Vipin P Mehta v ITO - ITA No. 3317 (Mum.) of 2010
Disallowance of interest under s 40(a)(ia)
The assessee’s claim that he had the declarations of the payees in the prescribed form before him at the time when the interest was paid, was not liable to deduct tax therefrom under s 194A and no disallowance can be made under s 40(a)(ia) is accepted in absence of any direct evidence produced by revenue — as held by MumTrib in Vipin P Mehta v ITO — In favour of: The Assessee ; ITA No. 3317 (Mum.) of 2010 : Assessment Year: 2006–2007
Decided on: 20 May 2011
Section 197A(1A) merely requires a declaration to be filed by the payee of the interest, and once it is filed the payer of the interest has no choice except to desist from deducting tax from the interest.
Vipin P. Mehta v ITO
ITAT, Mumbai
ITA No. 3317 (Mum.) of 2010
Assessment Year: 2006-07
R.V. Easwar, President and R.K. Panda, AM
Decided on: 20 May 2011
Counsel appeared:
Satish R. Mody for the appellant
Vijay Shankar for the respondent
Order
R.V. Easwar, President
1. This is an appeal by the assessee and it relates to the assessment year 2006-07. The assessee is
an individual carrying on business in the manufacture and printing of packaging materials in the
name and style of M/s. V.P. Mehta and Co. The appeal arises out of the assessment made on him
under section 143(3) of the Income-tax Act by an order dated 24-12-2008.
2. The only ground in the appeal is whether the departmental authorities are justified in
disallowing the interest of Rs.7,87,291 by invoking section 40(a)(ia) of the Act. Under this
section any interest paid by the assessee on which tax is deductible at source under Chapter XVIIB
but such tax has not been deducted or after deduction the same has not been paid on or before
the due date specified in section 139(1) for filing the return, will be disallowed in computing the
income from business. The assessee herein paid Rs.13,51,056 on account of interest and claimed
the same as deduction in computing his business income. The Assessing Officer noted that the
assessee had paid interest exceeding Rs.5,000 to 34 parties and the total thereof came to
Rs.7,87,291. The Assessing Officer also noticed that the assessee ought to have deducted tax on
such payments under section 194A of the Act. The Assessing Officer, on the footing that the
assessee did not deduct the tax as required by section 194A, asked the assessee to explain why the
interest should not be disallowed in terms of section 40(a)(ia). The assessee submitted by letter
dated 17-11-2008 that all the payees to whom the interest aggregating to Rs.7,87,291 was paid
have furnished declarations in form No. 15H/15G, as the case may be, before the date on which
tax ought to have been deducted and therefore the assessee was not liable to deduct the tax. It was
therefore pleaded that section 40(a)(ia) was not applicable to the assessee's case since it would
apply only if the assessee was required to deduct the tax, but had not deducted the same. The
assessee also submitted that by oversight he did not submit the copies of the declarations in form
No. 15G/15H to the office of the CIT(TDS) and that these forms were recently submitted to him.
3. The Assessing Officer did not accept the assessee's explanation. He noted that the declarations
submitted by the payees were submitted with the CIT(TDS) only on 15-10-2008 after the
Assessing Officer asked the assessee to show cause why the interest should not be disallowed. He
also noticed from the returns filed by some of the payees in response to the notices issued under
section 133(6) that some of them were having taxable income, even though the assessee claimed
that they also filed form No. 15G with the assessee which were in turn filed by the assessee with
the office of the CIT(TDS). From these facts, the Assessing Officer came to the conclusion that
the assessee purposely did not deduct the tax as required by section 194A. He accordingly
invoked section 40(a)(ia) and disallowed the interest payment of Rs.7,87,291.
4. On appeal the CIT(A) held that the assessee's arguments cannot be accepted because unless
and until the declarations filed by the payees of the interest in the prescribed form are filed with
the CIT(TDS) within seven days of the month following the month in which they were submitted
to the assessee they are as good as no declarations having been filed and therefore the assessee
had committed a default in not deducting the tax at source from the payment of interest. He
therefore upheld the disallowance made by the Assessing Officer.
