SHRI SALASAR INFRASTRUCTURES & DEVELOPERS,HYDERABAD vs. ITO, WARD-14(1), HYDERABAD

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ITA 2070/HYD/2025Status: DisposedITAT Hyderabad05 August 2026AY 2012-1315 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the second proviso to Section 40(a)(ia) is declaratory and curative, having retrospective effect. Therefore, if the recipient has offered the income to tax, the expenditure cannot be disallowed. However, the issue of whether the recipient actually paid the tax requires further verification.

What were the facts?

The assessee's appeal concerns the disallowance of expenditure under Section 40(a)(ia) for non-deduction of TDS. The ITAT had previously remanded the matter to the AO to verify if the recipient had declared the interest income in its return and paid taxes.

What were the issues?

Whether the disallowance under Section 40(a)(ia) is applicable when the recipient has declared the income, and whether the second proviso to Section 40(a)(ia) has retrospective effect. Additionally, whether the recipient has actually paid the tax on the declared income.

Which sections of the Income-tax Act were involved?

Section 40(a)(ia),Section 201(1),Section 139,Section 271C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, HYDERABAD

Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G

Pronounced: 05.08.2026

आदेश / ORDER PER VIJAY PAL RAO, VICE PRESIDENT: This appeal by the Assessee is directed against the order dated 16.09.2025 of the ld. CIT(A)-National Faceless Appeal Centre [in short "NFAC"], Delhi, arising from the order passed by the Assessing Officer u/sec.143(3) r.w.s.254 of the Income Tax Act [in short "the Act"], 1961, for the assessment year 2012-2013.

2.

The Assessee has raised the following grounds of appeal:

“The order of the CIT(A) passed u/s 250 of the Act dated 16- 1) 09-2025 is erroneous both on facts and in law to the extent the order is prejudice to the interests of the appellant. 2) (a). The Ld. CIT(A) erred in upholding the action of the AO without considering the submissions and evidences provided by the appellant, which is against the principles of Natural Justice. b). The Ld. CIT(A) ought to have judicially appreciated the factual matrix that the AO had grossly missed to take into account the confirmation letter from M/s. Abhishek Transtel Ltd., wherein the recipient has categorically stated that the interest income is duly admitted in its Return of Income.

3) a). The Ld. CIT(A) ought to have considered that the appellant had duly submitted the Income Tax Return filed by the payee and it clearly says that the payee has offered interest income in their return of income. b). The Ld. CIT(A) ought to have judiciously appreciated the legal position that when once the recipient has admitted the interest in Income Tax Return, the payer of the same cannot be deemed as defaulter for failure to deduct TDS, in terms of section 201 of the Act. 4) The Ld. CIT(A) ought to consider the fact that the AO during set aside proceedings did not consider the evidences placed on record such as Confirmation letters, Income Tax Return etc., and has vehemently disallowed the expenditure. 5) The Ld. CIT(A) ought to have appreciated that the appellant had already explained the reasons for non-deduction of TDS as the assessee-company was facing severe financial problems. 6) Appellant may, add OR alter OR amend OR modify OR substitute OR delete and/OR rescind all OR any of the grounds of appeal at any time before OR at the time of hearing of the appeal.”

3.

The solitary issue in the appeal of the assessee is whether in the facts and circumstances of the case, the Assessing Officer has erred in disallowing the expenditure u/sec.40(a)(ia) of the Act while passing the order to give effect to the order of this Tribunal dated 07.10.2021 in M.A.No.42/Hyd./2021.

4.

