ACIT 14(1)(1) MUMBAI, MUMBAI vs. AHURA MAZDA MANUFACTURING COMPANY PRIVATE LIMITED, MUMBAI

The brief facts of the case are that the assessee, Ahura Mazda Manufacturing Company Private Limited, is engaged in the business of manufacturing storage systems and furniture items. The assessee filed its return of income for A.Y. 2013-14 declaring total income of ₹1,60,10,470/-. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had paid interest of ₹5,71,933/- to Magma Financial Corporation and ₹3,75,466/- to Religare Finvest Ltd. without deduction of tax at source. The Assessing Officer asked the assessee to explain why the interest should not be disallowed under section 40(a)(ia) of the Income-tax Act, 1961 ("the Act").

In response, the assessee furnished Form No. 26A in respect of Religare Finvest Ltd. and submitted that the recipient had already accounted for the interest income and paid tax thereon. In respect of Magma Financial Corporation, the necessary certificate was not furnished. The Assessing Officer, however, held that the assessee had not shown that Form No. 26A had been furnished before DGIT (Systems) for his perusal. Accordingly, the Assessing Officer disallowed the entire interest expenditure of ₹9,47,399/- under section 40(a)(ia) of the Act.

The assessee carried the matter in appeal before the learned CIT(A).

The learned CIT(A)examined the payments to the two finance companies. In respect of Magma Financial Corporation, since Form No. 26A was not produced either before the Assessing Officer or during the appellate proceedings, CIT(Appeals) sustained the disallowance of ₹5,71,933/- . However, in respect of Religare Finvest Ltd., Form No. 26A was available and the learned CIT(A) held that since the recipient had already offered the interest income of ₹3,75,466/- to tax, CIT(Appeals) directed the Assessing Officer to delete the disallowance to that extent.

The issue for consideration before us is whether the learned CIT(A) was justified in deleting the disallowance of ₹3,75,466/- being interest paid by the assessee to Religare Finvest Ltd. without deduction of tax at source.

The first proviso to section 201(1), read with the second proviso to section 40(a)(ia) of the Act, provides relief where the resident recipient has filed its return of income under section 139 of the Act, has taken the relevant amount into account while computing its income, has paid the tax due thereon and the payer furnishes the prescribed accountant's certificate. Where these conditions are satisfied, the payer is not treated as an assessee in default and, for the purposes of section 40(a)(ia), is deemed to have deducted and paid the tax.

The object of these provisions is that where the income has already been offered to tax by the recipient and the tax due thereon has been paid, the same payment should not again be disallowed in the hands of the payer merely because tax was not deducted at source, provided the prescribed conditions are otherwise fulfilled.

The Hon'ble Supreme Court in Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 163 Taxman 355 (SC); 293 ITR 226 (SC)held that where deductee, recipient of income, has already paid taxes on amount received from deductor, Department once again cannot recover tax from deductor on same income by treating deductor to be assessee-in-default for shortfall in its amount of tax deducted at source.

The Hon'ble jurisdictional High Court in Principal Commissioner of Income-tax v. Morgan Stanley India Capital (P.) Ltd. [2025] 177 taxmann.com 699 (Bombay), following Principal Commissioner of Income- tax-5 v. Perfect Circle India (P.) Ltd., Income Tax Appeal No. 707 of 2016, dated 07.01.2019, held that where assessee made payments without deducting tax at source under section 194J, since payee had filed return and offered sum received from assessee to tax, impugned disallowance made under section 40(a)(ia) of the Act deserved to be deleted.

Coming to the facts of the present case, the learned CIT(A) has observed that Religare Finvest Ltd. had offered the interest income of ₹3,75,466/- to tax. The Revenue has not brought any material before us to show that Form No. 26A was incorrect, that the recipient had not incorporated the interest in its income, or that the tax due on such income had not been paid by the recipient.

In our view, once the substantive conditions contemplated under the proviso to section 40(a)(ia), read with section 201(1) of the Act have been satisfied, the Assessing Officer cannot make the disallowance only on account of an objection regarding the mode of furnishing Form No. 26A. The Revenue has also not brought any contrary material to controvert the findings of the learned CIT(A).

We therefore find no infirmity in the order of the learned CIT(A) directing deletion of the disallowance of ₹3,75,466/- relating to interest paid to Religare Finvest Ltd.

In the result, the appeal filed by the Department is dismissed.