Amendment to sec. 40(a)(ia) vide Finance Act, 2010 was retrospective in nature

 ITAT RAJKOT BENCH

Rana Builders

versus

Income-tax Officer, Ward 1(2), Junagadh

IT Appeal Nos. 523 & 524 (Rajkot) of 2012
[ASSESSMENT YEAR 2006-07]

JANUARY  24, 2013

ORDER

D.K. Srivastava, Accountant Member

Both the appeals have been filed by the assessee. They relate to assessment year 2006-07. While the appeal bearing ITA No. 524/Rjt/2011 is directed against the order passed by the Commissioner of Income-tax on 18-03-2011 u/s 263 of the Income-tax Act by which he has set aside the original order of assessment passed by the AO u/s. 143(3) on 19-11-2008, the other appeal bearing ITA No.523/Rjt/2012 is directed against the order passed by the Commissioner of Income-tax (Appeals) on 20-06-2012. They are being disposed of by a consolidated order for the sake of convenience.

2. The assessee is a firm. It is engaged in the business as a civil contractor. It filed its return of income for the assessment year under appeal on 29-12-2006 returning total income at Rs. 38,960/-. Assessment u/s 143(3) was completed on 19-11-2008 assessing the total income at Rs. 97,670/- after disallowing a sum of Rs. 40,000/- out of labour expenses and 10% out of telephone expenses, petrol expenses and travelling expenses.

3. In exercise of powers conferred by section 263 of the Income-tax Act, the ld. Commissioner of Income-tax called for the records and examined them. He found that the Assessing Officer has completed the assessment without examining the issue in the light of the provisions of section 40(a)(ia). He noticed that a sum of Rs. 70,47,160/- and Rs. 20,82,537/- was paid to M/s. Rajdhani Construction and M/s. Parth Construction without deduction of tax at source. According to him, the AO was required to consider the applicability of section 40 (a)(ia) of the Income-tax Act in respect of the aforesaid two amounts but the AO did not do so while competing the assessment. He therefore set aside the assessment order passed by the AO u/s 143(3) on 19-11-2008, with the following observations:-

“5. Assessing Officer is directed to disallow the sub-contract payment to M/s. Rajdhani Construction of Rs. 70,47,160/- u/s.40(a)(ia) of the I.T. Act. Similarly, sub-contract payment of Rs. 20,82,537/- to M/s. Parth Construction should also be verified with reference to payment being made in the Govt. Account on or before the due date of filing of return. In view of these facts and circumstances, I hereby set-aside the original 143(3) order dated 19.11.2008 by ITO, Ward 2 (2), Junagadh. Assessing Officer is directed to make proper disallowance u/s.40(a)(ia) of the I. T. Act after giving due opportunity of being heard to the assessee before framing the new assessment order.”

4. In pursuance of the aforesaid directions, the Assessing Officer has passed another assessment order on 28-09-2011 u/s143(3) r.w.s. 263 of the I-T Act assessing the total income at Rs. 71,44,830/- after disallowing a sum of Rs. 70,47,160/-, with the following observations:-

“5. Hence, the assessee cannot get benefit of amendment to section 40(a)(ia) in the assessment year under consideration. As per provisions of section 194C and 200(1) of the I.T. Act, T.D.S. on payment of Rs. 70,47,160/-was required to be deducted and deposited into Govt. A/c. by 31.03.2006 Deposit in Govt. A/c. was made much later i.e. on 05-10-2006 instead on before 31.03.2006. Therefore the sub contract payment of Rs. 70,47,160/- is disallowed u/s. 40(a)(ia) of the Act.”

5. Aggrieved by the aforesaid order of assessment, the assessee filed appeal before the CIT (A), which was dismissed by him with the following observations:-

“6. I have gone through the assessment order and submissions of appellant. The assessment order has been passed by the Assessing Officer in pursuance of the directions of CIT-III, Rajkot u/s.263 of the I.T. Act with the remark that:

“Assessing Officer is directed to disallow the sub contract payment to M/s. Rajdhani Construction of Rs. 7047160/- u/s.40(a)(ia) of the IT Act. Similarly, sub-contract payment of Rs. 2082537/- to Ms. Parth Construction should also be verified with reference to payment being made in the Govt. Account on or before the due date of filing of return.”