5. The assessee is in further appeal before the Tribunal. The main submission of the learned
counsel for the assessee was that for non-filing of the declarations furnished by the payees to the
assessee within the time required by sub-section (2) of section 197A of the Act a separate penalty
is prescribed by section 272A(2)(f) of the Act in a sum of one hundred rupees for every day
during which the default continues and no such penalty proceedings having been initiated by the
income-tax authorities, the delay in filing the declarations with the office of the CIT(TDS) should
be taken to have been condoned and in these circumstances the assessee was under no obligation
to deduct tax under section 194A and therefore the provisions of section 40(a)(ia) were not
applicable. The argument of the revenue however is that it cannot be verified as to whether the
declarations in the prescribed form were actually furnished by the payees to the assessee at the
appropriate time unless the assessee files them with the office of the CIT(TDS) within the time
prescribed by sub-section (2) of section 197A, that the fact that the Assessing Officer did not
initiate any penalty proceedings under section 272A(2)(f) did not mean that the delay was
condoned in the absence of a specific order to that effect and in these circumstances, and in order
to prevent misuse of the provisions of section 197A, it should be held that the assessee did not
have the declarations of the payees before him when the payment of interest was made and
consequently he was under a liability to deduct tax under section 194A. Having failed to do so, it
was submitted, the assessee must suffer the disallowance.
6. We have carefully considered the facts and the rival contentions. Section 194A provides for
deduction of tax from the interest paid by the assessee, at the appropriate rate. Section 197A(1A)
provides that notwithstanding anything contained in section 194A no deduction of tax shall be
made under the section if the payee of the interest furnished to the person responsible for paying
the interest, a declaration in writing in duplicate in the prescribed form and verified in the
prescribed manner to the effect that the tax on his estimated total income of the previous year in
which the interest is to be included will be nil. Sub-section (2) provides that the person
responsible for paying interest shall deliver or cause to be delivered to the CCIT or CIT one copy
of the declaration submitted by the payee of the interest to the assessee on or before the seventh
day of the month next following the month in which the declaration was furnished to him. If the
person responsible for paying the interest (i.e., the assessee) does not comply with sub-section (2)
of section 197A, he is liable to pay penalty of Rs.100 for every day during which the failure
continues. Such penalty can be imposed only by the Commissioner or Chief Commissioner of
Income-tax as stated in clause (b) of sub-section (3) of section 272A and sub-section (4) requires
that an opportunity shall be given to the assessee before any penalty order is passed.
7. In the present case the claim of the assessee is that at the time of paying the interest to the 34
persons mentioned in the assessment order, he had before him the appropriate declarations in the
prescribed form from the payees stating that no tax was payable by them in respect of their total
income and therefore tax need not be deducted from interest under section 194A, and in the light
of these declarations he had no option but to make the payment of interest without any tax
deduction. If the claim is true then the contention must be accepted because under sub-section
(1A) of section 197A, if such a declaration is filed by the payee of interest, no deduction of tax
shall be made by the assessee. The revenue authorities have doubted the assessee's version
because according to them it is only when the Assessing Officer proposed the disallowance of the
interest by invoking the section 40(a)(ia) in the course of the assessment proceedings that the
assessee filed the declarations claimed to have been submitted to him by the payees of the
interest, in the office of the CIT(TDS) as required by sub-section (2) of section 197A. Apart from
this inference, there is no other evidence in their possession to hold that the declarations were not
submitted by the payees of the interest to the assessee at the time when the payments were made.
Without disproving the assessee's claim on the basis of other evidence, except by way of
inference, it would not be fair or proper to discard the claim. The Assessing Officer has not
recorded any statements from the payees of the interest to the effect that they did not file any
declarations with the assessee at the appropriate time or to the effect that they filed the
declarations only at the request of the assessee in September/October, 2008. In the absence of any
such direct evidence, we are unable to reject the assessee's claim. The Assessing Officer has
stated in para 4.4 of the assessment order that he found that some of the loan creditors were
having taxable income but still the assessee had submitted declarations from them in form No.
15G. Unless it is proved that these forms were not in fact submitted by the loan creditors, the
assessee cannot be blamed because at the time of paying the interest to the loan creditors, he has
to perforce rely upon the declarations filed by the loan creditors and he was not expected to
embark upon an enquiry as to whether the loan creditors really and in truth have no taxable
income on which tax is payable. That would be putting an impossible burden on the assessee.
