Amendment brought out in Section 40(a)(ia) are clarificatory and retrospective w.e.f 1st April 2005

Kanubhai Ramjibhai Makwana Vs. ITO- ITAT Ahemdabad

Brief:- Business dis allowance under section 40(a)(ia) – Payment to resident without deduction of tax-Amendment in section 40(a)(ia) by the Finance Act, 2010-Nature of amendment-Amendment made by the Finance Act, 2010 in section 40(a)(ia) is of clarificatory nature and hence would apply retrospectively from 1-4-2005.

ORDER

This appeal by the assessee is arising out of the order of Commissioner (Appeals)-IV, Baroda in appeal No.CAB/IV-A-256/07-08 dated 29-08-2008. The assessment was framed by Income Tax Officer Ward-1, Anand under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as `the Act’) vide his order dated 24-12-2007 for assessment year 2005-06.

2. The first issue in this appeal of assessee is against the order of Commissioner (Appeals) confirming the addition made by assessing officer by invoking the provisions of section 40A(2)(b) of the Act. For this, assessee has raised the following ground No.1:-

“1. The learned Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and on facts of the case by confirming the addition of Rs.4,97,716/-under section 40A(2)(b) of the Income Tax Act, 1961.”

3. At the outset, both the Ld. Counsel for the assessee as well as Ld. SR-DR agreed that this issue is squarely covered by the Tribunal’s decision in assessee’s own case for assessment years 2003-04 and 2004-05 in ITA No.464/Ahd/2008 and 3883/Ahd/2007 both order dated 18-06-2010 respectively. We find that the Tribunal has dealt with the issue vide para-8 as under:-

8. We have heard both the sides at some length and also perused the orders of authorities below in the light of the compilation filed before us. Certain important points as raised before us for consideration were that the accounts being audited as prescribed under section 44AB of the Act. Therefore, there was no reason to disallow the claim of expenditure that the sub-contractors were separately assessed to tax by filing their respective returns. That the TDS was deducted on the said payment and the details were furnished before the assessing officer. Finally, it was vehemently argued that the statute do not prescribed an ad hoc disallowance and for a disallowance the assessing officer ought to have earmarked a particular payment as excessive or unreasonable. Regarding the onus to prove that the impugned payment was unreasonable or excessive, a reliance was placed on the CBDT Circular No.6-P(LXXVI-66) of 1968, dated 6-7-1968, wherein vide paragraph No.74 an observation is that the Income Tax Officer is expected to exercise his judgment in a reasonable and fair manner. The Board says that it should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate-concerns and should not be applied in a manner which will cause hardship in bona fide cases. In this context, Ld. Counsel for assessee has pleaded that there was no evasion of tax in the present case because those sub-contractors have filed their income-tax returns independently and in support of the contention, a reliance has been placed on the decision of ITAT Mumbai Bench “B” in the case of ITO v. M.M. Textiles reported (2010) 34 (II) ITCL 66 (Mum-Trib) : (2009) 31 SOT 207 (Mum) for the proposition that it is necessary on the part of the assessing officer to prove that the expenditure was excessive or unreasonable. The next plank of argument was that for the purpose of invocation of section 40A(2)(b) of the Act. There is no scope of ad hoc addition. In support of this argument, a reliance was placed on the decision of ITAT Jodhpur Bench in the case of Neha Proteins v. ACIT (2004) 83 TTJ 236 (Jd.). In this context, one more decision viz. in the case of Shyam Oil Cake Ltd. v. ACIT (2004) 83 TTJ 414 (Jd.) has also been cited. In one of the case of Bativala & Karani v. ACIT (2005) 2 SOT 379 (Mum.) an observation was made that the unreasonableness should be based upon some subjective perceptions of the assessing officer and dis allowance should be based upon some cogent material on record. Since in the present case, these basic requirements were wanting, hence, we are of the view that the approach of the assessing officer of ad hoc dis allowance was unwarranted, therefore, cannot be approved in the eyes of law considering the intention of the legislature and the law laid down by various judicial authorities. The findings of the authorities below are therefore hereby reversed.

4. We find that the facts are exactly identical in respect to dis allowance of payments under section 40A(a)(2b) of the Act in the present year also. Respectfully following and taking a consistent view, we allow this issue of the assessee’s appeal.

