My payee has already paid the tax on the interest I paid him without deducting TDS. Can I use the second proviso to s.40(a)(ia) for an earlier year?
Not in Kerala. The Kerala High Court held that the second proviso to s.40(a)(ia), inserted by the Finance Act 2012 with effect from 1 April 2013, is prospective only, because it confers an additional benefit rather than removing an unintended hardship, and so cannot rescue a disallowance for an earlier assessment year. The Court also held that the fact that the recipient has since paid the tax does not undo the disallowance, Hindustan Coca Cola being confined to s.201(1).
Decided by the High Court (Antony Dominic J and Shaji P. Chaly J) on 2015-07-03, reported as ITA Nos. 278, 279, 282, 283, 288, 289, 290 and 292 of 2014 (Kerala High Court). It bears on section 40(a)(ia), section 194A, section 194A(1), section 44AB, section 201(1), section 43B of the Income Tax Act 1961, in TDS Defaults, Deductions & Disallowances and How Tax Law Is Read matters.
This is the other side of the line from the Delhi High Court's view in CIT v Ansal Land Mark Township, which treats the same proviso as declaratory and retrospective. A reader with a pre-AY 2013-14 disallowance needs to know which High Court he is in before he builds his appeal on Form 26A. The decision also disposes of two other arguments that are still pleaded: that an individual is outside s.194A altogether, and that s.40(a)(ia) reaches only amounts still 'payable' on the last day of the year — the second of which the Supreme Court later closed in Shree Choudhary Transport.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The appellants — Sri Thomas George Muthoot (ITA Nos. 278 and 279 of 2014), Sri Thomas Muthoot (ITA Nos. 282, 289 and 290 of 2014) and Sri John Muthoot (ITA Nos. 283, 288 and 292 of 2014) — were partners in firms. During assessment years 2005-06, 2006-07 and 2007-08 they drew amounts from their firms and paid interest to the firms without deducting tax at source. The Assessing Officer disallowed the interest under s.40(a)(ia); for the assessment year 2006-07 in one of the appeals the addition was Rs.6,28,28,000. The Commissioner (Appeals) confirmed, and the Tribunal dismissed the further appeals by a common order dated 28 August 2014. Before the High Court the assessees argued four things: that an individual is excluded from the obligation to deduct under s.194A(1); that the second proviso to s.40(a)(ia), inserted by the Finance Act 2012 with effect from 1 April 2013, was curative and therefore retrospective, relying on Allied Motors and Alom Extrusions; that Hindustan Coca Cola Beverages applied because the payee firms had already paid the tax; and that following the Allahabad High Court in Vector Shipping Services the disallowance was confined to amounts remaining payable on the last day of the year. The Tribunal had recorded a specific finding that the assessee's business income exceeded the s.44AB limit so that the proviso to s.194A(1) brought him within the deduction obligation.
The appeals were dismissed and all the questions of law were answered against the assessees. The exclusion of individuals and HUFs in s.194A(1) is cut down by the proviso inserted by the Finance Act 2002, and the burden lies on the individual claiming the exclusion to establish that his turnover did not exceed the s.44AB limits; on the Tribunal's unrebutted finding it did (paragraphs 8 to 10). The second proviso to s.40(a)(ia) was introduced with effect from 1 April 2013, confers an additional benefit rather than a cure for unintended hardship, and is therefore prospective (paragraph 15). Section 40(a)(ia) is automatic on failure to deduct, and the subsequent payment of tax by the recipient does not absolve the payer; Hindustan Coca Cola was decided on s.201(1), whose object is compensatory, and does not assist (paragraph 16). The disallowance is not confined to amounts remaining payable at the year end (paragraph 17).