That apart sub-section (1A) of section 197A merely requires a declaration to be filed by the payee
of the interest and once it is filed the payer of the interest has no choice except to desist from
deducting tax from the interest. The sub-section uses the word "shall" which leaves no choice to
the assessee in the matter. In the case of payment of leave travel concession and conveyance
allowance to employees who are liable to deduct tax from the salary paid to the employees under
section 192, the Supreme Court has held in CIT v. Larsen and Toubro Ltd. [2009] 313 ITR 1/181
Taaxman 71, that the assessee was under no statutory obligation under the Act or Rules to collect
evidence to show that the employee had actually utilized the money paid towards leave travel
concession/conveyance allowance. The position is stronger under section 197A which does not
apply to section 192, but which provides in sub-section (1A) that if the payee of the interest has
filed the prescribed form to the effect that he is not liable to pay any tax in computing his total
income, the payer shall not deduct any tax. The sub-section does not impose any obligation on the
payer to find out the truth of the declarations filed by the payee. Even if the assessee has delayed
the filing of the declarations with the office of the CIT/CCIT (TDS) within the time-limit
specified in sub-section (2) of section 197A, that is a distinct omission or default for which a
penalty is prescribed. Section 273B provides that no penalty shall be imposed under any of the
clauses of sub-section (2) of section 272A for the delay, if the assessee proves that there was
reasonable cause for the same. We have already seen that under sub-section (4) of section 272A,
no penalty can be imposed unless the assessee is given an opportunity of being heard. All these
provisions indicate that the failure on the part of the assessee, who is the payer of the interest, to
file the declarations given to him by the payees of the interest, within the time-limit specified in
sub-section (2) to section 197A is distinct and separate and merely because there is a failure on
the part of the assessee to submit the declarations to the income-tax department within the timelimit,
it cannot be said that the assessee did not have declarations with him at the time when he
paid the interest to the payees. That would be a separate matter and separate proof and evidence is
required to show that even when the assessee paid the interest, he did not have the declarations
from the payees with him and therefore he ought to have deducted the tax from the payment. No
such evidence or proof has been brought by the department.
8. For the aforesaid reasons, we accept the assessee's claim that since he had the declarations of
the payees in the prescribed form before him at the time when the interest was paid, he was not
liable to deduct tax therefrom under section 194A. If he was not liable to deduct tax, section
40(a)(ia) is not attracted. There is no other ground taken by the Income-tax authorities to disallow
the interest. We therefore accept the assessee's appeal and delete the disallowance of interest of
Rs.7,87,291.
The assessee’s claim that he had the declarations of the payees in the prescribed form before him at the time when the interest was paid, was not liable to deduct tax therefrom under s 194A and no disallowance can be made under s 40(a)(ia) is accepted in absence of any direct evidence produced by revenue — as held by MumTrib in Vipin P Mehta v ITO — In favour of: The Assessee ; ITA No. 3317 (Mum.) of 2010 : Assessment Year: 2006–2007
Decided on: 20 May 2011
Section 197A(1A) merely requires a declaration to be filed by the payee of the interest, and once it is filed the payer of the interest has no choice except to desist from deducting tax from the interest.
Vipin P. Mehta v ITO
ITAT, Mumbai
ITA No. 3317 (Mum.) of 2010
Assessment Year: 2006-07
R.V. Easwar, President and R.K. Panda, AM
Decided on: 20 May 2011
Counsel appeared:
Satish R. Mody for the appellant
Vijay Shankar for the respondent
Order
R.V. Easwar, President
1. This is an appeal by the assessee and it relates to the assessment year 2006-07. The assessee is
an individual carrying on business in the manufacture and printing of packaging materials in the
name and style of M/s. V.P. Mehta and Co. The appeal arises out of the assessment made on him
under section 143(3) of the Income-tax Act by an order dated 24-12-2008.
2. The only ground in the appeal is whether the departmental authorities are justified in
disallowing the interest of Rs.7,87,291 by invoking section 40(a)(ia) of the Act. Under this
section any interest paid by the assessee on which tax is deductible at source under Chapter XVIIB
but such tax has not been deducted or after deduction the same has not been paid on or before
the due date specified in section 139(1) for filing the return, will be disallowed in computing the
income from business. The assessee herein paid Rs.13,51,056 on account of interest and claimed
the same as deduction in computing his business income. The Assessing Officer noted that the
assessee had paid interest exceeding Rs.5,000 to 34 parties and the total thereof came to
Rs.7,87,291. The Assessing Officer also noticed that the assessee ought to have deducted tax on
such payments under section 194A of the Act. The Assessing Officer, on the footing that the
assessee did not deduct the tax as required by section 194A, asked the assessee to explain why the
interest should not be disallowed in terms of section 40(a)(ia). The assessee submitted by letter
dated 17-11-2008 that all the payees to whom the interest aggregating to Rs.7,87,291 was paid
have furnished declarations in form No. 15H/15G, as the case may be, before the date on which
tax ought to have been deducted and therefore the assessee was not liable to deduct the tax. It was
therefore pleaded that section 40(a)(ia) was not applicable to the assessee's case since it would
apply only if the assessee was required to deduct the tax, but had not deducted the same. The
assessee also submitted that by oversight he did not submit the copies of the declarations in form
No. 15G/15H to the office of the CIT(TDS) and that these forms were recently submitted to him.
