Second Proviso to Sec 40(a)(ia) being not curative by nature does not have retrospective effect: HC

Brief of the case:

The Hon’ble Kerala HC in the case of Thomas George Muthoot vs. CIT held that the second proviso to sec 40(a)(ia) is not curative by nature , the same is an additional remedy to provide non-disallowance in certain tax deduction default cases. Thus, being not curative the second proviso does not have retrospective effect.

Facts of the case:

• The assessee is a partner in a firm who paid interest on funds withdrawn from firm. The said payment was made to firm without deducting tax at source. As such the AO disallowed the same u/s 40(a)(ia) of the Act. Thus, AO made an addition to the tune of Rs. 6,28,28,000/- to the total returned income.
• The order of AO was upheld by CIT(A) as well as tribunal on the ground since there was failure to deduct tax the fact that income has been offered to tax by payee cannot cure assessee’s failure in the absence of any such compensatory provision for the relevant assessment year.
• Against such order of tribunal the assessee is in appeal before High Court.

Contention of Assessee:

• The failure to deduct tax has been cured by payee’s including the interest in its total income and the same has been provided by second proviso to Sec 40(a)(ia) inserted by Finance Act , 2012.
• Such a provision is curative in nature and therefore, would have retrospective effect. In this regard the assessee relied  on  Apex Court’s Hindustan Coca Cola Beverages Pvt. Ltd. [(2007) 293 ITR 226].
• Further, relying on the decision of Allahabad HC in the case of Vector Shipping Services (P) [(2013) 357 ITR 642] , it was contended that assessee had already paid the amount and therefore, the provisions of Section 40(a)(ia), applicable only in respect of the amount which remains to be payable on the last day of the financial year, is not attracted.

Contention of Revenue:

• The inclusion or non-inclusion of sums (subject to TDS) in total income by payee has nothing to do with the disallowance made u/s 40(a)(ia) which is on failure to deduct tax at source as required to be deducted u/s 40(a)(ia).
• The claim of benefit under second provision to sec 40(a)(ia) cannot be allowed for the assessment year relevant to case because the amendment has been made by Finance Act ,2012 and does not have retrospective as the same has been given prospective effect by statute i.e. w.e.f. f. April 1,2012.

Held by High Court:

• The High court considered the various contention of assessee and disposed off them one by one.
• The first contention that Second Proviso to Sec 40(a)(ia) inserted by Finance Act,  2012 which provides that if there was failure to deduct tax  as per provisions of Chapter XVII-B but  such amount has been included in total income by payee then the sum cannot be disallowed u/s 40(a)(ia) in the hands of payer.
• The contention of assessee is not tenable because the second proviso inserted to Sec 40(a)(ia) was not retrospective in nature . Because in tax laws, only those provisions which are curative by nature or which have expressly provided to have been retrospective effect can only be retrospective, except in these cases all new provisions to have prospective effect.
• Reading of the second proviso does not show that it was meant or intended to be curative or remedial in nature, and even the appellants should not take the same in that way. Instead, by this proviso, an additional benefit was conferred on the assessees. Such a provision can only be prospective.
• Further, it has been also contended that the sum can be disallowed only if there was failure to deduct tax and the same remained payable at the last day of financial year. Such contention of assessee is not acceptable because if sec 40(a)(ia) interpreted in such a manner then there would be sharp discrimination i.e. some failures facing disallowance and other not facing just because the sum has been paid or remained payable.