Section 40 of the Income Tax Act, 1961 deals with amounts not deductible in computing the income chargeable under the head “Profits and gains of business and profession”. According to sub-section (ia), as amended by the Finance (No. 2) Act, 2014 w.e.f. 01.04.2015, 30% of any sum payable to a resident on which tax was deductible at source but on which tax has either not been deducted or, after deduction has not been paid on or before the due date for filing return of income was to be disallowed in the hands of the deductor at the time of computing income under the head of “Profits and gains of business and profession”. In such cases, the sum could be claimed as a deduction in the year in which the tax was actually paid [first proviso to section 40(a)(ia)].
The Finance Act, 2013 introduced a second proviso to section 40(a)(ia). According to this, if the deductor has failed to deduct the whole or any part of tax that was deductible on payment of any sum to a resident but is not deemed to be an assessee in default as per section 201, then the tax shall be deemed to have been deducted and paid on the date on which the payee (recipient) has filed his/her/its return of income.
For the deductor to be deemed to be not an assessee in default as per section 201, the following are to be satisfied vide proviso to section 201(1) inserted by the Finance Act, 2012 w.e.f. 01.07.2012:
- The deductor has failed to deduct the whole or any part of the tax deductible on sum paid/credited to a resident;
- The payee has furnished his return of income u/s 139;
- The payee has taken into account such sum for computing his income in his return of income;
- The payee has paid the tax due on the income declared by him in the return of income; and
- Form 26A is furnished by the payee vide Rule 31ACB.
Therefore, government was not really losing any revenue because the tax was being paid by the resident payee although it was not deducted at source /not paid after deduction by the deductor. Although in such cases the deductor was not being considered an assessee in default vide section 201, during the course of assessment, the deductor was not being able to claim the benefit of deduction of the sum in computing his return of income for assessment years up to the date of amendment by the Finance Act, 2013. The revenue authorities continued to disallow the amount u/s 40(a)(ia) up to AY 2012-13 because the amendment in this section was effected from AY 2013-14.
In an order that has recently been confirmed by the Hon’ble High Court (in the case of Ansal Land Mark Township Pvt. Ltd.), Delhi, the ITAT, Agra Bench considered the entire issue in the case of Rajiv Kumar Agarwal in ITA 337/Agra/2013. The ITAT analysed the provisions in detail and reasoned that the insertion of the second proviso to section 40(a)(ia) was declaratory and curative in nature and should be given retrospective effect from 01.04.2005.
This judgment of the Hon’ble High Court, Delhi should be of assistance to those who face disallowance u/s 40(a)(ia) of such sums, although they are not be held assessees in default as per section 201.