Case Law Details

Case Name : Hi-Lite Builders Pvt Ltd Vs DCIT (ITAT Cochin)
Appeal Number : ITA No. 620/Coch/2022
Date of Judgement/Order : 20/01/2023
Related Assessment Year : 2009-10

Hi-Lite Builders Pvt Ltd Vs DCIT (ITAT Cochin)

ITAT Cochin held that amendment to section 40(a)(ia) of the Income Tax Act made by the Finance Act 2020 is retrospective in nature. Accordingly, TDS deposited on or before the due date of filing return u/s 139(1) is allowable.

Facts- The case of the assessee was selected for scrutiny and assessment was completed u/s. 143(3) assessing an income of Rs.1,03,48,780. Subsequently, the CIT, Kozhikode, set aside the order of assessment u/s. 263 with a direction to make fresh assessment on the ground that the tax deducted at source by the assessee during the period from 1.10.2008 to 28.2.2009 was credited to the Govt. account during May, 2009 to July, 2009 only and the AO did not make any disallowance u/s. 40(a)(ia). The AO subsequently passed an order u/s. 143(3) read with section 263 disallowing a sum of Rs.7,49,20,296 u/s. 40(a)(ia).

Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A). CIT(A) upheld the disallowance. Accordingly, being aggrieved, the present appeal is filed.

Conclusion- The Hon’ble Supreme Court has clearly laid down the ratio that the amendment to section 40(a)(ia) with respect allowability of the expenses on which tax is deducted incurred during the year that is remitted to Government account on or before the due date for filing the return of income u/s.139(1) being curative in nature is retrospective. In assessee’s case the tax deducted during the period from 1.10.2008 to 28.2.2009 was credited to the Govt. account during May, 2009 to July, 2009 i.e. before the due date for filing the return of income u/s.139(1). Therefore respectfully following the ratio laid down by the Apex Court, we hold that no disallowance is warranted in assessee’s case for the impugned amount and the disallowance made by the AO is deleted.

FULL TEXT OF THE ORDER OF ITAT COCHIN

This appeal is against the order of the CIT(A), National Faceless Appeal Centre, Delhi [NFAC], dated 23.2.2022 for the assessment year 2009-10.

2. The assessee is carrying on business as builder/developer of residential and commercial complexes. The assessee filed the return of income for AY 2009-10 on 30.9.2009 declaring a total income of Rs.98,41,018. The case was selected for scrutiny and assessment was completed u/s. 143(3) assessing an income of Rs.1,03,48,780. Subsequently, the CIT, Kozhikode, set aside the order of assessment u/s. 263 with a direction to make fresh assessment on the ground that the tax deducted at source by the assessee during the period from 1.10.2008 to 28.2.2009 was credited to the Govt. account during May, 2009 to July, 2009 only and the AO did not make any disallowance u/s. 40(a)(ia). The AO subsequently passed an order u/s. 143(3) read with section 263 disallowing a sum of Rs.7,49,20,296 u/s. 40(a)(ia).

3. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A). The assessee submitted before the CIT(A) that the amount of tax deducted at source is deposited before the due date for filing the return of income and therefore has complied with the provisions of section 40(a)(ia) as amended by the Finance Act, 2010 which inserted the words “has not been paid on or before the due date specified in sub-section (1) of section 139”. The assessee also submitted that though the amendment made effective from 01.04.2010 it is retrospectively applicable as it is curative in nature. The CIT(A) did not agree with the contention of the assessee and accordingly upheld the disallowance by relying on the decision of the jurisdictional High Court in the case of Thomas George Muthoot [2015] 63 com 99 (Ker). Aggrieved, the assessee is in appeal before the Tribunal.

4. The assessee raised the following grounds and additional ground:-

“1. That the order of the Ld. CIT (A) is against the law, facts and circumstances of the case.

