ITAT rules in Favor of Jaggery Trader, holds No 40(a)(ia) Disallowance Where Tax already Paid on Interest Income [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune bench, has ruled in favor of a jaggery products trader, holding that no disallowance under Section 40(a)(ia) of the Income Tax Act, 1961, can be made for interest payments where the recipient NBFCs hKudale Agro Goods vs Income Tax Officerad already declared and paid taxes on the income. The tribunal partially allowed the appeal, directing the Assessing Officer (AO) to verify claims related to one lender while deleting additions for three others.

The case involved Kudale Agro Goods, which had taken loans from four NBFCs—Bajaj Finance Ltd., IDFC First (Capital First) Ltd., Tata Capital Finvest Ltd., and Religare Finvest Ltd.—and paid interest totaling ₹13.06 lakh during Assessment Year 2017-18. The AO disallowed 30% (₹3.92 lakh) of the interest expense under Section 40(a)(ia) for non-deduction of TDS. The disallowance was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], prompting the firm to appeal before ITAT.

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The tribunal noted that three of the four NBFCs had already declared the interest income in their tax returns and paid due taxes, as evidenced by Form 26A submissions. Relying on the Supreme Court's judgment in Hindustan Coca Cola Beverages (2007), ITAT held that no disallowance can be sustained if the payee has already discharged its tax liability.

Judicial Member Astha Chandra and Vice President R.K. Panda emphasized that the purpose of Section 40(a)(ia) is to ensure tax compliance, not to doubly tax the same income.

For Religare Finvest Ltd., the tribunal acknowledged the assessee's failure to furnish Form 26A but noted the existence of a lower TDS deduction certificate under Section 197. It remanded this aspect to the AO for verification, directing Kudale Agro Goods to submit supporting documents. The tribunal referenced its earlier decision in Jai Mata Di V. ITO (2018), which followed the Mumbai ITAT ruling in Karwat Steel Traders, to reinforce that technical lapses in TDS compliance should not trigger disallowance if the payee has accounted for the income.

The ruling provides relief to the jaggery trader while clarifying that disallowance under Section 40(a)(ia) cannot be mechanical. The tribunal's decision aligns with the principle that the provision is a safeguard, not a penalty, when the tax chain remains intact. The AO was directed to delete additions for three NBFCs and reconsider Religare Finvest's case based on fresh evidence.

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The order underscores that where the recipient has disclosed income and paid taxes, disallowance under Section 40(a)(ia) becomes redundant. This balanced approach ensures fairness while upholding tax compliance objectives.The ruling provides relief to the jaggery trader while clarifying that disallowance under Section 40(a)(ia) cannot be mechanical.

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