within the time-limit specified in sub-section (2) to section 197A was distinct and separate and merely because there was a failure on the part of the assessee to submit the declarations to the income-tax department within the time-limit, it could not be said that the assessee did not have declarations with him at the time when he paid the interest to the payees. That would be a separate matter and separate proof and evidence was required to show that even when the assessee paid the interest, he did not have the declarations from the payees with him and therefore he ought to have deducted the tax from the payment. No such evidence or proof had been brought on record by the department. [Para 7]

For the aforesaid reasons, the assessee's claim was to be accepted that since he had the declarations of the payees in the prescribed form before him at the time when the interest was paid, he was not liable to deduct tax there from under section 194A. If he was not liable to deduct tax, section 40(a)(ia) was not attracted. There was no other ground taken by the income-tax authorities to disallow the interest. Therefore, the assessee's appeal was to be allowed and the disallowance of interest was to be deleted. [Para 8]"

4.3 Similar finding was also held in other cases relied upon by the assessee, which we do not intend to extract here. Suffice to say that on the facts of the case, there is no need to deduct tax at source in the above 17 cases and thus, there is no default committed by the assessee. Accordingly, disallowance under section 40(a)(ia) does not arise. Non filing or delayed filing of such forms can not result in disallowance u/s 40(a)(ia). The grounds raised by assessee are allowed. AO is directed to modify the order accordingly.

5. In the result, appeal of the assessee is allowed.