2. The Ld CIT has contended that The assessee was specifically requested twice to clarify if he has filed any appeal against the order u/s.263 passed by the Ld.CIT, Kozhikode. On both occasions the assessee is silent and has uploaded his written submissions again. However the assessing officer failed to consider the fact that the appellate in both occasions have uploaded a copy of the Form-35 which clearly states the order against which appeal is filed , which is “143(3) r.w.s 263 dated 18/11/2014. Hence it is evident that the CIT(A) has not carefully verified the submissions and documents submitted by the appellant and had mechanically confirmed the views adopted by the assessing officer, which is incorrect and unsustainable.

3. That the Ld. CIT (A) has erred in law and in facts in confirming the disallowance of Rs.7,49,20,296/- u/s 40(a)(ia) without considering the submissions and case laws put forth by the appellant.

4. The appellants submits that it had deducted tax at source on the various payments made during the period 01.10.2008 to 28.02.2009 enumerated in para 6 of the assessment order and duly paid the TDS to the credit of Central Government during the period May,2009 to July,2009 i.e. before the due date specified i 139(1) of the Act for filing the return of Income. On such facts and circumstances the appellant submits that the provisions of section 40(a)(ia) cannot be invoked and the disallowance made is unjustified.

5. The appellant has relied on the reasoning and conclusion of the Hon’ble Delhi High Court in CIT vs. Rajendra Kumar [(2014) 362 ITR 241 (Delhi)] (Judgment dated July 1st 2013) and CIT vs. Naresh Kumar [(2014) 362 ITR 256 (Delhi)] (Judgment dated September 6, 2013) in particular the observations of the Hon’ble High Court in the concluding paras 25 86 26 of the judgment in Rajedra Kumar’s case. Without prejudice to the above contention that section 40(a)(ia) has no application on the facts of the appellant case, the appellant is advised to submit that provisions of section 40(a)(ia) of the Act would apply only to the amounts which remain payable at the end of the relevant financial year (i.e. 31.03.2009) and cannot be invoked to disallow the amounts which had actually been paid during the previous year as held in Merlyn Shipping and Transports vs. Additional CIT [(2012) 16 ITR(Trib.) 1 (SB) (Vishakhapatnam)] affirmed in CIT vs. Vector Shipping Services (P) Ltd. [(2013) 357 ITR 642(All)].

6. That the CIT (A) is unjustified in not accepting the judgements in the case of

a. Assistant Commissioner of Income Tax Vs. Shri M.K. Gurumurthy (ITAT Bangalore) dated 10/ 05 /2012 relating to Assessment Year 2008-09.

b. IN THE ITAT BANGALORE BENCH ‘B’ -Deputy Commissioner of Income-tax, Circle 1, Udupi Vs. Ananda Marakala* [ASSESSMENT YEAR 2005-06] dated SEPTEMBER 13, 2013

c. Hon’ble SC in the case of Allied Motors P Ltd, Extrusions Ltd

d. Supreme Court in the case of CIT v. Vegetable Products Ltd. [1993] 88 ITR 192 (SC).

e. Apex Court judgment in Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355, in its proper perspective.

7. The CIT(A) has relied solely on the case law Thomas George Muthoot (2015) 63 taxman.com 99 (Ker) and failed to consider the legality that the Judgement of the Supreme Court prevails over the judgement of the Jurisdictional high court.

8. The appellant further submits that applying the judgment of the Supreme Court in Hindustan Coco Cola Beverages Pvt. Ltd vs. CIT [(2007) 293 ITR (SC)] rendered in the context of section 201(1) of the Act held that in a case in which the deductee paid the tax no demand visualized u/s.201(1) of the Act should be enforced against the deductor, the provisions of section 40(a)(ia) will be equally inapplicable in a case in which tax has not been deducted at source or after deduction has not been paid before the expiry of the stipulated due date.

9. In the light of the above , the appellant submits that the confirmation of disallowance of Rs.7,49,20,296/- made in the impugned assessment order is, in any event, incorrect and highly excessive.

10. For these and other grounds that may be adduced .at the time of hearing the appellant prays that the Commissioner (Appeals) be pleased to allow the appeal and render justice.”

Additional grounds:-

“A. That the purpose of provisions of section 40(a) (ia) of the IT Act is only to ensure the compliance of TDS provisions and not to punish those assessee who had deducted and paid TDS to the government sooner or later.