On the individual-payer point the Court read s.194A(1) with its proviso and held that the exclusion of individuals and HUFs survives only for those below the s.44AB monetary limits, so that a person claiming it must prove he is within it; no such contention had been urged before the statutory authorities and nothing was produced to displace the Tribunal's finding (paragraphs 8 to 10). On retrospectivity the Court set the second proviso against Allied Motors (P) Ltd and Alom Extrusions, where the first proviso to s.43B was held remedial and curative because the section as enacted was causing undue hardship and produced unintended consequences, and found the position here different: the second proviso to s.40(a)(ia) neither says it is retrospective nor reads as curative or remedial, and the appellants did not even contend that it was, so what it does is confer an additional benefit, which can only operate prospectively; this Court had already so held in Prudential Logistics and Transports v ITO (paragraphs 13 to 15). On the payee's payment of tax the Court held that s.40(a)(ia) is in categoric terms and is attracted automatically upon failure to deduct, and that Hindustan Coca Cola was rendered in the different, compensatory setting of s.201(1) (paragraph 16). On 'paid or payable' the Court held that the language of the section does not warrant reading in a requirement that the amount remain payable on the last day of the year, and that accepting the argument would require the Court to alter the statutory language; it preferred the Calcutta and Gujarat High Court view relied on by the Tribunal to the Allahabad view in Vector Shipping Services (paragraph 17).
A statutory provision, unless otherwise expressly stated to be retrospective or by intendment shown to be retrospective, is always prospective in operation.
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Handle my notice → Ask a CA on WhatsAppNot in Kerala. The Kerala High Court held that the second proviso to s.40(a)(ia), inserted by the Finance Act 2012 with effect from 1 April 2013, is prospective only, because it confers an additional benefit rather than removing an unintended hardship, and so cannot rescue a disallowance for an earlier assessment year. The Court also held that the fact that the recipient has since paid the tax does not undo the disallowance, Hindustan Coca Cola being confined to s.201(1). This was decided by the High Court (Antony Dominic J and Shaji P. Chaly J) and bears on section 40(a)(ia), section 194A, section 194A(1), section 44AB, section 201(1), section 43B of the Income Tax Act 1961. It is reported as ITA Nos. 278, 279, 282, 283, 288, 289, 290 and 292 of 2014 (Kerala High Court). This is the other side of the line from the Delhi High Court's view in CIT v Ansal Land Mark Township, which treats the same proviso as declaratory and retrospective. A reader with a pre-AY 2013-14 disallowance needs to know which High Court he is in before he builds his appeal on Form 26A. The decision also disposes of two other arguments that are still pleaded: that an individual is outside s.194A altogether, and that s.40(a)(ia) reaches only amounts still 'payable' on the last day of the year — the second of which the Supreme Court later closed in Shree Choudhary Transport. If it applies to you, the first step is this: Fix the assessment year first. If the disallowance is for AY 2013-14 or later the second proviso applies on its own terms and this decision does not stand in the way.
The appellants — Sri Thomas George Muthoot (ITA Nos. 278 and 279 of 2014), Sri Thomas Muthoot (ITA Nos. 282, 289 and 290 of 2014) and Sri John Muthoot (ITA Nos. 283, 288 and 292 of 2014) — were partners in firms. During assessment years 2005-06, 2006-07 and 2007-08 they drew amounts from their firms and paid interest to the firms without deducting tax at source. The Assessing Officer disallowed the interest under s.40(a)(ia); for the assessment year 2006-07 in one of the appeals the addition was Rs.6,28,28,000. The Commissioner (Appeals) confirmed, and the Tribunal dismissed the further appeals by a common order dated 28 August 2014. Before the High Court the assessees argued four things: that an individual is excluded from the obligation to deduct under s.194A(1); that the second proviso to s.40(a)(ia), inserted by the Finance Act 2012 with effect from 1 April 2013, was curative and therefore retrospective, relying on Allied Motors and Alom Extrusions; that Hindustan Coca Cola Beverages applied because the payee firms had already paid the tax; and that following the Allahabad High Court in Vector Shipping Services the disallowance was confined to amounts remaining payable on the last day of the year. The Tribunal had recorded a specific finding that the assessee's business income exceeded the s.44AB limit so that the proviso to s.194A(1) brought him within the deduction obligation. The matter was decided on 2015-07-03 by the High Court (Antony Dominic J and Shaji P. Chaly J). On those facts the High Court held as follows. The appeals were dismissed and all the questions of law were answered against the assessees. The exclusion of individuals and HUFs in s.194A(1) is cut down by the proviso inserted by the Finance Act 2002, and the burden lies on the individual claiming the exclusion to establish that his turnover did not exceed the s.44AB limits; on the Tribunal's unrebutted finding it did (paragraphs 8 to 10). The second proviso to s.40(a)(ia) was introduced with effect from 1 April 2013, confers an additional benefit rather than a cure for unintended hardship, and is therefore prospective (paragraph 15). Section 40(a)(ia) is automatic on failure to deduct, and the subsequent payment of tax by the recipient does not absolve the payer; Hindustan Coca Cola was decided on s.201(1), whose object is compensatory, and does not assist (paragraph 16). The disallowance is not confined to amounts remaining payable at the year end (paragraph 17).