CIT-III, Rajkot has given clear directions to the Assessing Officer in respect of disallowance of sub contract payment to M/s. Rajdhani Construction of Rs. 7047160/-. The assessment order of the Assessing Officer is simply giving effect to the direction of CIT-III, Rajkot in respect of disallowance of sub contract payment to M/s. Rajdhani Construction of Rs. 7047160/-.

Therefore no appeal can be filed before CIT (A) u/s.246A of the I.T. Act in respect of directions of CIT-III, Rajkot u/s.263 of the I.T. Act in respect of disallowance of sub contract payment to M/s. Rajdhani Construction of Rs. 7047160/-. The only possibility of filing appeal against the order of the Assessing Officer could arise in respect of the other direction of CIT-III, Rajkot where he directed the Assessing Officer to verify the TDS payment being made in the Govt. Account on or before the due date of filing of return. As far as other directions of CIT-III, Rajkot in respect of sub-contract payment of Rs. 2082537/ to M/s. Parth Construction is concerned, the Assessing Officer verified that the TDS of such payment made in March 2006 was deposited before the due date for filing the return of income in Gujarat Region and therefore did not make any disallowance and therefore the question of filing any appeal before CIT (A) by the appellant does not arise. In nutshell, I find that appellant had accepted the directions of CIT-III, Rajkot in respect of disallowance of sub contract payment to M/s. Rajdhani Construction of Rs.7047160/- when the order u/s.263 was passed by CIT-III, Rajkot and did not prefer an appeal before Hon’ble ITAT where any appeal against the order u/s.263 could be filed. Appellant has filed appeal against the assessment order giving effect to the order of CIT u/s.263 in respect of disallowance of sub contract payment to M/s. Rajdhani Construction of Rs.7047160/- where there was no discretion with the Assessing Officer against which the appellant could have filed appeal u/s.246A of the I.T. Act. Therefore, I find that appellant has incorrectly filed appeal u/s.246A against the order of Assessing Officer giving effect to clear directions of CIT-III, Rajkot of disallowance of sub contract payment to M/s. Rajdhani Construction of Rs. 7047160/- u/s.263 of the I.T. Act. The appeal of the appellant in this regard before CIT (A) is invalid and therefore is dismissed.”

6. Aggrieved by the order passed by the ld. Commissioner of Income-tax u/s 263 and the order passed by the ld. CIT (A) on 20-06-2012, the assessee is now in appeal before this Tribunal.

7. In ITA No.524/Rjt/2011, the assessee has taken the following grounds of appeal:-

1.            The Learned C.I.T.-III, Rajkot erred in issuing notice u/s.263 of the Act, as a consequence of which order u/s.263 passed by him is bad in law.

2.            The Learned C.I.T.-III, Rajkot erred in setting aside the original order u/s.143(3) passed by the I.T.O. Ward 2(2), Junagadh and further erred in directing the I.T.O. to make disallowance u/s.40(a)(ia) of the Act.

3.            The earlier C.I.T.-III, Rajkot failed to appreciate that the Proviso to clause (ia) was clarificatory in nature and hence it ought to have been applied to the year under appeal.

8. The aforesaid appeal filed by the assessee is barred by limitation by as many as 485 days. The assessee has applied for condonation of delay. Written submissions filed by the assessee in this behalf read as under:-

“The appellant abovenamed has preferred appeal before the Hon’ble Tribunal against order u/s.263 passed by the C.I.T.-III, Rajkot. The said appeal is delayed by 485 days. An affidavit from the appellant in support of the reasons for the said delay is enclosed herewith. The relevant dates of the history of assessment for the year under appeal may be stated here as under:-

It is most respectfully submitted in this regard as under:

(i)           After the passing of order u/s.263 whereby the A.O. was directed to make proper disallowance u/s.40(a)(ia) of the Act after giving due opportunity of being heard to the assessee before framing the fresh assessment order, the I.T.O., Junagadh initiated proceedings for fresh assessments. Letter of inquiry dated 26-8-2011 was also issued by the I.T.O. During the said proceedings, written submissions were filed by the appellant and personal attendance was also made. Thereafter, the I.T.O. passed a speaking order which has been passed u/s.143(3) of the Act r.w.s. 263. Against the said order, appeal u/s.246A(1)(a) of the Act was preferred by the appellant under bonafide belief that appeal would lie before the first appellate authority, particularly because the fresh order was passed by the I.T.O. u/s.143(3) of the Act. Thus, the appellant was pursuing alternative remedy in law. However, now that the C.I.T. (Appeals) has taken a view that the appeal was invalid, the appellant has filed appeal before the Hon’ble Tribunal u/s.253(c) of the Act. Hence, the appellant pleads that there was reasonable and sufficient cause for the said delay of 485 days in filing the appeal against order of the C.I.T. passed u/s.263 of the Act.