B. That both the Assessing Officer and the 1st Appellate authority had failed to appreciate that the TDS deducted during the period 1.10.2008 to 28.02.2009 were paid between the period May 2009 to July 2009, i.e, on or before the due date for filing the return u/s 139 of the Income Tax Act.

C. That both the Assessing Officer as well as the 1st Appellant authority had failed to appreciate that, the amendments made to section 40 (a) (ia) by the Finance Act 2010 are curative in nature and was indented to address the concerns of those, assessees who had deposited tax with the government in the subsequent year, though could not deposit such tax before the prescribed period.

D. That as per the amended provisions of Sec 40(a)(ia) of the IT Act, where TDS is deductible at source under Chapter XVIIB 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, the expenses can be disallowed.

E. That both the Assessing Officer and the 1st Appellate Authority had failed to appreciate that the amendment made to section 40 (a) (ia), being curative in nature will have retrospective operation and will take effect from 1.04.2005e, the date of original insertion of section 40 (a) (ia) as held by the Honourable Supreme Court in the case of Commissioner of Income Tax Calcutta, Vs Calcutta Export Company reported in (2018) (2016) SCC 686.

F. That since the amendments made to Sec 40 (a) (ia) of Finance Act 2010 has retrospective affect, the Appellant is also entitled to the benefit of the amended provision and no disallowances can be made as the TDS deducted has been paid on or before the due date for filing the tax returns u/s 139 (1).”

5. In the application along with affidavit for admission of additional grounds, the assessee has stated that the additional grounds are raised on the advice of the counsel for proper adjudication of the issues involved which were not raised in the original grounds and hence the same may be admitted for adjudication.

6. After hearing both the parties, we are of the opinion that the additional grounds raised do not involve fresh investigation into facts and are legal grounds, therefore following the Hon’ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional grounds are admitted for adjudication.

7. During the course of hearing, the ld. AR submitted that the contention raised through additional ground stating that the amendment made to section 40(a)(ia) being curative in nature will have retrospective operation and will take effect from 1.4.2005 is adjudicated, then the rest of the grounds can be left open. Accordingly, we will consider only the additional ground first for adjudication.

8. The ld. AR reiterated the submissions made before the CIT(A) with regard to the amendment to section 40(a)(ia) being retrospective in nature. The ld. AR also submitted that the provisions of section 40(a)(ia) are meant to ensure that the assessee performs the obligation to deduct tax at source and in assessee’s case, it is duly complied with. Therefore, the ld. AR argued that it would be unjust to disallow a legitimate business expense on this ground. The ld. AR relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Calcutta Export Co. [2018] SCC 686 to submit that the amendment to section 40(a)(ia) is retrospective in nature. The ld AR submitted that the assessee has deposited the tax deducted in the month of May, 2009 to July, 2009 i.e., before the due date for filing the return of income u/s. 139(1) and therefore according to the amended provisions, no disallowance is warranted u/s. 40(a)(ia).

9. We heard the rival submissions and perused the material on record. We notice that the Hon’ble Supreme Court in the case Calcutta Export Co.(supra) has considered the issue of retrospective effect of amendment to section 40(a)(ia) and held that –

13. The dispute in the present case revolves around the fact that whether the amendment made by the Finance Act, 2010 to the provisions of Section 40 (a) (ia) of the IT Act is retrospective in nature so as to apply to the present case or not. If it is so, then the tax duly paid by the assessee on 01.08.2005 is well in accordance with law and the assessee is allowed to claim deduction for the tax deducted and paid to the government, in the previous year in which the tax was deducted.

14. For deciding as to the retrospective effect of the amendment made by Finance Act, 2010, it is required to see the Section as it stands before and after the amendment made through the Finance Act, 2010 and the purpose of such insertion or amendment to the said provisions. The provisions of Section 40(a)(ia) came into force in the year 2005 which stood as under:—

40. Amounts not deductible– 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 XVIIB 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 during 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.”