The learned Authorised Representative of the Assessee has submitted that vide Order dated 07.10.2021 the Tribunal has directed the Assessing Officer to verify the submissions of the assessee and thereafter decide the matter in accordance with law and merits. It is observed by the Tribunal that the facts need verification, and assessee cannot be penalized under the provisions of sec.40(a)(ia) of the Act if the recipient had declared the amount received from the assessee in its return of income and paid taxes. The learned Authorised Representative of the Assessee has submitted that while passing the order to give effect to the order of this Tribunal the Assessing Officer has not followed the directions of this Tribunal and disallowed the claim of the assessee on the ground that second proviso to sec.40(a)(ia) has been inserted by the Finance Act, 2012 w.e.f. 01.04.2013 and is not applicable for the assessment year 2011-2012. The learned Authorised Representative of the Assessee has submitted that the said proviso was inserted to remove the undue hardship in the cases where the assessee’s tax withholding lapse did not result in any loss to the exchequer as the recipient has already considered the said amount while computing its income and offered to tax in the return of income. Thus, the learned Authorised Representative of the Assessee has submitted that second proviso to sec.40(a)(ia) read with section 201(1) shall have the retrospective effect as the same is into the nature of declaratory and curative. In support of his contention, he has relied upon the Judgment of Hon’ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township (P) Ltd. [2015] 377 ITR 635 (Del.) as well as the following decisions: i. Order of ITAT, Hyderabad in the case of M/s. Visu International Limited vs. DCIT, Circle-3(3), Hyderabad in ITA.Nos.488 & 621/Hyd./2013, dated 12.11.2014; ii. Order of ITAT, Hyderabad in the case of Country Club Hospitality & Holidays Ltd., Hyderabad vs. Addl. CIT, Range-1, Hyderabad in ITA.Nos.1504 & 1654/Hyd./2012, dated 27.04.2018;

iii. Order of ITAT, Hyderabad in the case of DCIT, Circle-1(1), Hyderabad vs. M/s. Aditya Construction Company India P. Ltd., Hyderabad in ITA.No.1319/Hyd./2014, dated 28.11.2014;

5.

On the other hand, the learned DR has relied upon the orders of the authorities below and submitted that the Assessing Officer has clearly stated that the second proviso to sec.40(a)(ia) has been inserted by the Finance Act, 2012 w.e.f. 01.04.2013 and therefore, the same is not applicable for the year under consideration.

6.

We have considered the rival submissions as well as relevant material on record. The Tribunal vide order dated 07.10.2021 in MA.No.42/Hyd./2021 in ITA.No.508/Hyd./ 2018 has remanded the matter to the Assessing Officer in Para no.3 as under:

“3. On perusing the submissions of the assessee, I find merit in the MA filed by the assessee. In the case of the assessee the Ld. AO had invoked the provisions of section 40(a)(ia) of the Act and disallowed the interest paid by the assessee to M/s. Abhishek Transtel Limited as allowable deduction since the assessee had not remitted the tax deducted at source in the Government Treasury. The Ld. CIT (A) as well as the Tribunal also has upheld the order of the Ld. AO. However, the facts stated by the assessee needs verification. As submitted by the Ld. AR the assessee cannot be penalised under the provisions of section 40(a)(ia) of the Act if the recipient has declared the amount received from the assessee in its return of income and paid tax. The Ld. AR had claimed before us that the M/s. Abhishek Transtel Limited the recipient of the interest from the assessee had declared the same in its return as its income and paid tax which we had not considered while passing the Order. Therefore, as requested by the assessee, in the interest of justice, I hereby recall the order of the Tribunal dated 21/1/2021 and remit the matter back to the file of the Ld. AO for verifying the submission of the Ld. AR and thereafter decide the matter in accordance with law and merit.”

6.1. Thus the issue of disallowance made u/sec. 40(a) (ia) was remitted to the record of the Assessing Officer for verification of the submissions of the assessee and thereafter, deciding the matter in accordance with law. In the order passed by the Assessing Officer dated 22.11.2022 giving effect to the order of this Tribunal the Assessing Officer has denied the claim by giving finding in Para nos.17 and 18 as under:

“17. The claim of the assessee in miscellaneous application before the Hon'ble ITAT emanates from the second proviso inserted in sub-clause (ia) of clause (a) of section 40 by the Finance Act, 2012 w.o.f. 1-4-2013. Thus, it is not applicable for the A. Y. 2012- 13 and in the case of the assessee. The assessee has not presented correct fact of the case before the Hon'ble ITAT. Even otherwise, to claim the benefit under the said proviso, the onus lies on the assessee who fails to deduct tax to prove that the recipient of the amount on which tax was not deducted – (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the assessee furnishes a certificate to this effect. 18. Going on the merits of the present case, the assessee could not substantiate that M/s Abhishek has taken into account the said amount of Rs.34,60,870 and has paid the tax due on the income. As per return of income of M/s Abhishek Transtel Limited for A. Y. 2012-13, the tax payable is Rs.19,04,660. Thus, M/s Abhishek Transtel Limited had not paid taxes till the time of filing return of income.”

