DESIMUS FINANCIALS LIMITED,MOGA vs. INCOME TAX OFFICER WARD 1(3), PUNE

The only issue raised herein is against the confirmation of addition of Rs.86,88,000/- made by the Assessing Officer (AO) u/s.40(a)(ia) of the Income-tax Act, 1961 (Act) on account of failure of the assessee to deduct tax at source on interest paid by it to Muthoot Mini Finance Corporation Ltd.

Succinctly, the facts of the case are that the assessee is a Non-banking finance company (NBFC) set up with the object of carrying on business of hire-purchase, housing, industrial and general finance. For this purpose, the assessee made borrowings from various financial institutions, including four NBFCs to whom interest amounting to Rs.4,15,50,000/- was paid. The AO observed that no tax at source was deducted at source u/s.194A from such interest. The assessee was called upon to explain the position. It was responded that an amendment has been carried out to section 201(1) of the Act along with section 40(a)(ia) with the effect that if the payee has included the interest received from the payer in his total income and filed the return with taxes paid thereon, then the payer can‟t be treated as an assessee in default and no consequential disallowance u/s.40(a)(ia) can be made. The AO noted that the amendment to section 201(1) was made by the Finance Act, 2012 w.e.f. 01-07-2012. He, therefore, inferred that section 40(a)(ia) could be invoked in respect of such interest payment for the period 01-04-2012 to 30-06-2012. In this way, he calculated interest for the first quarter of the financial year 2012-13 at Rs.74.68 lakh. He further observed that in order to claim the benefit of section 201(1) it was necessary for the assessee to furnish certificate in Form 26A obtained from a Chartered Accountant to the effect that the payees had furnished returns of income u/s.139 after considering such interest income and having paid due tax on such total income. Since no such certificate was furnished, the AO held that the entire amount was disallowable u/s.40(a)(ia) of the Act. The assessee challenged the assessment order before the ld. CIT(A) by furnishing necessary evidence to the effect that the amount of interest paid by it to the four NBFCs was accounted for by them in their respective returns. The assessee furnished Chartered Accountants‟ certificate in Form 26A in respect of three parties, viz., (i) Future Capital Financial Services Ltd.; (ii) India Info line Finance Ltd; and (iii) Shriram City Union Financial Ltd. For the fourth lender, namely, Muthoot Mini Finance Corp. Ltd., the assessee furnished a certificate from the company initially, which was later on replaced with certificate in Form 26A. The ld. CIT(A), after taking remand report from the AO, deleted the disallowance u/s.40(a)(ia) of the Act in respect of the first three amounts. He, however, sustained the disallowance for a sum of Rs.86,88,000/- on the ground that the AO refused, in remand report, to entertain a photocopy of the certificate issued by Muthoot Mini Finance Corporation Ltd. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.

I have heard both the sides and gone through the relevant material on record. Indisputably, the assessee paid interest to four NBFCs amounting to Rs.4.15 crore without deduction of tax at source u/s.194A. The ld. CIT(A) allowed relief in respect of interest payment to first three NBFCs by considering the certificates furnished by the assessee in Form 26A during the course of proceedings before him. The impugned order has attained finality pro tanto. The only dispute concerns the payment of interest to Muthoot Mini Finance Corporation Ltd. amounting to Rs.86,88,000/-.

It has been noticed above that the AO made the disallowance on two counts, firstly, by considering that the first proviso to section 201(1) was inserted by the Finance Act, 2012 w.e.f. 01-07-2012 and hence interest for the period from 01-04-2012 to 30-06-2012 was uncovered by the proviso. The second reasoning of the AO was that the assessee did not furnish any certificate in Form 26A and hence even the proviso to section 201(1) was of no help.

Section 201(1) provides that where any person, who is required to deduct tax at source, does not deduct or after deducting fails to pay, then such person shall be deemed to be an assessee in default in respect of such tax. The first proviso to section 201(1) provides that if the concerned person who fails to deduct tax at source on a sum credited to the account of a payee, he shall not be deemed to be an assessee in default, if the payee has furnished his return of income u/s.139; has taken into account such sum for computing income in such return; and has paid taxes due on the income declared in such return of income. When these conditions are cumulatively fulfilled and the person responsible for paying furnishes a certificate in this regard from a Chartered Accountant in Annexure A to Form 26A, then the payer cannot be treated as an assessee in default. The first proviso has been inserted by the Finance Act, 2012 w.e.f. 01-07-2012.

