Mumbai tax tribunal held that liability to deduct TDS does not arise on a person for payments which have been disclosed by the payees in their tax return as income and taxes are paid on the same.

Brief Background

• The taxpayer is a resident Individual for the purposes of Income Tax Act, 1961 (‘the Act’);
• The taxpayer has failed to deduct TDS on payments to NBFCs towards interest on loans procured from the same;
• The Assessment order issued by the AO had disallowed the interest expenditure under Section 40(a)(ia) of the Act and added the same to the total income;
• Aggrieved by the order, the taxpayer filed an appeal before the Mumbai Income Tax Appellate Tribunal (‘ITAT’) challenging the AO’s decision;
• In the first round of appeal, ITAT remanded the case to the AO to verify if the NBFCs had disclosed the interest payments made by the taxpayer as income in their tax return and paid taxes on the same;
• In this connection, the taxpayer was required to provide necessary evidence to support AO’s verification process;
• In this regard, the Division Bench of ITAT (‘the Bench’) has conducted the second round of appeal.

Key points from the ruling

• The Bench has observed that the second proviso to Section 40(a)(ia) of ITA reduces the rigours of said section. The aforementioned proviso states the liability to deduct TDS does not arise for payments to residents which are shown as income by the payees in their tax returns and the taxes are paid on the same;
• The taxpayer had furnished Form 26A – a certificate issued by a Chartered Accountant under Section 201(1) of the Act, as evidence certifying that the payee NBFCs had furnished the tax return including the interest payment as income and paid due taxes;
• The AO however contended that the taxpayer has not provided necessary evidence/documents for verification since documents like ITR, audit report, proof of tax payment were not provided by the same;
• The Bench held that the taxpayer had discharged his onus upon furnishing Form 26A. The Bench further held that the AO is adequately empowered under the Act to seek information directly from the relevant payees than to expect the taxpayer to obtain and furnish the details, for examination of the veracity of disclosures made in Form 26A;
• With the above points said, the Bench ruled that if the payees are found to have disclosed the interest payments received from the taxpayer in their respective returns and paid taxes on the same thereon, no liability to deduct TDS would arise on such payments to the taxpayer.