6.2. Thus, the Assessing Officer has denied the claim on two grounds i.e., (i) that second proviso inserted by Finance Act, 2012 w.e.f. 01.04.2013 is not applicable for the year under consideration and (ii) then, the Assessing Officer has also stated that assessee could not substantiate that the recipient has taken into account the said amount and paid taxes due on the income. The Assessing Officer has considered the return of income of the recipient and noted that it shows the tax payable of Rs.19,04.660/- and thus presumed that recipient has not paid the taxes.

7.

As regards the applicability of the second proviso to sec.40(a)(ia) of the Act is concerned, the said proviso was inserted by the legislature to mitigate the undue hardship of the taxpayers and therefore, the same is considered as declaratory and curative in nature having retrospective effect from the date of insertion of sec.40(a)(ia) i.e., on 01.04.2005. This issue has been considered by the Hon’ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township (P) Ltd., (supra), in Para nos.11 to 16 as under:

“11. The first proviso to Section 201(1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfilment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a)(ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee.

The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies.

12.

Relevant to the case in hand, what is common to both the provisos to Section 40(a)(ia) and Section 201(1) of the Act is that as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax. 13. Turning to the decision of the Agra Bench of ITAT in Rajiv Kumar Agarwal's case (supra ), the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40(a)(ia) of 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 should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, 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 which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, 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, in our considered view, 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. 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 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. In view of these discussions, 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 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.’

14.

The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a)(ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance.

15.

In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in Rajiv Kumar Agarwal's case (supra).

16.

No substantial question of law arises in the facts and circumstances of the present case. The appeal is dismissed.

6.3. Thus, the Hon’ble Delhi High Court after considering the order of the Tribunal has held that there is no legal infirmity in the order of the Tribunal holding that the proviso has been inserted to remove the undue hardship of the assessee where the recipient of the amount has considered the same in computing their income and declared in the return of income and thereby, the said proviso was considered as declaratory and curative with retrospective effect. A similar view has been taken by the ITAT, Hyderabad Bench in the case relied upon by the learned Authorised Representative of the Assessee. Accordingly, the issue of applicability of second proviso to sec.40(a)(ia) is decided in favour of the assessee.

7.

As regards the non-satisfaction of the conditions as prescribed in the proviso to sec.201(1), the Assessing Officer has stated that the recipient has not paid tax though filed the return of income, but the tax was payable. On this issue, the Assessing Officer was required to ascertain the status of the payment of tax on the part of the recipient as on the date of passing the order instead of just referring to the return of income filed by the recipient. Accordingly, this issue is remanded to the record of the Assessing Officer to verify whether the recipient has actually paid the taxes on the said income or not. The assessee is also directed to file the relevant documentary evidence to substantiate the claim that the recipient has paid the taxes on the said amount as required as per proviso to sec.201(1) of the Act.

8.

In the result, appeal of the Assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 05.08.2026.

Sd/- Sd/- MANJUNATHA G VIJAY PAL RAO ACCOUNTANT MEMBER VICE PRESIDENT Hyderabad, Dated day of July, 2026. VBP Copy to: SHRI SALASAR INFRASTRUCTURES & DEVELOPERS, C/O. P. MURALI & CO., CHARTERED ACCOUNTANTS, 1 6-3-655/2/3, SOMAJIGUDA, HYDERABAD. PIN – 500 082,TELANGANA. 2 ITO, WARD-14(1), HYDERABAD-, TELANGANA 3 THE PR. CIT, HYDERABAD. 4 THE D.R., ITAT, HYDERABAD SMC-BENCH, HYDERABAD. 5 GUARD FILE TRUE COPY VADREV Digitally signed by VADREVU U PRASADA RAO PRASAD ASSISTANT REGISTRAR / Date: I.T.A.T., HYDERABAD 2026.08.05 A RAO 10:32:56 +05'30'

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