3. The Assessing Officer did not accept the assessee's explanation. He noted that the declarations
submitted by the payees were submitted with the CIT(TDS) only on 15-10-2008 after the
Assessing Officer asked the assessee to show cause why the interest should not be disallowed. He
also noticed from the returns filed by some of the payees in response to the notices issued under
section 133(6) that some of them were having taxable income, even though the assessee claimed
that they also filed form No. 15G with the assessee which were in turn filed by the assessee with
the office of the CIT(TDS). From these facts, the Assessing Officer came to the conclusion that
the assessee purposely did not deduct the tax as required by section 194A. He accordingly
invoked section 40(a)(ia) and disallowed the interest payment of Rs.7,87,291.
4. On appeal the CIT(A) held that the assessee's arguments cannot be accepted because unless
and until the declarations filed by the payees of the interest in the prescribed form are filed with
the CIT(TDS) within seven days of the month following the month in which they were submitted
to the assessee they are as good as no declarations having been filed and therefore the assessee
had committed a default in not deducting the tax at source from the payment of interest. He
therefore upheld the disallowance made by the Assessing Officer.
5. The assessee is in further appeal before the Tribunal. The main submission of the learned
counsel for the assessee was that for non-filing of the declarations furnished by the payees to the
assessee within the time required by sub-section (2) of section 197A of the Act a separate penalty
is prescribed by section 272A(2)(f) of the Act in a sum of one hundred rupees for every day
during which the default continues and no such penalty proceedings having been initiated by the
income-tax authorities, the delay in filing the declarations with the office of the CIT(TDS) should
be taken to have been condoned and in these circumstances the assessee was under no obligation
to deduct tax under section 194A and therefore the provisions of section 40(a)(ia) were not
applicable. The argument of the revenue however is that it cannot be verified as to whether the
declarations in the prescribed form were actually furnished by the payees to the assessee at the
appropriate time unless the assessee files them with the office of the CIT(TDS) within the time
prescribed by sub-section (2) of section 197A, that the fact that the Assessing Officer did not
initiate any penalty proceedings under section 272A(2)(f) did not mean that the delay was
condoned in the absence of a specific order to that effect and in these circumstances, and in order
to prevent misuse of the provisions of section 197A, it should be held that the assessee did not
have the declarations of the payees before him when the payment of interest was made and
consequently he was under a liability to deduct tax under section 194A. Having failed to do so, it
was submitted, the assessee must suffer the disallowance.
6. We have carefully considered the facts and the rival contentions. Section 194A provides for
deduction of tax from the interest paid by the assessee, at the appropriate rate. Section 197A(1A)
provides that notwithstanding anything contained in section 194A no deduction of tax shall be
made under the section if the payee of the interest furnished to the person responsible for paying
the interest, a declaration in writing in duplicate in the prescribed form and verified in the
prescribed manner to the effect that the tax on his estimated total income of the previous year in
which the interest is to be included will be nil. Sub-section (2) provides that the person
responsible for paying interest shall deliver or cause to be delivered to the CCIT or CIT one copy
of the declaration submitted by the payee of the interest to the assessee on or before the seventh
day of the month next following the month in which the declaration was furnished to him. If the
person responsible for paying the interest (i.e., the assessee) does not comply with sub-section (2)
of section 197A, he is liable to pay penalty of Rs.100 for every day during which the failure
continues. Such penalty can be imposed only by the Commissioner or Chief Commissioner of
Income-tax as stated in clause (b) of sub-section (3) of section 272A and sub-section (4) requires
that an opportunity shall be given to the assessee before any penalty order is passed.
