Disallowance of Expenditure u/s 40(a)(ia) of Income Tax Act for Non-Deduction of TDS restricted to 30% Considering Curative Nature of Amendment to Finance Act: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Ahmedabad bench has held that the disallowance of expenditure under Section 40(a)(ia) of the Income Tax Act, 1961 for the non-deduction of Tax Deducted at Source (TDS) shall be restricted to 30% of the expenditure considering the curative nature of Amendment to the Finance Act.

The assessee, Shri Niteshkumar Maganbhai Patel is an individual engaged in the business of civil construction.

The AO, during the assessment proceedings, had observed that the assessee made a payment of Rs. 7,55,750/- to Sri Kanubhai M Parjapati for the work of landfilling and levelling which was like work contract and hence the same shall be liable to TDS under section 194C of the Income Tax Act. However, the assessee failed to deduct tax at source. Hence, AO invoked the provision of section 40(a)(ia) of the Income Tax Act and disallowed the expenses.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)), who confirmed the addition made by AO.

Aggrieved by this, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), Ahmedabad bench against the order of CIT(A) confirming the order of AO.

The assessee contended that CIT(A) has erred both in law and in fact in confirming the applicability of Sec.40(a)(ia) of the Income Tax Act, 1961 to the case which is not applicable and disallowance/addition is not called for.

The assessee, represented by S.N. Soparkar, Parin Shah and Shri Anil R. Shah argued that the confirmation of the disallowance of land levelling expenses for Rs. 7,55,750/- under section 40(a)(ia) of Income Tax Act by CIT(A) shall be deleted.

The assessee submitted that the recipient of money Shri Kanubhai Prajapati is assessed to Income Tax and the amount of landfilling and levelling charges paid to him are duly shown as income by him and paid Tax thereon and therefore Section l94C of the Income Tax Act, 1961 does not apply. Hence, CIT(A) ought to have deleted the said disallowance/addition, the assessee contended.

The revenue, represented by Vijay Kumar Jaiswal and Atul Pandey vehemently supported the order of lower authorities and contended that the order shall be upheld.

The bench observed that the assessee, at the time of the hearing could not controvert the findings of lower authorities and failed to provide details that the payee has included the amount received from the assessee in its income. Thus, the assessee cannot be given the benefit of the proviso to section 40(a)(ia) of the Income Tax Act.

However, the bench finds that the Finance (No.2) Act has an amended section 40(a)(ia) of the Income Tax Act with effect from 01-04-2015 and various benches of the Tribunals have held it to be curative in nature.

The bench noted that the coordinate bench of the Tribunal in M/s. R. H. International v. ITO ITA No. 6724/Del/2018 has held that disallowance under Section 40(a)(ia) of the Income Tax Act be restricted to 30% of expenses paid as against 100% because the amended provision is curative in nature and the provisions should be applied retrospectively.

The two-member bench consisting of Shri Waseem Ahmed (Accountant Member) and Shri T.R. Senthil Kumar (Judicial Member) held that disallowance of expenses under section 40(a)(ia) on account of non-deduction of TDS should be restricted to 30% of the expenses and not 100%, considering the curative nature of the amendment made by Finance Act.

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