s 40(a)(i) for failure to deduct TDS

By TG Team Income Tax Judiciary November 8, 2013

TaxGuru Citation: 2013 taxguru.in 1118
Case Name: Metro & Metro Vs Additional Commissioner of Income Tax (ITAT Agra)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Related Assessment Year: 2008- 09
Courts: All ITAT, ITAT Agra

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Dis allowance U/s. 40(a)(i) cannot be made in a situation in which tax ability is confirmed only as a result of retrospective amendment of law

Issue – Dis allowance of Rs 52,07,883, in respect of leather testing charges paid to TUV Product Und Umwelt GmbH – a tax resident of Germany, under section 40(a)(i) of the Act, on the ground that the assessee failed to discharge his tax withholding obligations in respect of the same.

In our considered view, the provisions of Section 40(a)(i) cannot be interpretated in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year, because, apart from the difference in wording of Section 40(a)(i) vis-a-vis Section 40(a)(ia) and other factors, such an interpretation will make the section redundant and it is one of the fundamental principles of interpretation is to interpret is ut res magis valeat quam pereat, i.e., in such a manner as to make it workable rather than redundant, and to understand the words with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. It is also an elementary legal principle, as was also held by Hon’ble Bombay High Court in the case of CIT Vs Sudhir Jayantilal Mulji (214 ITR 154) that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein.31. Learned counsel also submits in any event, it is because of a retrospective amendment in law . It is submitted that the retrospective amendment was brought about by the Finance Act 2010 which was nowhere in sight at the material point of time, i.e. previous year relevant to the assessment year 2008- 09. Learned counsel submits that the assessee cannot be penalized for performing the impossible task of deducting tax at source in accordance with the law which was brought on the statute book much after the point of time when tax deduction obligations were to be discharged. Our attention is invited to the decisions of a coordinate bench in the case of Channel Guide India Ltd Vs ACIT (139 ITD 49), wherein, following the views expressed by Ahmedabad bench in the case of Sterling Abrasives Ltd Vs ITO (ITA No. 2234 and 2244/Ahd/2008; order dated 2008), it is held that law cannot cast the burden of performing the impossible task of performing tax withholding obligations with retrospective effect, and, accordingly, the dis allowance under section 40(a)(i) cannot be made in a situation in which tax ability is confirmed only as a result of retrospective amendment of law. Learned counsel has also cited several other decisions in support of the proposition that in the case of retrospective amendment, the assessee cannot be punished for not complying with the law as it did not exist at the material point of time.

Even as we do not think that the provisions of Section 40(a)(i) are penal provisions in nature, particularly as the related deduction is allowed even in a subsequent period when tax withholding obligation is discharged, and even as we are alive to the fact that we are not dealing with consequences of non tax deduction of tax at source under section 201, as was the position in the case of Sterling Abrasives Ltd (supra), once there is a coordinate bench decision on this issue in favor of the assessee as in the case of Channel Guide (supra), and such a decision is not a manifestly erroneous decision, we see no reasons to take any other view of the matter than the view so taken by the coordinate bench. It is hardly necessary to emphasize that considerations of judicial propriety and decorum require us to normally follow the coordinate bench decision unless there are very strong and compelling reasons to refer the matter to larger bench. It is not one of those cases. We are inclined to agree with this view which also seems to be reasonable and justified. In the case of Channel Guide (supra), the coordinate bench has observed that the amount paid to the foreign enterprise was not taxable in India in the light of the legal position as it prevailed at that point of time, and it became taxable in India only as a result of the retrospective amendment in Section 9(1), the said payment cannot be disallowed by invoking section 40(a)(i). The situation is the same here. It is only as a result of the amendment in Section 9(1), by the virtue of Finance Act 2010, that the training fees paid to the TUV GmbH can be said to be taxable in India. As for the earlier period, even though the amendment is said to be merely clarifiactory in nature, in view of Hon’ble Supreme Court’s judgment in the case of Ishikwajima (supra) and in view of the fact that services were rendered outside India – even if utilized in India, the impugned leather testing fees was not taxable in India. Such being the position, and respectfully following the decision of coordinate bench in the case of Channel Guide (supra), we hold that the dis allowance under Section 40(a)(i) cannot be invoked on the facts of this case.

In the light of the above discussions, and for the reasons set out above, we delete the dis allowance of Rs. 52,07,883. The assessee gets the relief accordingly.

INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA

[Coram : Bhavnesh Saini JM and Pramod Kumar AM]

I.T.A. No.: 393/Agra/2012 Assessment year: 2008-09

Metro & Metro

Vs.

Additional Commissioner of Income Tax

Date of pronouncing the order : November 01, 2013

ORDER