(ii)          In view of above, it is prayed that the delay in appeal of 485 days may kindly be condoned in the interest of justice and in view of the aforesaid reasonable cause.”

9. In reply, the ld. DR opposed the prayer for condonation of delay.

10. We have heard both the parties. There is no dispute that there is delay of 485 days in filing the appeal. The delay is not of a few days or few weeks but as long as of 593 days. In Vedabai alias Vaijayanatabai Baburao Patil v. Shantaram Baburao Patil [2002] 253 ITR 798, it has been held that pragmatic approach should be adopted while exercising discretion in condoning delay but a distinction must be made between a case where the delay is inordinate and a case where the delay is of a few days. Whereas in the former consideration of prejudice to the other side will be a relevant factor and calls for a more cautious approach, in the latter case no such consideration may arise and such a case deserves liberal approach. It is the case of the assessee that it was under bona-fide belief that appeal would lie first before the first appellate authority against the order passed by the AO u/s.143(3) pursuant to the directions given by the Commissioner u/s.263 and therefore it has not filed appeal before this Tribunal against the order passed by the Commissioner. The aforesaid submission is completely unsupported by any material on record. The assessee has not placed any material to suggest the advice given by any competent professional on the lines pleaded by the assessee. The assessee was represented by qualified professionals before the AO, the Commissioner and also before the CIT(A). In the absence of any material to support that the assessee had formed the aforesaid belief bona-fide, it is not possible to condone such inordinate delay. Besides, the ld. Commissioner has merely set aside the order of assessment originally passed by the AO with the direction to pass a fresh assessment order after hearing the assessee. In view of the foregoing, the appeal filed by the assessee is dismissed.

11. In ITA No.523/Rjt/2011, the assessee has taken the following grounds of appeal:-

1.            The Learned C.I.T.(Appeals)-IV, Rajkot erred in holding that the appeal filed before him against order u/s.143(3) r.w.s..263 of the Act was invalid.

2.            The Learned C.I.T.(Appeals)-IV, Rajkot erred in dismissing the appeal filed by the appellant and hence erred in upholding the order u/s.143(3) making addition of Rs.70,47,160/- u/s.40(a)(ia) of the Act.

12. We have heard both the parties. The appeal filed by the assessee is barred by limitation of 09 days. The period of delay is nominal. The ld. Departmental Representative has also not opposed the prayer of the assessee for condonation of delay. Following the principles laid down in Vedabai alias Vaijayanatabai Baburao Patil (supra), delay of 09 days in filing the appeal is condoned. Appeal is admitted.

13. In support of appeal, it was submitted that the assessee had paid a sum of Rs. 17,47,160/- to M/s. Rajdhani Construction in the month of March, 2006 on which tax was also deducted at source on 31-03-2006. It was further submitted that the tax so deducted at source on 31-03-2006 was paid before the due date of filing of the return of income u/s 139(1) of the Income-tax Act. In support of the proposition that section 40(a)(ia) would not apply if the tax deducted at source is paid over to the Government before the due date for filing the return of income u/s 139(1). In support of the aforesaid proposition, the ld. AR relied upon the judgment of the Hon’ble Calcutta High Court in Virgin Creations.

14. In reply, the ld. DR supported the order passed by the CIT (A).

15. We have heard both the parties and carefully considered their submissions. Section 40(a)(ia), as it is now worded, reads as under:

“Amounts not deductible.

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)           ………..

(ia)         any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), 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.]

Explanation.- ………………”

*Substituted for the following by the Finance Act, 2010, w.e.f. 1-4-2010:

“has not been paid,-

(A)         in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or

(B)         in any other case, on or before the last day of the previous year:”

Prior to its substitution, the quoted words were substituted by the Finance Act, 2008, w.r.e.f. 1-4-2005.

