Disallowance u/s. 40(a)(i) cannot be Invoked in view of Retrospective Amendment to S. 195 Imposing TDS on Payment to Non-Residents: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) of Chennai Bench ruled that the disallowance imposed under Section 40(a)(i) of the Income Tax Act, 1961, prohibiting Tax Deduction Source (TDS) on payments to Non-Residents, cannot be applied retroactively.

The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)].

The bench took the question into consideration regarding the disallowance under Section 40(a)(i) of the Income Tax Act.

The Assessing Officer (AO) invoked disallowance under section 40(a)(i) of the Income Tax Act as a result of the assessee, M/s Allsec Technologies Pvt Ltd (current respondent), paying a selling commission of Rs. 288.57 Lacs for services provided by the payees outside of India without deducting tax at source as required by section 195 of the Income Tax Act.

The bench stated that by anticipating such a future alteration to the law, the assessee could not be expected to deduct tax at source in this year. There was no requirement for the assessee to deduct TDS during the contested year, but this requirement has emerged as a result of a later alteration to the legislation that the assessee could not have foreseen.

The tribunal referred to the case of M/s. TVS Electronics Ltd. v. ACIT, wherein, the Tribunal under identical facts held that the assessee cannot be fastened liability on the basis of subsequent amendment to the law with retrospective effect, because the assessee cannot be expected to do impossibility of performance and thus, for non-deduction of TDS under section 195 of IT Act, payment made to non-residents, cannot be disallowed under section 40(a)(i) of IT Act. The bench of Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant member) dismissed the appeal filed by the respondent and stated that the disallowance made under section 40(a)(i) of Income Tax Act would be unwarranted.

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