SHRI DEEPAK SURESH GADGE,,NAGPUR vs. JOINT. CIT, CIR.- I, NAGPUR

The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee dismissed the appeal of the assessee and confirmed the additions aforesaid made by the AO.

The assessee has challenged the impugned order passed by the Ld.CIT (A) on the following effective grounds:- 1. “The Hon’ble CIT (A) erred in confirming the disallowance of interest expenses paid to NBFC u/s 40(a)(ia) of the I.T. Act, 1961 at Rs. 43,22,883/-.

Before us, the Ld. counsel for the assessee submitted that the lenders have advanced the loan to the appellant in their ordinary course of business and the appellant paid interest thereon. The lenders have recovered their money from the appellant in ordinary course of business by way of installments payable monthly which are contracted at the time of granting of loans. The installment payable comprised of two components i.e. interest as well as principal repayment which were determined by the lenders. The interest paid to Indiabulls and Citi financial should not be disallowed u/s 40(a)(ia) in view of the fact that, these companies are non banking financial companies engaged in the business of financing after being duly authorised by The Reserve Bank of India. The operations of these companies are akin to the business of banking in so far as loans granted by these companies to the assessee are concerned. 6. Further. relying on the decision of ITAT, Agra Bench, in the case of Rajeev Kumar Agarwal Vs Addl CIT for AY 2006-07 ( 2014 149 ITD 363 Agra and the judgment of the Hon’ble Delhi High Court rendered in the Commissioner of Income Tax Vs. Ansel Landmark Township Pvt. Ltd. 377 ITR 635 (Del) the Ld. counsel submitted that the second proviso to section 40(a)(ia), introduced by the Finance Act 2013 w.e.f. 01.04.2013, read with s. 201, provides that despite failure to deduct TDS, disallowance of the expenditure shall not be made if the resident payee has (i) furnished his return of income u/s 139, (ii) taken into account such sum for computing income in such ROI, (iii) paid the tax due on the income declared by him in such return of income and (iv) furnishes a certificate to this effect from an accountant in the prescribed form. The scheme of s. 40(a)(ia) 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.

Without prejudice to the above arguments, the Ld. counsel submitted that as per the amendment to section 40(a)(ia) of the Act, disallowance is to be restricted to 30 percent of expenditure claimed on which tax has not been deducted at source. Since the amendment has retrospective effect, the addition should be restricted to 30 percent of the expenditure claimed. 8. On the other hand, the Ld. Departmental representative relied on the findings of the Ld. CIT(A). 9. We have heard the rival submissions of the parties and also perused the material on record. As pointed out by the Ld counsel, the ‘Hon’ble Delhi High Court has dealt with the identical issue in the case of Commissioner of Income Tax Vs. Ansel Landmark Township Pvt. Ltd.(supra) holding 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 this 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 a 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 legislature is not to trade the Assessee as a person in default subject to the fulfillment 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 provisio intended to benefit the Assessee. The fact of the legal fiction created thereby is to treat the Assessee is 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 proviso 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

In view of the ratio laid down by the Hon’ble Delhi High Court in Commissioner of Income Tax Vs. Ansel Landmark Township Pvt. Ltd. 377 ITR 635 (Del), we deem it proper to remit the issue back to the file of AO for passing the assessment order afresh after verification as to whether the recipents have furnished their return of income under section 139 of the Act. We accordingly, set aside the impugned order and send the file back to the AO for deciding the issue in accordance with the law laid down by the Hon’ble Delhi High Court in Commissioner of Income Tax Vs. Ansel Landmark Township Pvt. Ltd. (supra) after affording opportunity of being heard to the assessee. 11. As regards the ground raised by the assessee, without prejudice to the main ground, we direct the AO to decide this ground, if needed, in the light of the submissions made by the Ld. counsel for the assessee. In the result, appeal filed by the assessee for assessment year 2010-2011 is allowed for statistical purposes.