Amendment to S. 40(a)(ia) retrospective – ITAT Follows HC

The issue involved in the present appeal has now been decided by the Hon’ble Calcutta High Court in the case of CIT v. Virgin Creation in GA No. 3200/2011 dated 23-11-2011 against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd. v. DCIT in ITA No.2404/Mum/2009 in order dated 12-09-2011 has taken a view that the amendment is prospective in nature and would apply accordingly. Respectfully following the decision of Hon’ble Calcutta High Court in the case of Virgin Creators (supra) the order of Ld. CIT(A) is not sustainable. Hence, this ground of assessee’s appeal is allowed. The Assessing Officer is directed to delete the dis allowance of Rs.3,69,568/- as made u/s. 40(a)(ia) of the Act.

INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD

ITA No. 2869/Ahd/2011 – Assessment Year: 2005- 06

M/s. Alpha Projects Society P. Ltd V/s. DCIT

Date of Pronouncement 23-03-2012

O R D E R

PER Kul Bharat, Judicial Member:-

The present appeal has been filed by the assessee against the order directed by Ld. Commissioner of Income-tax (Appeals)-I, Baroda dated 14-09- 2011 for assessment year 2005-06.

2. The facts in brief are that the in this case the assessment u/s. 143(3) of the Income-tax Act, 1961 was completed on 24-04-2007. Subsequently it was noticed by the Assessing Officer that the income chargeable to tax has escaped income and a notice u/s. 148 of the Act after recording the reasons u/s. 147 of the Act was served upon the assessee on 22-02-2010. The reasoning given for reopening of the assessment reproduced as under:-

“From the perusal of the return of income filed by the assessee it is seen that assessee company made payment to contractors and to professional and technical service. TDS was deducted on various dates from April 2004 to Feb 2005, but paid after the financial year i.e. 313.2005 i.e. assessee had remitted the TDS amount in govt. Account on 11.4.2005 and 6.4.2005.

In view of the above facts of the case and the provisions of law, I have reason to believe that disallowance u/s.40(a)(ia) of Rs.3,69,568/- remained to be made & thereby income to the tune of Rs.3,69,568/- has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts for its assessment.

As per column 27(a) of Form No. 3CD, assessee has made payments to contractor/sub-contractor and professional/tech service, TDS was deducted on various dates from April 2004 to Feb 2005 but paid after the financial year i.e. 31.3.2005.

The assessee objected to the reopening of the assessment, however, the objection of the assessee was not accepted by the Assessing Officer and he proceeded to disallow the expenses u/s. 40(a)(ia) of the Act.

3. The assessee feeling aggrieved by the order of the Assessing Officer approached the Ld. CIT(A) who dismissed the appeal of the assessee.

4. Again the assessee feeling aggrieved by the order of Ld. CIT(A) has approached before the Tribunal by way of this present appeal and raised the following ground:-

“1. The Learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of AO in reopening the assessment completed by way of regular assessment by invoking the provision of section 147 of the Income Tax Act, 1961 and completing the assessment, commenced under invalid exercise of powers u/s. 147 of the Act.

2. The Learned Commissioner of Income Tax (*Appeals) erred in fact and in law in confirming the action of AO in making dis allowance u/s.40(a)(ia) amounting to Rs. 3,69,568/-

3. The Learned Commissioner of Income Tax (Appeals) erred in fact and in law in charging interest u/s.234B of the Income Tax Act, 1961.

4. Learned Commissioner of Income Tax (Appeals) erred in fact and in law in initiating penalty proceedings u/s. 271(1)(c) of the Income Tax Act, 1961.”

5. At the time of hearing Ld. Counsel for the assessee has not pressed the ground No.1. Hence, we dismiss the same as not pressed.

6. Ground No.2 is with regard to dis allowance of u/s. 40(a)(ia). The Ld. CIT(A) has given view which reproduced as under:-

“3.2 I have considered the matter. Dis allowance of Rs. 3,69,568/- made u/s. 40(a)(ia) was in respect of amount credited in months of February and January, 2006, tax deducted from which was deposited to the credit of Government in April/August 2006. Appellant has relied upon decision of ITAT, Ahmedabad in the case of Kanubhai Ramjibhai Makwana (2011) 44 SOT 264 (Ahd) that provisions of section 40(a)(ia) as amended by Finance Act, 2010 w.e.f. 1.4.2010 are to be treated as having retrospective application with effect from 1st April, 200-5. However, ITA T’s Mumbai Special Bench in the case of Bharati Shipyard Ltd. v DCIT in order dated 12.9.2011 (itatonline.org) has overruled decision in the case of Kanubahai Makwana, 135 TTJ (Ahd) 364 as well as Bansal Parivahan 43 SOT 619 (Mumbai and has held as under:-

‘The amendment to s.40(a)(ia) by the FA 2010 was made retrospectively applicable only from AY 2010-11 and not earlier. It is nowhere stated that the amendment is curative or declaratory in nature nor is such an intention discernible. Ordinarily, a substantive provision is “prospective” in operation and courts cannot give it “retrospective effect” except in limited circumstances where, say, the amendment makes explicit what was earlier implicit or where the amendment was to remove unintended consequences in the existing  provision and to make it workable. A provision giving relief cannot be regarded as retrospective only because the original provision caused hardship to the assessee. S.40(a)(ia) caused “intended difficulty” with the object of discouraging non-compliance with the TDS provisions. A partial relaxation in its rigor, inserted with prospective effect, cannot be treated as “retrospective’.

In view of this, dis allowance of Rs. 3,69,568/- u/s. 40(a)(ia) in respect of payments in months of January & February, 2006, tax deducted at source from which was not deposited to the credit of Government before 31.3.2006 is confirmed.”

7. We have heard both the parties and perused the materials available on record and orders passed by the authorities below. The issue involved in the present appeal has now been decided by the Hon’ble Calcutta High Court in the case of CIT v. Virgin Creators in GA No. 3200/2011 dated 23-11-2011 against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd. v. DCIT in ITA No.2404/Mum/2009 in order dated 12-09-2011 has taken a view that the amendment is prospective in nature and would apply accordingly. Respectfully following the decision of Hon’ble Calcutta High Court in the case of Virgin Creators (supra) the order of Ld. CIT(A) is not sustainable. Hence, this ground of assessee’s appeal is allowed. The Assessing Officer is directed to delete the dis allowance of Rs.3,69,568/- as made u/s. 40(a)(ia) of the Act.

8. In the result, appeal of assessee is allowed.

Order pronounced in Open Court on 23/03/2012