MM TRUST MARCH 2014III,MUMBAI vs. INCOME TAX OFFICER WARD 17(1)(1), MUMBAI

Erred in confirming the addition of Rs.85,20,950/- made by the Assessing Officer Considering the facts and circumstances of the case and in Law, the National Faceless Appeal Centre (NFAC) erred in confirming the addition of Rs.85,20,950/- made by the Assessing Officer u/s.40(a)(ia)

The Notice and Order is against the principles of natural law of equity and justice Considering the facts and circumstances of the case and in Law, the notice u/s.148 dated 15th July, 2022 and reassessment order u/s. 147 rw.s. 144B dated 23rd May, 2023 is not only bad in Law and invalid but also against the principles of natural law of equity and justice.

Non-Applicability of section 40(a)(ia) & 194LBC of the Act On the facts and circumstances of the case as well as in Law, the LAO has grossly erred in making an addition of Rs.85,20,950 being 30% of Excess Interest Paid ('EIS'), u/s 40(a)(ia) of the Act alleging that TDS is applicable u/s 194LBC on payment of Excess Interest Spread (EIS) of Rs.2,84,03,168 but TDS not deducted.

Non applicability of section 40(a)(ia) of the Act On the facts and circumstances of the case as well as Law, without prejudice to other grounds of appeal, the LAO has grossly erred in making disallowance u/s 40(a)(ia) of the Act without appreciating the fact that the appellant does not fulfil the twin conditions of section 40(a)(ia) as it is a securitisation trust not meant for any business or professional activity, and has not claimed any expenditure under the head" Business and Profession".

The NFAC has erred in Law and on facts of the case in placing reliance on various case laws which are clearly distinguishable on facts and in law and, therefore, not applicable to the Appellant's case on merits.

Considering the facts and circumstances of the case and in Law, the NFAC erred in confirming the action of the Assessing Officer in initiating the penalty proceedings under section 270A of the Act.

The appellant craves leave to add, to amend, alter/delete and/or modify the above grounds of appeal on or before the final hearing.

Considering the facts and circumstances of the case and in Law, the Assessing Officer erred in assuming jurisdiction under section 147 for reopening the assessment, when the procedures prescribed under section 148A r.w.s. 149 r.w.s. 151 of the Act have not been complied with.

Considering the facts and circumstances of the case and in Law, the order u/s. 148A(d) 15th July, 2022 was passed beyond three years from end of relevant assessment year and approval was obtained from PCIT 17, Mumbai instead of specified authority required under amended section 151(ii), non-compliance with such statutory mandate and time limits vitiated jurisdiction of Assessing Officer, rendering order u/s. 148A(d) dated 15th July, 2022 and notice u/s. 148 dated 15th July, 2022 liable to be quashed.

Considering the facts and circumstances of the case and in Law, the Assessing Officer erred in assuming jurisdiction under section 147 when the procedures prescribed under section 151A of the Act were not carried out.

Inconsistent with the Taxpayers' Charter

Inconsistent with Income tax Circular No. 14, dated 11-04-1955

The assessee submitted that it was merely a pass-through securitisation trust whose income was exempt under section 10(23DA) of the Act and any income was assessable directly in the hands of the investors under section 115TCA of the Act. The assessee submitted that the EIS paid to the originator was not income arising from investment in the securitisation trust but it was merely the residual surplus left after meeting all obligations of the trust under the contractual arrangement. According to the assessee, EIS was not in the nature of income payable to an investor in respect of investment so as to attract section 194LBC of the Act. The assessee further argued that the originator received EIS in its capacity as a residual beneficiary and not as an investor, and therefore the twin conditions prescribed under section 194LBC of the Act were not satisfied and there was no obligation to deduct tax at source. The assessee also contended that section 40(a)(ia) of the Act was not applicable because the trust had not claimed any expenditure while computing its exempt income and only acted as a conduit for distribution of collections.

The Assessing Officer, however, held that the definition of "income" under section 2(24) of the Act is of wide import and EIS was a gain arising from the securitisation transaction. The Assessing Officer observed that EIS was distributed after investor payouts and therefore was in the nature of income flowing to an investor. The Assessing Officer observed that Mahindra & Mahindra Financial Services Ltd., the originator, was shown as an investor in Schedule C of the Receipts and Payments Statement and accordingly the payment was in the nature of income paid to an investor in respect of investment in the securitisation trust, and attracted the provisions of section 194LBC of the Act. Since the assessee did not deduct tax at source, the Assessing Officer invoked section 40(a)(ia) of the Act and disallowed 30% of the EIS payment amounting to ₹85,20,950/-.

In appeals, the CIT(Appeals), after considering the assessment records, written submissions of the assessee, documents and judicial precedents relied upon by the assessee concurred with the Assessing Officer that the originator was shown as an investor in the trust records and the EIS distributed by the assessee was income accruing to such investor. The CIT(Appeals) observed that the definition of income under section 2(24) of the Act is wide enough to include such recurring surplus and held that the payment was within the ambit of section 194LBC of the Act. The CIT(Appeals) held that the exemption available to the assessee trust under section 10(23DA) of the Act did not dispense with the statutory obligation to deduct tax at source and the liability to deduct TDS is independent of the taxability of the recipient. The assessee also rejected the argument that section 40(a)(ia) could not apply in the absence of a claim of expenditure and held that the provision is intended to enforce compliance with TDS obligations. The CIT(Appeals) upheld the disallowance of ₹85,20,950/- made under section 40(a)(ia) of the Act by the Assessing Officer and dismissed the appeal of the assessee.

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee.

We have heard the rival contentions and perused the material on record. The issue involved in the present appeal relates to the disallowance of ₹85,20,950/- made by the Assessing Officer under section 40(a)(ia) of the Act on the ground that the assessee had failed to deduct tax at source under section 194LBC on payment of Excess Interest Spread (EIS) made to the originator, namely Mahindra & Mahindra Financial Services Ltd. Before us, the learned Counsel for the assessee has produced Form No. 26A, duly certified by a Chartered Accountant, to contend that the recipient has already filed its return of income under section 139 of the Act, including therein the impugned receipt in its total income and paid the taxes due thereon. The Counsel for the assessee submitted that since the conditions under the first proviso to section 201(1) are fulfilled, the assessee cannot be treated as an assessee in default and consequently no disallowance under section 40(a)(ia) can be sustained.

We find that this contention goes to the root of the matter and requires proper verification at the level of the Assessing Officer. The second proviso to section 40(a)(ia), inserted by the Finance Act, 2012, provides that where the assessee fails to deduct tax but is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee. The Hon'ble Supreme Court in Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [(2007) 293 ITR 226 (SC)] held that where the recipient has already paid tax on the income received, the Revenue cannot recover the same tax once again from the payer. The legislative intent behind the insertion of the second proviso to section 40(a)(ia) of the Act is also to ensure that no disallowance is made where the tax due on such income has already reached the exchequer.

Since the assessee has placed reliance upon Form No. 26A for the first time before us, and the correctness of the said certificate have not been examined either by the Assessing Officer or by the CIT(Appeals), we are of the considered view that the ends of justice would be met by restoring this issue to the file of the Assessing Officer. The Assessing Officer shall verify the authenticity of Form No. 26A and examine whether the payee Mahindra & Mahindra Financial Services Ltd., has furnished its return of income under section 139 of the Act, has taken into account the amount received from the assessee while computing its total income and paid the taxes due thereon in accordance with the requirements of the first proviso to section 201(1) of the Act.

In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 03.07.2026