**Substituted by the Finance Act, 2010, w.e.f. 1-4-2010. Prior to its substitution, proviso as substituted by the Finance Act, 2008, w.r.e.f. 1-4-2005, read as under:

“Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted-

(A)         during the last month of the previous year but paid after the said due date; or

(B)         during any other month of the previous year but paid after the end of the said previous year,

such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”

16. The matter under appeal relates to assessment year 2006-07. The provisions of section 40(a)(ia) as they existed at that time stipulated not only deduction of tax at source but also its deposit with the Government within the same year. The rigours of section 40(a)(ia) were relaxed by the Finance Act, 2010 w.e.f. 1.4.2010 to enable an assessee to pay the tax deducted by him at source under Chapter XVII-B of the Income-tax Act on or before the due date specified in sub-section (1) of section 139. In its judgment dated 23rd November 2011 in CIT v. Virgin Creations [ITAT No. 302 of 2011, dated 23-11-2011] the Hon’ble Calcutta High Court has taken the view that the aforesaid relaxation introduced by the Finance Act 2010 w.e.f. 1.4.2010 would be available in earlier years also. The ld. authorised representative for the assessee has filed a copy of the aforesaid judgment, which reads as under:

“The Court: We have heard Mr. Nizamuddin and gone through the impugned judgment and order. We have also examined the point formulated for which the present appeal is sought to be admitted.

It is argued by Mr. Nizamuddin that this court needs to take decision as to whether section 40(a)(ia) is having retrospective operation or not.

The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April 1, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i. e., well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed.

Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., has already decided that the aforesaid provision has retrospective application. Again, in the case reported in 82 ITR 570, the Supreme Court held that the provision, which has inserted the remedy to make the provision workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the sections as well.

In view of the authoritative pronouncement of the Supreme Court, this court cannot decide otherwise. Hence we dismiss the appeal without any order as to costs.”

17. Following the aforesaid judgment, we agree with the ld. authorized representative for the assessee that disallowance u/s 40(a)(ia) would not be called for where the assessee has deducted the tax at source in conformity with Chapter XVII-B of the Income-tax Act and paid over the same to the Government on or before the due date specified in sub-section (1) of section 139. However, the condition precedent for the applicability of the aforesaid judgment is that the assessee must have deducted the tax at source in conformity with the provisions of Chapter XVII-B of the Income-tax Act.

18. Bare perusal of the scheme of Chapter XVII-B shows that it mandates the person responsible for paying any sum out of which tax is required to be deducted at source to deduct the requisite amount of tax at source out of the amounts paid/credited by him. Deduction of tax is made out of the amounts paid/credited by the person responsible for paying/crediting the same. They further require the person responsible for deduction of tax at source to furnish a certificate of deduction of tax at source in the prescribed format detailing the date of payment/credit, amount paid/credited, amount of tax deducted at source out of such payments, etc. Section 194 requires deduction of tax at source out of payments made to the deductee. Section 199 provides that any deduction made in accordance with the provisions of Chapter XVII-B of the I-T Act shall be treated as payment of tax on behalf of the person from whose income the deduction is made. It thus follows that tax must be deducted out of the amount paid/credited by the assessee. Though it is stated by the AO that tax has been deducted at source in the present case, it does not come out from his order whether such tax was deducted at source out of the amounts paid/credited by the assessee. In this view of the matter, the issue under appeal is restored to the file of the AO with the direction to verify as to whether the assessee has deducted the tax at source out of payments made to the deductee. For this purpose, he will examine the books of account as also the TDS certificates issued by the assessee. If he finds that the assessee has duly deducted the tax at source out of payments made by him in conformity with Chapter XVII-B of the Income-tax Act and also deposited the same with the Government on or before the due date specified in sub-section (1) of section 139, he will not make any disallowance u/s 40(a)(ia) in terms of the judgment in Virgin Creations (supra). The AO shall however disallow the impugned sum if he finds that the assessee has either not deducted the requisite amount of tax at source out of amounts paid/credited by the assessee or that the amount so deducted was not paid to the Government on or before the due date specified in sub-section (1) of section 139. Reasonable opportunity of hearing shall be given by the AO to the assessee. The appeal filed by the assessee is treated as allowed for statistical purposes.

19. In view of the foregoing, appeal bearing ITA No.524/Rjt./12 is dismissed while the appeal bearing ITA No.523/Rjt/2012 is treated as allowed for statistical purposes.