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Facts
The assessee failed to disallow 30% of a payment of Rs.1,71,78,470/- in its Income Tax Return, which was identified by the AO as an inadmissible expense under Section 40(a)(ia) of the Income Tax Act. The assessee submitted Form 26A late and not electronically, leading to the disallowance.
Held
The Tribunal held that the non-submission of Form 26A electronically to the DGIT(Systems) was a procedural lapse and not a reason to deny the substantial benefit of claiming the interest expense as a deduction. The payee had included the interest as income and paid taxes on it.
Key Issues
Whether a disallowance under Section 40(a)(ia) for non-deduction of TDS is sustainable when the Form 26A was submitted late and not electronically, despite the payee having accounted for the income and paid taxes.
Sections Cited
40(a)(ia), 250, 142(1), 201, 139, 36(1)(iii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI BR BASKARAN & SHRI NARENDER KUMAR CHOUDHRY
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Assessee against the order dated 08.10.2024, impugned herein, passed by the National Faceless Appeal Center (NFAC)/ Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2018-19.
In this case, the case of the Assessee was selected for limited scrutiny on the issue: default in TDS and disallowance for such default. The AO observed from financials that the Assessee has disallowed lower amount u/s 40(a)(ia) of the Act in ITR (part A-OI) in comparison to the audit report, wherein in para no.21(b)(B)(ii) in Form no.3CD the details of the payment of Rs.1,71,78,470/- though has been mentioned, on which tax is not deducted. The column is titled as “amounts inadmissible u/s 40(a) of the Act, whereas the Assessee failed to disallow 30% of Rs.1,71,78,470/- in the ITR.
The AO consequently, by issuing the statutory notices asked the Assessee to furnish details with supporting documentary evidences for such issue.
The Assessee responded the notices and furnished the documents on dated 11.02.2020. The Assessee also furnished Form no.26A qua (i) Pankaj Dyes and Chemicals Pvt. Ltd. (ii) Amit Kulkarni (iii) Vrindha S Bal and (iv) Ind-origin Electric Ltd.
The Assessing Officer (AO) on perusing the Form 26A also observed that the certificates have been issued on 10.10.2019 and 27.08.2020, whereas return of income has been filed on 31.10.2018 and consequently he again show caused the Assessee by issuing a notice u/s 142(1) of the Act on dated 18.08.2020 “as to why 30% of Rs.1,71,78,470/- which works out to Rs.51,53,541/- as payment to resident which is inadmissible u/s 40(a)(ia) of the Act, be added in the income of the Assessee”.
5. The Assessee vide reply dated 13.02.2021 submitted as under:
“"..The delay in submission of Form 26A We had studied section 201 of Income Tax Act 1961 and according to the said section we did not filed 26A form along with return of Income. This being the new system, we were not aware of the same. This is not mentioned anywhere under section 201 for the disallowance of expenditure for non-filling the 26A form to traces. We request you to condone the delay for this year, and allow the expenditure in full. We assure you to comply with these provisions in future. We will submit these forms online as per rules in subsequent years."
6. Though the AO considered the explanation of the Assessee, however found the same as not acceptable and therefore the AO made the addition of Rs.51,53,541/- being 30% of the payments made to the residents and added to the income of the Assessee by observing and holding as under:
“During the F.Y. 2017-18 there is non-compliance of the provision of TDS as per section 40(a)(ia) of the Act, by the Assessee. As per Form 3CD the total amount recommended by the auditor for disallowance u/s para 21(b)(B)(ii)(A) is Rs.1,71,78,470/-. The same has been certified in the audit report for the year under consideration. The Form 26A furnished on 10.10.2019 and 27.08.2020 are not filed electronically filed and as per rule 31ACB of the Rule 1962 (in short “the Rules”). In view of the above, the Assessee has not deducted the TDS on the payments made as mentioned above and did not disallow 30% of the payments made as per section 40(a)(ia) of the Act in computation of income and in the income tax return, hence Rs.51,53,541/- which is 30% of the payments made to the residents, is added to the income of the Assessee”.
4. The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner, who more or less on the same reasoning as given by the AO, dismissed the appeal of the Assessee confirming the aforesaid addition.
The Assessee, being aggrieved, has challenged the said addition, by filing instant appeal under consideration. Admittedly, in the instant case, the Assessee during the assessment proceedings itself, has submitted Form nos. 26A dated 10.10.2019 and 27.08.2020, though not electronically filed and not as per rule 31ACB of the Rules, but in fact has filed the same during the assessment proceedings itself and therefore, the addition based on a procedural lapse, is liable to be deleted.