5. The next issue in this appeal of assessee is against the order of Commissioner (Appeals) confirming the addition made by assessing officer by invoking section 40a(ia) of the Act on account of non-payment of TDS deducted on labor payments within the due date prescribed under IT. Rules, 1962. For this, assessee has raised the following ground No.2:-

“2. The learned Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and on facts of the case by confirming the addition of Rs. 63,56,387/-under section40a(ia) of the Income Tax Act, 1961.”

6. The brief facts are that the assessee is a contractor and required to get work done through sub-contractors. During the course of assessment proceedings, the assessing officer required the assessee to produce the details of TDS deducted on sub-labour contract payments and paid. The assessee intimated as regards to inadmissibility with regard to non-deduction of TDS to the tune of Rs. 1,65,824/-. The assessee has filed the following details regarding TDS deducted and payment of TDS on labour contract payments as under:

DETAILS OF TAX DEDUCTED AT SOURCE AND PAYMENT OF TDS

Accordingly, assessing officer made dis allowance by invoking provisions of section 40(a)(ia) of the Act by stating that the total admissible expenditure worked out to Rs.1,21,56,330/- but as payments have already been disallowed under section 40A(2)(b) of the Act at Rs.4,97,716/- and the balance Rs.1,16,58,614/- was disallowed. Aggrieved, assessee preferred appeal before Commissioner (Appeals).

7. The Commissioner (Appeals) partly confirmed the dis allowance at Rs.63,56,387/- by stating in para-3.4 of his appellate order as under:-

“3.4. I have considered the submissions of the A.R and the assessment order. The assessing officer merely followed the provisions of the unamended section 40(a)(ia). As per the said section, the dis allowance is justified. However, the following payments i.e.:

Fall within the amended provisions of section 40(a)(ia) which state that if tax had been deducted in the month of March and deposited with the Government before submission of return of income, the provisions of section 40(a)(ia) are not attracted. In the above cases, since the tax had been deposited on 19.07.2005, the provisions of section 40(a)(ia) are not attracted. Therefore, the addition to the extent of Rs.53,02,227/- is deleted and balance is confirmed.”

Aggrieved, assessee came in second appeal before us.

8. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the Commissioner (Appeals) has deleted the addition to the extent of Rs.53,02,227/- as the payments relates to the month of March and the TDS was deducted in March 04 and paid in 19-07-2005 i.e. before the due date of filing of return of income under section. 139(1) of the Act. Balance, the Commissioner (Appeals) confirmed as payments relates to April 04 to February’05 on which the TDS was deducted from November’04 to February’05 and TDS was paid on 19-07-2005. The Ld. Counsel for the assessee, Shri M.G. Patel stated that the provisions as substituted by the Finance Act, 2010 that the TDS deducted is paid on or before the due date of filing of return of income as specified in section 139(1) of the Act, the expenses relating to such TDS are eligible for deduction and no dis allowance can be made by invoking the provisions of section 40(a)(ia) of the Act. The Ld counsel for the assessee argued that this provision as amended by Finance Act, 2010 is curative in nature and retrospective in operation. He relied on the decision of the Hon’ble apex court in the case of Allied Motors (P) Ltd. v. CIT (1997) 201 ITR 677 (SC) and also on CIT v. Alom Extrusions Ltd. (2010) 32 (I) ITCL 2 (SC) : (2009) 319 ITR 306 (SC). On the other hand, Ld. SR-DR, Shri K. M. Madhusudan argued that the amendment brought out by the Finance Act, 2010 is not curative in nature and hence not retrospective. He stated that the Legislature in its wisdom has given a date regarding the applicability of this provision. He stated that the substitution has been done by the Finance Act, 2010 with effect from 1-4-2010, this means that this amended provision will apply for and from assessment year 2010-11 and not to earlier assessment years. Accordingly, he urged the Bench to confirm the orders of the lower authorities.

9. Now the question arises is, whether the amendment brought out by the Finance Act, 2010 w.e.f 1-4-2010 in section 40(a)(ia) of the Act is clarificatory in nature or not. To decide this issue, now we have to go to the history of the provisions of section 40(a)(ia), which was substituted for sub-clause-1 by Finance (No. 2) Act, 2004 with effect from 1-4-2005 as under:-

“Amount 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 professions”,-

(a) … …

(ia) any interest, commission or brokerage, 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 during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation:- For the purposes of this sub-clause:-

(i)”commission or brokerage” shall have the same meaning as in clause (i) of the explanation to section 194H;

(ii)”fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (11) of section 9;

(iii)”professional services” shall have the same meaning as in clause (a) of the explanation to section 194J;