At this juncture, it is relevant to consider the judgment in Hindustan Coca Cola Beverage India (P) Ltd. vs. CIT (2007) 293 ITR 226 (SC). This judgment of August, 2007 was rendered in the context of the judgment of the Hon‟ble Delhi High Court passed in October, 2006. The Hon‟ble Summit Court in this case was confronted with a situation in which the income was paid by the assessee without deduction of tax at source and the payee had already paid taxes on such income. The payer was treated as assessee in default. In such circumstances, it was held that where the payee had already paid tax on the income on which there was a short-deduction of tax at source, recovery of tax could not be made once again from the payer. The legislature stepped in to statutorily recognize the verdict by substituting Explanation to section 191 by the Finance Act, 2008 with retrospective effect from 01-06-2003 with the effect that if the payee pays taxes on the income received from the payer who did not deduct tax at source, the payer cannot be treated as an assessee in default. The Finance Act, 2012 came out with an insertion of the first proviso to section 201(1) to magnify the mandate given in the Explanation to section 191 by providing in section 201 itself that the discharge of tax liability by the resident payee on an income which has been received without deduction of tax at source would not make the payer assessee in default if the payee has furnished his return of income u/s.139 after taking into account such income and has paid tax due on the income declared in the return. Whereas the Explanation to section 191 provided for non-deduction of tax at source by the payer followed by the payee failing to pay such tax directly resulting in the payer becoming an assessee in default, the first proviso to section 201 clarified the position beyond doubt by stipulating that where the non-deduction by the payer is followed by the payee, inter alia, paying the tax due on the income declared by him in the return of income. One-to-one co-relation between the amount of tax not deducted by the payer and payment of such tax by the payee as given in section 191 has been given a go-by in the proviso to section 201 by stipulating that the failure to deduct tax by the payer and payment of tax by the payee on his total income including such income is a norm for not treating the payer as assessee in default.

On a conjoint reading of the judgment of Hon‟ble Apex Court in Hindustan Coca Cola Beverage (supra) por una parte with Explanation to section 191 and first proviso to section 201(1) por otra parte, there remains no doubt whatsoever that a payer cannot be treated as an assessee in default for non-deduction of tax at source where the payee has included the amount received from the payer in his total income and filed the return after paying due tax on such declared income. The enunciation in Hindustan Coca Cola Beverage (supra) in this regard becomes a declaration of law as it has always been since inception because the substitution of Explanation to section 191 by the Finance Act, 2008 clarifying the position to some extent and the full effect to the clarity given by the insertion of proviso to section 201(1) are the amendments in affirmation and not in negation of the dictum. A fortiori, such statutory amendments are manifestly retrospective. It cannot be said that prior to insertion of the proviso, an assessee who paid the amount without deduction of tax at source could be treated as an assessee in default despite the fact that the recipient included it in his total income and paid tax thereon.

The second point of view espoused by the AO as well as the ld. CIT(A) is that the assessee did not comply with the requirement of section 201(1) inasmuch as the certificate from the Chartered Accountant in Form 26A was not furnished. Admittedly, the assessee did not furnish it before the AO. For the first time, the assessee submitted a certificate from Muthoot Mini Finance Corporation Ltd. before the ld. CIT(A) that the income received from the assessee was included in the total income. Such certificate was not in Form 26A. However, during the course of the first appellate proceedings itself, the assessee furnished proper annexure to the certificate in Form 26A. The ld. CIT(A), on a remand report from the AO, has refused to take cognizance of it. In my opinion, the necessary requirement got fully satisfied once the certificate in the requisite form was obtained by the assessee and placed before the ld. CIT(A) and also the AO (during the course of remand proceedings). There is no qualitative difference between the first three certificates filed by the assessee before the ld. CIT(A) for the first time for which the disallowance has been deleted and the fourth one, which was also filed before him for the first time for which the disallowance has been sustained. Ex consequenti, I hold that the necessary condition has been satisfied and hence the assessee cannot be treated as an assessee in default. I, ergo, delete the disallowance u/s.40(a)(ia) sustained in the first appeal.

In the result, the appeal is allowed.