On the individual-payer point the Court read s.194A(1) with its proviso and held that the exclusion of individuals and HUFs survives only for those below the s.44AB monetary limits, so that a person claiming it must prove he is within it; no such contention had been urged before the statutory authorities and nothing was produced to displace the Tribunal's finding (paragraphs 8 to 10). On retrospectivity the Court set the second proviso against Allied Motors (P) Ltd and Alom Extrusions, where the first proviso to s.43B was held remedial and curative because the section as enacted was causing undue hardship and produced unintended consequences, and found the position here different: the second proviso to s.40(a)(ia) neither says it is retrospective nor reads as curative or remedial, and the appellants did not even contend that it was, so what it does is confer an additional benefit, which can only operate prospectively; this Court had already so held in Prudential Logistics and Transports v ITO (paragraphs 13 to 15). On the payee's payment of tax the Court held that s.40(a)(ia) is in categoric terms and is attracted automatically upon failure to deduct, and that Hindustan Coca Cola was rendered in the different, compensatory setting of s.201(1) (paragraph 16). On 'paid or payable' the Court held that the language of the section does not warrant reading in a requirement that the amount remain payable on the last day of the year, and that accepting the argument would require the Court to alter the statutory language; it preferred the Calcutta and Gujarat High Court view relied on by the Tribunal to the Allahabad view in Vector Shipping Services (paragraph 17). In the words reproduced by the source cited on this page: "A statutory provision, unless otherwise expressly stated to be retrospective or by intendment shown to be retrospective, is always prospective in operation." The decision followed or applied Prudential Logistics and Transports v. Income Tax Officer [(2014) 364 ITR 689 (Ker)] — followed; Allied Motors (P) Ltd. v. Commissioner of Income Tax [(1997) 224 ITR 677 (SC)] — distinguished; Commissioner of Income Tax v. Alom Extrusions Ltd. [(2009) 319 ITR 306] — distinguished; Commissioner of Income Tax v. Hindustan Coca Cola Beverages Pvt. Ltd. [(2007) 293 ITR 226] — distinguished as confined to section 201(1); Commissioner of Income Tax v. Vector Shipping Services (P) [(2013) 357 ITR 642 (All)] — not followed.
It was decided by the High Court on 2015-07-03 and is reported as ITA Nos. 278, 279, 282, 283, 288, 289, 290 and 292 of 2014 (Kerala High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 40(a)(ia), section 194A, section 194A(1), section 44AB, section 201(1), section 43B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed and all the questions of law were answered against the assessees. The exclusion of individuals and HUFs in s.194A(1) is cut down by the proviso inserted by the Finance Act 2002, and the burden lies on the individual claiming the exclusion to establish that his turnover did not exceed the s.44AB limits; on the Tribunal's unrebutted finding it did (paragraphs 8 to 10). The second proviso to s.40(a)(ia) was introduced with effect from 1 April 2013, confers an additional benefit rather than a cure for unintended hardship, and is therefore prospective (paragraph 15). Section 40(a)(ia) is automatic on failure to deduct, and the subsequent payment of tax by the recipient does not absolve the payer; Hindustan Coca Cola was decided on s.201(1), whose object is compensatory, and does not assist (paragraph 16). The disallowance is not confined to amounts remaining payable at the year end (paragraph 17). It arises in TDS Defaults, Deductions & Disallowances and How Tax Law Is Read matters, on section 40(a)(ia), section 194A, section 194A(1), section 44AB, section 201(1), section 43B of the Income Tax Act 1961, and was decided by Antony Dominic J and Shaji P. Chaly J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For an earlier year, check the jurisdictional High Court before pleading retrospectivity: the Kerala view here is prospective, the Delhi view in Ansal Land Mark is retrospective, and the Tribunal is bound by its own High Court. If you are an individual or HUF resisting s.194A liability, put the turnover evidence on record at the assessment stage — the Court refused the point here because the Tribunal had recorded an unrebutted finding that business income exceeded the s.44AB limit and nothing was produced to contradict it. Do not rely on Hindustan Coca Cola to resist a s.40(a)(ia) disallowance; the Court held it was decided in the compensatory context of s.201(1) and does not travel to s.40(a)(ia). Where the payee has in fact returned the income and paid the tax, obtain the accountant's certificate in Form 26A and route the relief through the first proviso to s.201(1) rather than through an argument about retrospectivity.