(iv)”work” shall have the same meaning as in explanation-III to section 194C;”

Subsequently, in sub-clause (ia) the words, (rent and royalty) has been inserted by the Taxation Laws (Amendment) Act, 2006 w.r.e.f. 1-4-2006 and similarly in Explanation sub-clauses (v) & (vi) were inserted as under:-

“(v) “rent” shall have the same meaning as in clause (i) to the explanation to section 194-1;

(vi) “royalty” shall have the same meaning as in explanation 2 to clause (vi) of sub-section (1) of section 9;”

Further, by the Finance Act, 2008, the quoted words were substituted in sub-clause (ia) w.r.e.f. 1-4-2005 as under:-

“”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 lat day of the previous year”

And finally by the Finance Act, 2010 with effect from 1 -4-2010 sub-clause (ia) is as under:-

(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 labor 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:

10. We find from the above provision of section 40(a)(ia) of the Act, amended by Finance Act, 2010, that the payment of expenses as specified in this provision, on which tax is deductible at source under Chapter XVII-B of the Act and the assessee has not deducted the tax or after deduction has not been paid on or before the due date specified in section 139(1) of the Act, will be disallowed while computing the income chargeable under the Head `profits and gains of business or profession’. It means that the tax so deductible at source has been deducted and paid on or before the due date specified in section 139(1) of the Act, the expenses related to the same will be allowed while computing the income chargeable under the Head `profits and gains of business or profession’. Prior to its amendment, this section was amended by the Finance Act, 2008, w.r.e.f. 1-4-2005 where the provision was made to disallow the payments on which tax is deductible at source and such tax has not been deducted or after deduction 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 years.

From the above amendments in this provision of section 40(a)(ia) of the Act it is clear that the intention of the Legislature is to operates retrospectively to serve its object of removing hardship faced by the taxpayers. While bringing this amendment by Finance Bill, 2010, the object was explained in Notes On Clauses and the relevant Clause-12 was explained as under:-

“Clause 12 of the Bill seeks to amend section 40 of the Income Tax Act relating to amounts not deductible.

Under the existing provisions contained in sub-clause (ia) of clause (a) of the aforesaid section, non-deduction of tax or non-payment of tax after deduction

on payment of any sum by way of 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, results in the dis allowance of the said sum, in the computation of income of the payer, on which tax is required to be deducted under Chapter XVII-B.

The proviso to the said sub-clause provides that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the last month of the previous year but paid after the due date of filing of return or deducted 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.”

Further the Amendment was explained in Memorandum Explaining the provision in Finance Bill, 2010 as under:-

Dis allowance expenditure on account of non-compliance with TDS provisions,

“The existing provisions of section 40(a)(ia) of the Income Tax Act provide for the dis allowance of expenditure like interest, commission,, brokerage, professional fees, etc. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. However, in case the deduction of tax is made during the last month of the previous year, no dis allowance is made if the tax is deposited on or before the due date of filing of return.

It is proposed to amend the said section to provide that no dis allowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub-section(1) of section 139.

This amendment is proposed to take effect retrospectively from 1-4-2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.”

11. In view of the above amendments brought out in section 40(a)(ia) on different times to remove the difficulties of taxpayers a remedial steps were taken by the Legislature. We are of the view that for modern purposes a declaratory amendment in section of the Act may be defined as an amendment to remove doubts existing as to the meaning or effect of any statute and such amendments are usually held to be retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act and this view has been held in Keshavlal Jethalal Shah v. Mohanalal Bhagwandas, AIR 1968 SC 1336, 1339). Further Hon’ble apex court in the case of CIT v. Podar Cement Pvt. Ltd., (1997) 226 ITR 625, 652 (SC) settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. Further more in similar circumstances, Hon’ble apex court in the case of Allied Motors (P.) Ltd. v CIT (1977) 224 ITR 677,687 (SC) held that the amendment will not serve its object in such a situation unless it is construed as retrospective. The Hon’ble apex court held as under:-

“The departmental understanding also appears to be that section 43B, the proviso and Explanation 2 have to be read together as expressing the true intention of section 43B. Explanation 2 has been expressly made retrospective. The first proviso, however, cannot be isolated from Explanation 2 and the main body of section 43B. Without the first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of section 43B. The proviso supplies obvious, omission. But for this proviso the ambit of section 43B becomes unduly wide bringing within its scope those payments, which were not intended to be prohibited from the category of permissible deductions.