15. The purpose of bringing the said amendment to the existing provision of Section has been highlighted in the memorandum explaining the provision which reads as under:—

“With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of the section 40(a)(ia) to payments of interest, commission or brokerage, fee for professional services or fee for technical services to the residents and payments to a residential contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed under sub-section(1) of section 200 and in accordance with the provisions of other provisions of Chapter XVII-B.”

16. The purpose is very much clear from the above referred explanation by the memorandum that it came with a purpose to ensure tax compliance. The fact that the intention of the legislature was not to punish the assessee is further reflected from a bare reading of the provisions of Section 40(a)(ia) of the IT Act. It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the tax deducted at source was duly deposited with the government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government.

17. However, it has caused some genuine and apparent hardship to the assesses especially in respect of tax deducted at source in the last month of the previous year, the due date for payment of which as per the time specified in Section 200 (1) of IT Act was only on 7th of April in the next year. The assessee in such case, thus, had a period of only seven days to pay the tax deducted at source from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure under Section 40(a)(ia) of IT Act.

18. With a view to mitigate this hardship, Section 40(a)(ia) was amended by the Finance Act, 2008 and the provision so amended read as under:—

“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 “profit and gains of business or profession (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 contactor 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—

(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;

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.”

19. The above amendments made by the Finance Act, 2008 thus provided that no disallowance under Section 40 (a) (ia) of the IT Act shall be made in respect of the expenditure incurred in the month of March if the tax deducted at source on such expenditure has been paid before the due date of filing of the return. It is important to mention here that the amendment was given retrospective operation from the date of 01.04.2005 i.e., from the very date of substitution of the provision.

20. Therefore, the assesses were, after the said amendment in 2008, classified in two categories namely; one; those who have deducted that tax during the last month of the previous year and two; those who have deducted the tax in the remaining eleven months of the previous year. It was provided that in case of assessees falling under the first category, no disallowance under Section 40(a) (ia) of the IT Act shall be made if the tax deducted by them during the last month of the previous year has been paid on or before the last day of filing of return in accordance with the provisions of Section 139(1) of the IT Act for the said previous year. In case, the assessees are falling under the second category, no disallowance under Section 40(a)(ia) of IT Act where the tax was deducted before the last month of the previous year and the same was credited to the government before the expiry of the previous year. The net effect is that the assessee could not claim deduction for the TDS amount in the previous year in which the tax was deducted and the benefit of such deductions can be claimed in the next year only.

21. The amendment though has addressed the concerns of the assesses falling in the first category but with regard to the case falling in the second category, it was still resulting into unintended consequences and causing grave and genuine hardships to the assesses who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns under Section 139(1) of the IT Act. The disability to claim deductions on account of such lately credited sum of TDS in assessment of the previous year in which it was deducted, was detrimental to the small traders who may not be in a position to bear the burden of such disallowance in the present Assessment Year.

22. In order to remedy this position and to remove hardships which were being caused to the assessees belonging to such second category, amendments have been made in the provisions of Section 40(a) (ia) by the Finance Act, 2010.

23. Section 40(a)(ia), as amended by Finance Act, 2010, with effect from 01.04.2010 and now reads as under:

“40(a)(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 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 deducted in computing the income of the previous year in which such tax has been paid.”

24. Thus, the Finance Act, 2010 further relaxed the rigors of Section 40(a)(ia) of the IT Act to provide that all TDS made during the previous year can be deposited with the Government by the due date of filing the return of income. The idea was to allow additional time to the deductors to deposit the TDS so made. However, the Memorandum explaining the provisions of the Finance Bill, 2010 expressly mentioned as follows: “This amendment is proposed to take effect retrospectively from 1st April, 2010 and will, accordingly, apply in relation to the Assessment Year 2010-11 and subsequent years.”

25. The controversy surrounding the above amendment was whether the amendment being curative in nature should be applied retrospectively i.e., from the date of insertion of the provisions of Section 40(a)(ia) or to be applicable from the date of enforcement.

26. TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of Section 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, should not be allowed to be converted into an iron rod provision which metes out stern punishment and results in malevolent results, disproportionate to the offending act and aim of the legislation. Legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced but the magnitude of punishment must not be disproportionate by what is required and necessary. The consequences and the injury caused, if disproportionate do and can result in amendments which have the effect of streamlining and correcting anomalies. As discussed above, the amendments made in 2008 and 2010 were steps in the said direction only. Legislative purpose and the object of the said amendments were to ensure payment and deposit of TDS with the Government.