7. In the present case the claim of the assessee is that at the time of paying the interest to the 34
persons mentioned in the assessment order, he had before him the appropriate declarations in the
prescribed form from the payees stating that no tax was payable by them in respect of their total
income and therefore tax need not be deducted from interest under section 194A, and in the light
of these declarations he had no option but to make the payment of interest without any tax
deduction. If the claim is true then the contention must be accepted because under sub-section
(1A) of section 197A, if such a declaration is filed by the payee of interest, no deduction of tax
shall be made by the assessee. The revenue authorities have doubted the assessee's version
because according to them it is only when the Assessing Officer proposed the disallowance of the
interest by invoking the section 40(a)(ia) in the course of the assessment proceedings that the
assessee filed the declarations claimed to have been submitted to him by the payees of the
interest, in the office of the CIT(TDS) as required by sub-section (2) of section 197A. Apart from
this inference, there is no other evidence in their possession to hold that the declarations were not
submitted by the payees of the interest to the assessee at the time when the payments were made.
Without disproving the assessee's claim on the basis of other evidence, except by way of
inference, it would not be fair or proper to discard the claim. The Assessing Officer has not
recorded any statements from the payees of the interest to the effect that they did not file any
declarations with the assessee at the appropriate time or to the effect that they filed the
declarations only at the request of the assessee in September/October, 2008. In the absence of any
such direct evidence, we are unable to reject the assessee's claim. The Assessing Officer has
stated in para 4.4 of the assessment order that he found that some of the loan creditors were
having taxable income but still the assessee had submitted declarations from them in form No.
15G. Unless it is proved that these forms were not in fact submitted by the loan creditors, the
assessee cannot be blamed because at the time of paying the interest to the loan creditors, he has
to perforce rely upon the declarations filed by the loan creditors and he was not expected to
embark upon an enquiry as to whether the loan creditors really and in truth have no taxable
income on which tax is payable. That would be putting an impossible burden on the assessee.
That apart sub-section (1A) of section 197A merely requires a declaration to be filed by the payee
of the interest and once it is filed the payer of the interest has no choice except to desist from
deducting tax from the interest. The sub-section uses the word "shall" which leaves no choice to
the assessee in the matter. In the case of payment of leave travel concession and conveyance
allowance to employees who are liable to deduct tax from the salary paid to the employees under
section 192, the Supreme Court has held in CIT v. Larsen and Toubro Ltd. [2009] 313 ITR 1/181
Taaxman 71, that the assessee was under no statutory obligation under the Act or Rules to collect
evidence to show that the employee had actually utilized the money paid towards leave travel
concession/conveyance allowance. The position is stronger under section 197A which does not
apply to section 192, but which provides in sub-section (1A) that if the payee of the interest has
filed the prescribed form to the effect that he is not liable to pay any tax in computing his total
income, the payer shall not deduct any tax. The sub-section does not impose any obligation on the
payer to find out the truth of the declarations filed by the payee. Even if the assessee has delayed
the filing of the declarations with the office of the CIT/CCIT (TDS) within the time-limit
specified in sub-section (2) of section 197A, that is a distinct omission or default for which a
penalty is prescribed. Section 273B provides that no penalty shall be imposed under any of the
clauses of sub-section (2) of section 272A for the delay, if the assessee proves that there was
reasonable cause for the same. We have already seen that under sub-section (4) of section 272A,
no penalty can be imposed unless the assessee is given an opportunity of being heard. All these
provisions indicate that the failure on the part of the assessee, who is the payer of the interest, to
file the declarations given to him by the payees of the interest, within the time-limit specified in
sub-section (2) to section 197A is distinct and separate and merely because there is a failure on
the part of the assessee to submit the declarations to the income-tax department within the timelimit,
it cannot be said that the assessee did not have declarations with him at the time when he
paid the interest to the payees. That would be a separate matter and separate proof and evidence is
required to show that even when the assessee paid the interest, he did not have the declarations
from the payees with him and therefore he ought to have deducted the tax from the payment. No
such evidence or proof has been brought by the department.
8. For the aforesaid reasons, we accept the assessee's claim that since he had the declarations of
the payees in the prescribed form before him at the time when the interest was paid, he was not
liable to deduct tax therefrom under section 194A. If he was not liable to deduct tax, section
40(a)(ia) is not attracted. There is no other ground taken by the Income-tax authorities to disallow
the interest. We therefore accept the assessee's appeal and delete the disallowance of interest of
Rs.7,87,291.
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