In the case of Goodyear India Ltd. v. State of Haryana (1991) 188 ITR 402, this court said that the rule of reasonable construction must be applied while construing a statute. A Literal construction should be avoided if it defeats the manifest object and purpose of the Act.

Therefore, in the well known words of Judge learned Hand, one cannot make a fortress out of the dictionary; and should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of R.B. Jodha Mai Kuthiala v. CIT (1971) 82 ITR 570, this court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole.

This view has been accepted by a number of High Courts. In the case of CIT v. Chandulal Venichand (1984) 209 ITR 7, the Gujarat High Court has held that the first proviso to section 43B is retrospective and sales tax for the last quarter paid before the filing of the return for the assessment year is deductible. This decision deals with assessment year 1984-85. The Calcutta High Court in the case of CIT v. Sri Jagannath Steel Corporation (1991) 191 ITR 676, has taken a similar view holding that the statutory liability for sales tax actually discharged after the expiry of the accounting year in compliance with the relevant statute is entitled to deduction under section 43B. The High Court has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first provisos to be explanatory in the case of Jamshedpur Motor Accessories Stores v. Union of India (1991) 189 ITR 70. It has held the amendment inserting first proviso to be retrospective. The special leave petition from this decision of the Patna High Court was dismissed (see (1991) 191 ITR (St.)8). The view of the Delhi High Court, therefore, that the first proviso to section 43B will be available only prospectively does not appear to be correct. As observed by G.P. Singh in his Principles of Statutory Interpretation, 43B will be available only prospectively does not appear to be correct. As observed by G.P. Singh in his Principles of Statutory Interpretation, 4th Edn., page 291. “It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended.” In act the amendment would not serve its subject in such a situation, unless it is construed as retrospective. The view, therefore, taken by the Delhi High Court cannot be sustained.”

12. Accordingly, we are of the view that the Amendments brought out in section 40(a)(ia) of the Act from time-to-time was clarificatory and when an amendment is declaratory and clarificatory in nature, the presumption against its retrospectivity is not applicable and amendments of this kind only declare. It is no doubt true that, ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date should be construed prospectively and not retrospectively. But this principle will not be applicable in a case where the provision construed is merely explanatory, clarificatory or declaratory it cannot be disputed that the object of the Explanation is to explain the meaning and intendment of the Act itself and this view has been hold by Hon’ble Calcutta High Court in the case of CIT v. India Steamship Co. Ltd. (1992) 196 ITR 917, 936 (Cal). In that case, Explanation 8, which has newly been inserted by the Finance Act, 1986, with retrospective effect from 1-4-1974, to section 43(1), has been held to be clarificatory in nature and the same has been held to be deemed to be always in existence even before 1 -4-1974. Similarly, in the case of Allied Motors (P) Ltd (supra), it has been held that the provisions of the first proviso, which has newly been inserted by the Finance Act, 1987, with effect from 1-4-1988 to section 43B is remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation, and is of clarificatory nature and, therefore, has to be treated as retrospective with effect from 1-4-1984, the date on which section 43B has newly been inserted by the Finance Act, 1983. In taking this view, the Supreme Court has approved Jamshedpur Motor Accessories Stores v. Union of India (1991) 189 ITR 70 (Pat), special leave petition dismissed by the Supreme Court : (1991) 191 ITR (St.) 8 (SC)), CIT v. Sri Jagannath Steel Corporation ((1991) 191 ITR 676 (Cal.)), and CIT v. Chandulal Venichand (1992) 197 ITR 718, 720 (Cal) and CIT v. Pyarilal Kasam Manji & Co. (1992) 198 ITR 110 (Ori).

13. In view of the above discussion, following the case laws of Hon’ble apex court and of Hon’ble High Courts cited above, we are of the view that the provisions of section 40(a)(ia) as amended by the Finance Act, 2010 w.e.f 1-4-2010, which has newly been inserted by the Finance (No.2) Act, 2004, with effect from 1-4-2005 to section 40 of the Act is remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the taxpayers and which made the provision unworkable or unjust in a specific situation, and is of clarificatory nature and, therefore, has to be treated as retrospective with effect from 1-4-2005, the date on which section 40(a)(ia) has been inserted by the Finance (No.2) Act, 2004. Accordingly, this issue of the assessee’s appeal is allowed.

14. In the result, assessee’s appeal is allowed.

Order pronounced in Open court on 3-12-2010.

NF