27. 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, is required to be read into the Section to give the Section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the Section as a whole.

28. The purpose of the amendment made by the Finance Act, 2010 is to solve the anomalies that the insertion of section 40(a)(ia) was causing to the bona fide tax payer. The amendment, even if not given operation retrospectively, may not materially be of consequence to the Revenue when the tax rates are stable and uniform or in cases of big assessees having substantial turnover and equally huge expenses and necessary cushion to absorb the effect. However, marginal and medium taxpayers, who work at low gross product rate and when expenditure which becomes subject matter of an order under Section 40(a)(ia) is substantial, can suffer severe adverse consequences if the amendment made in 2010 is not given retrospective operation i.e., from the date of substitution of the provision. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Such could not be the intention of the legislature. Hence, the amendment made by the Finance Act, 2010 being curative in nature required to be given retrospective operation i.e., from the date of insertion of the said provision.

29. Further, in Allied Motors (P) Ltd. case (supra) , this Court while dealing with a similar question with regard to the retrospective effect of the amendment made in section 43-B of the Income Tax Act,1961 has held that the new proviso to Section 43B should be given retrospective effect from the inception on the ground that the proviso was added to remedy unintended consequences and supply an obvious omission. The proviso ensured reasonable interpretation and retrospective effect would serve the object behind the enactment. The aforesaid view has consistently been followed by this Court in the following cases, viz., Whirlpool of India Ltd., CIT [20001 245 ITR 3, CIT v. Amrit Banaspati Co. Ltd.[20021 255 ITR 117/[20021 123 Taxman 74 (SC) and CIT v. Alom Enterprises Ltd. [20091 319 ITR 306/185  Taxman 416 (SC).

30. Hence, in light of the forgoing discussion and the binding effect of the judgment given in Allied Motors (P.) Ltd. case (supra), we are of the view that the amended provision of Sec 40(a)(ia) of the IT Act should be interpreted liberally and equitable and applies retrospectively from the date when Section 40(a)(ia) was inserted i.e., with effect from the Assessment Year 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. As the developments with regard to the Section recorded above shows that the amendment was curative in nature, it should be given retrospective operation as if the amended provision existed even at the time of its insertion. Since the assessee has filed its returns on 01.08.2005 i.e., in accordance with the due date under the provisions of Section 139 IT Act, hence, is allowed to claim the benefit of the amendment made by Finance Act, 2010 to the provisions of Section 40(a)(ia) of the IT Act.

31. In light of the forgoing discussion, we are of the view that judgment of the High Court does not call for any interference and, hence, the appeals are accordingly dismissed. In view of the above, all the connecting appeals, interlocutory applications, if any, transferred cases as well as diary numbers are disposed off accordingly. Parties to bear cost on their own.

10. The Hon’ble Supreme Court has clearly laid down the ratio that the amendment to section 40(a)(ia) with respect allowability of the expenses on which tax is deducted incurred during the year that is remitted to Government account on or before the due date for filing the return of income u/s.139(1) being curative in nature is retrospective. In assessee’s case the tax deducted during the period from 1.10.2008 to 28.2.2009 was credited to the Govt. account during May, 2009 to July, 2009 i.e. before the due date for filing the return of income u/s.139(1). Therefore respectfully following the ratio laid down by the Apex Court, we hold that no disallowance is warranted in assessee’s case for the impugned amount and the disallowance made by the AO is deleted.

11. In the result, the appeal by the assessee is allowed.

Pronounced in the open court on this 20th day of January, 2023.

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One Comment

  1. T K WADHWA says:

    We are having GSTIN. We are doing business and our bankers transfer the excess amount in our current account to fixed deposit. We earn interest on this fixed deposit. TDS is also deducted. My query is whether Rule 42 of CGST is applicable. An early reply in this regard is highly solicited.

    Thanks in advance.

    TKW

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