We observe that the Hon’ble Tribunal in the case of M/s. Hical Infra Pvt. Ltd. vs. Dy. Commissioner of Income Tax (OSD), Bangalore (ITA No.313/Bang/2022 decided on 07.07.2022) has also dealt with the identical issue and by considering the peculiar facts and circumstances in totality as well as the relevant provisions of law and ultimately deleted the identical addition by observing and holding as under:
“22. The AO noticed during the assessment proceeding that out of total interest expenditure of Rs. 78,11,581, the assessee has deducted tax in respect of Rs. 11,07,053 and the balance interest expenditure of Rs. 67,04,528 was paid without deduction of tax at source. The AO asked the assessee to submit Form No 26A to verify whether the payee i.e. M/s Tata Capital Financial Services Limited has taken into account the interest paid by the assessee in computing its total income and whether it has filed the return of income or not. The assessee submitted the Form No 26A [page 178 to 180 of the paper book] as per which M/s Tata Capital Financial Services Limited had taken into account the interest paid by the assessee in computing the total income for AY 2016- 17 and had filed the return of income on 30.11.2016. The AO did not accept the explanations of the assessee and held that 30% of the interest expenditure of Rs. 67,04,528 i.e., Rs. 20,11,358 is to be disallowed under section 40(a)(ia). As the entire interest expenditure of Rs. 78,11,581 was disallowed under section 36(1)(iii), it was stated by the AO that the disallowance of Rs. 20,11,358 will be enforced based on the adverse findings (if any) by the appellate authorities at a later stage.
On further appeal by the assessee the learned CIT(A) held that mere furnishing the certificate in Annexure A without the declaration in Form 26A by the assessee cannot be said to be compliance of the provision. The CIT(A) further held that as per rule 31ACB, the said form should have been furnished to the DGIT (Systems) and therefore upheld the decision of the AO in disallowing 30% of interest expenditure amounting to Rs. 20,11,358 under section 40(a)(ia).
Aggrieved the assessee is in appeal before the Tribunal. The ld. AR reiterated the submissions made before the lower authorities. The ld. AR submitted that in the present case, it is not in dispute that Form No 26A was submitted to the AO during the assessment proceedings which consisted of both the declaration by the assessee and the certificate of the CA certifying that the payee had taken into account the interest paid by the assessee and that the payee filed the return of income on 30.11.2016 for the AY 2016-17. Thus, the ld. AR argued that there is no merit in the contention of the CIT(A) that the declaration of the assessee has not been submitted. As regards non filing of Form No 26A in electronic form to DGIT (Systems), it was the contention of the ld. AR that the same is only a procedural irregularity and that once the condition of filing of Form No 26A is complied in substance the same should be accepted and not rejected only for the reason that the said form is not electronically filed.
The ld. DR supported the order of the lower authorities. A proviso was inserted Section 201 by Finance Act 2012 with effect from 01/07/2012 which reads as under:-
“Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee—
(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,
The corresponding rule i.e. Rule 31ACB contains the procedure as given below :–
“31ACB. (1) The certificate from an accountant under the first proviso to sub-section (1) of section 201 shall be furnished in Form 26A to the Director General of Income-tax (Systems) or the person authorized by the Director General of Income-tax (Systems) in accordance with the procedures, formats and standards specified under sub-rule (2), and verified in accordance with the procedures, formats and standards specified under sub rule (2).
(2) The Director General of Income-tax (Systems) shall specify the procedures, formats and standards for the purposes of furnishing and verification of the Form 26A and be responsible for the day-to-day administration in relation to furnishing and verification of the Form 26A in the manner so specified.”
Section 40(a)(ia) contains a proviso whereby an assessee is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes section 40(a)(ia) 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 referred to in the said proviso.
A combined reading of the above provisions of the Act and the rule, makes it clear that an assessee who is required to deduct tax in accordance with Chapter XVII-B, fails to do so would not be treated as an assessee in default provided the payee has paid tax on the said sum and the assessee has filed the required form in 26A along with a CA certificate. When the assessee is not treated as an assessee in default then no disallowance can be done as per the proviso to section 40(a)(ia) as it is deemed that the assessee has deducted and paid the tax.
In the present case, the assessee has submitted Form No 26A to the AO during the assessment proceedings which fact is admitted by the AO in para 5.3 of his order. However, the AO and the CIT(A) have disallowed 30% of the interest on the ground that the assessee has not furnished Form 26A to the DGIT(systems) and that the same should have been done before filing the return of income. This in our view is a procedurals lapse on the part of the assessee and the same cannot be the reason for disallowance. In the case of Sardar Amarjit Singh Kalra v. Pramod Gupta, (2003) 3 SCC 272 where it was held that Procedure has always been viewed as the handmaid of justice and not meant to hamper the cause of justice or sanctify miscarriage of justice. In the given case the assessee has substantiated the fact that the payee M/s. Tata Capital has included the interest as income and has paid taxes on the same and the condition of filing of Form No 26A is complied in substance. Therefore, in our view the assessee cannot be denied the substantial benefit of claiming the interest expense as a deduction on the ground off a procedural lapse. We therefore delete the disallowance made u/s.40(a)(ia) of Rs. 20,11,358.”
As the Tribunal in the aforesaid case held that the Assessee cannot be denied the substantial benefit of claiming the interest expense as a deduction, on the ground of a procedural lapse and therefore the Tribunal ultimately deleted the identical addition made u/s 40(a)(ia) of the Act and thus the issue involved in this case is squarely covered in favour of the Assessee and therefore respectfully following the aforesaid judgment, we are inclined to delete the addition under consideration. Thus, the addition is deleted.
In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 25.03.2025.