Introduction
In the case of Ahlers India (P.) Ltd. v. Deputy Commissioner of Income-tax[i], the Chennai bench of the Income Tax Appellate Tribunal (‘ITAT’) provided significant clarity regarding the retrospective applicability of s. 40(a)(i) of the Income-tax Act, 1961 (‘Act’). The judgment addresses whether expenses paid to non-residents, without tax deduction at source (‘TDS’), can be disallowed when the recipients have already declared these amounts in their tax returns. Additionally, it touches upon the divergent High Court views and provides clarity to this contentious issue.
Brief Facts
Ahlers India (P) Ltd. (‘Appellant’), a company engaged in shipping contract services, faced disallowance of expenses for payments made to non-residents without TDS deductions. For assessment year (‘AY’) 2011-12, the Appellant paid Rs. 2,26,73,426/- to several non-resident entities without deducting TDS. The assessing officer (‘AO’) disallowed these expenses under s. 40(a)(i) of the Act, citing non-deduction of TDS under s. 195 of the Act.
The Appellant challenged this before the Dispute Resolution Panel (‘DRP’), which directed the AO to reconsider the case, whereby the AO confirmed the disallowance in a final assessment order dated 16.02.2016. The Appellant then appealed to the ITAT, which remanded the matter to the AO for a fresh decision on whether the recipient of the payments disclosed the amounts in their tax returns. On remand, the AO again sustained the disallowance, citing the ongoing challenges of the related High Court decision in CIT v. Ansal Land Mark Township (P.) Ltd.[ii] pending before the Hon’ble Supreme Court.
When the matter came before the Commissioner of Income Tax (Appeals) (‘CIT(A)’), it dismissed the appeal, stating it was infructuous under the Vivad Se Viswas Scheme, 2020, despite the Appellant not opting for the scheme for the disallowance under s. 40(a)(i). Aggrieved, the Appellant came before the ITAT.
The ITAT remanded the matter to the CIT(A) once more, but the CIT(A) reaffirmed the disallowance by referring to conflicting judicial precedents on the retrospective application of the second proviso to s. 40(a)(i) of the Act. The Appellant again approached the ITAT, arguing that the payments made to non-residents had been disclosed in their respective income tax returns. Thus, no disallowance should be made under s. 40(a)(i) of the Act.
A key contention was whether the second proviso to s. 40(a)(i) applied retrospectively. The proviso, inserted by the Finance Act, 2012, became effective on 01.07.2012, raising questions about its applicability before AY 2013-14. While the Appellant relied on the Delhi High Court’s decision in Ansal Land Mark Township (supra) favouring retrospective applicability, the Department cited the Kerala High Court’s judgments in Prudential Logistics and Transports v. ITO[iii] and Thomas George Muthoot v. CIT[iv], which opposed retrospective application.
Held
The ITAT allowed the appeal in favour of the Appellant and found that the Appellant had provided adequate proof demonstrating that the non-resident recipients declared the payments in their income tax returns, thus fulfilling the conditions of the second proviso to s. 40(a)(i) of the Act.
The ITAT acknowledged the conflicting judgments between the Hon’ble Delhi High (favouring retrospective application) and the Hon’ble Kerala High Court (opposing it). Considering this conflict, the ITAT followed the principle laid down by the Hon’ble Supreme Court in CIT v. Vegetable Products Ltd.[v], where the view favouring the assessee should be adopted when divergent decisions from non-jurisdictional High Courts exist.
Consequently, the ITAT reversed the disallowance made by the CIT(A) and allowed the deduction of Rs. 2,26,73,426/-, holding that the declaration of income by the non-resident recipients satisfied the requirements of the second proviso to s. 40(a)(i) of the Act.
Our Analysis
The crux of this decision lies in applying the second proviso to s. 40(a)(i) of the Act, which allows deductions if recipients declare the payments in their tax returns. A significant aspect of this decision is whether the second proviso to s. 40(a)(i), inserted by the Finance Act, 2012, applies retrospectively. The ITAT’s adoption of a taxpayer-friendly approach, particularly in the presence of conflicting High Court rulings, showcases the Tribunal’s reliance on the principle favouring the assessee in cases of conflicting judicial interpretations from non-jurisdictional courts. By leaning on this principle, the Tribunal not only resolved the present case but also set a precedent for other cases involving divergent judicial opinions on similar matters.
Further, this decision also adds to the body of rulings favouring the second proviso's retrospective application to s. 40(a)(i) of the Act, distancing itself from the contrary stance taken by the Kerala High Court, further blurring the lines of finality on this issue.
End Notes
[i] [2024] 165 taxmann.com 640 (Chennai – Trib.) [27.06.2024].
[ii] 2015 SCC OnLine Del 11554.
[iii] 2014 SCC OnLine Ker 28605.
[iv] 2015 SCC OnLine Ker 19368.
[v] (1973) 1 SCC 442.
Authored by Jitin Bharadwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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