A recent ruling by the Tax Tribunal (Rajeev Kumar Agarwal Vs. Additional CIT) mitigates Dis allowance arising out of TDS non-compliance by Taxpayers on payments made to residents in India. Here’s a quick summary of the ruling –

• The Dis allowance provision

If you don’t deduct taxes on payment which are subjected to  Tax Deduction  obligations, the payment made (i.e. expenditure incurred) would not be allowed as deduction

• Relief under Law

Finance Act 2012 created a “relief mechanism” for such dis allowance. If the tax-payer could prove (by furnishing an accountant’s certificate from the recipient) that the recipient has included the amount paid as his income in his Tax return and paid taxes on it, then the dis allowance would not operate. The relief mechanism was stated to be effective from April 1, 2013

• The Controversy

Whether a tax-payer can opt for relief under the above route even for earlier years, when the relief mechanism was not incorporated in law

• Ruling by the Tax Tribunal

Yes, relief mechanism can be availed even for the dis allowance suffered by Tax payer in earlier years (i.e. prior to 1st April,  2013) even though the relief mechanism was stated to be effective from April 1, 2013.

• What Tax payers can do to avail benefit of the ruling

In every case where a Tax payer has suffered a dis allowance – irrespective of the year of such dis allowance – the Tax payer can obtain an accountant’s certificate from the recipient of the payment to establish that the payment has been included by the recipient in his tax return. This would help fortify Taxpayer’s claim for the deduction.

The Legalese of the ruling 

• Relief Mechanism is Curative in nature

Insertion of the second proviso to section 40(a)(ia) is curative in nature and has retrospective effect from April 1, 2005 – the date of insertion of section 40(a)(ia)