Year of allowance of expenditure u/s 40(a)(i)?

With effect from April 1, 2013, the provisions of section 201 of the Act provides that where taxpayer fails to withhold taxes or fails to deposit taxes so withheld on payments to resident payee, such taxpayer shall not be considered to be an 'assessee in default', if such resident payee:

• furnishes its income-tax return;

• accounts into such payments for computing income in its income-tax return;

• pays tax due on such income declared; and

• furnishes Chartered Accountant's certificate in relation to above.

However, the above provisions were not applicable in case of payments to non-resident payee.

Now the amendment has been made as follows:

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",—

 (a) in the case of any assessee—

 (i) any interest (not being interest on a loan issued for public subscripttion before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—

 (A) outside India; or

 (B) in India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Following second proviso shall be inserted after the existing proviso to sub-clause (i) of clause (a) of section 40 by the Act No. 23 of 2019, w.e.f. 1-4-2020 :

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years. Whether the amendment is retrospective or not is a debatable issue.