High Courts differ on this point. This judgment is in open conflict with other High Courts and a practitioner's answer may turn on where the matter lies. The Karnataka High Court refused to follow it in CIT v S M Anand (23 August 2019): at para 13 the Bench said 'With due respect, we are unable to subscribe to the view of the Hon'ble Kerala High Court in the decision referred to supra', and held the second proviso to section 40(a)(ia) retrospective from 1 April 2005, answering the question against the Revenue. The same judgment records at para 10 that the Allahabad High Court had already 'respectfully expressed its opinion to disagree with the judgment of Hon'ble Kerala High Court', on the footing that the Kerala Bench 'did not have the benefit of authority of Constitution Bench in Vatika Township Private Ltd.' The only other superior-court citation, CIT v S.P. Balasubrahmanyam (Madras High Court, 29 August 2019), is no treatment at all: the judgment appears in the Revenue's list of substantial questions and the appeals were dismissed on low tax effect under CBDT Circular 17/2019 with the questions left open. A search of Supreme Court material found no decision resolving whether the second proviso is retrospective. In Kerala the judgment stands; in Karnataka, and on the Allahabad view, the opposite conclusion governs. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This document is sometimes dated 28 August 2014. That is the date of the Tribunal's common order under appeal, not of this judgment; the judgment's own last line reads 'Dated this the 3rd day of July, 2015', and 2015-07-03 is what is recorded here. The judgment runs from paragraph 1 to paragraph 17 followed by an unnumbered disposal; there is no paragraph beyond 17. Paragraph 17 relies on the Calcutta High Court in Crescent Exports Syndicate and the Gujarat High Court in Sikandarkhan N Tunvar on the 'paid or payable' question; the Supreme Court settled that question the same way in Shree Choudhary Transport Co. v ITO in 2020, which is already in this library. No Supreme Court decision on the appeals from this judgment is recorded, and no claim is made about one. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed and all the questions of law were answered against the assessees. The exclusion of individuals and HUFs in s.194A(1) is cut down by the proviso inserted by the Finance Act 2002, and the burden lies on the individual claiming the exclusion to establish that his turnover did not exceed the s.44AB limits; on the Tribunal's unrebutted finding it did (paragraphs 8 to 10). The second proviso to s.40(a)(ia) was introduced with effect from 1 April 2013, confers an additional benefit rather than a cure for unintended hardship, and is therefore prospective (paragraph 15). Section 40(a)(ia) is automatic on failure to deduct, and the subsequent payment of tax by the recipient does not absolve the payer; Hindustan Coca Cola was decided on s.201(1), whose object is compensatory, and does not assist (paragraph 16). The disallowance is not confined to amounts remaining payable at the year end (paragraph 17).
TaxSphere, “Thomas George Muthoot v CIT”, https://taxnotice.vittsphere.com/caselaw/case/thomas-george-muthoot-40aia-second-proviso-prospective/ (validity last checked 2026-09-08)
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My bank has deducted tax on my fixed deposit interest and I was told the limit had gone up. My father is a senior citizen and his bank deducted too. There is also a loan I took from a friend on which I pay interest, and a co-operative society that pays me interest on a deposit. Who exactly has to deduct under section 194A, on what amount, and what are the limits as they stand now?
We are a co-operative bank. The TDS officer says we should have deducted tax under s.194A on fixed deposit interest paid to co-operative housing societies that are not our members, and has treated us as an assessee in default. Is he right?
The department has raised s.201 demands on our co-operative bank for not deducting tax on time deposit interest paid to members in years before June 2015. Does the Finance Act 2015 amendment to s.194A(3)(v) apply to those years?
Our co-operative society pays interest to members, to other co-operative societies and to outsiders. Which of these payments carry a TDS obligation under s.194A?
