Amendment in Section 40(a)(ia) In Finance Act, 2012: Rerospective or Prospective

CA Ritu Jain

Ever since the insertion of provision of Section 40a(ia) ( “the section”)through finance act, 2004, the subject of TDS has gained a lot of momentum in terms of anxiety from general public. Non deduction or even untimely deduction of tax results to disallowance or deferment of allowance of expenditure, which can lead to deep holes in the pockets of the assessees. Thus, even if a payee of income has duly paid its taxes but the payer does not deduct it, the payer becomes liable for not only interest and penalty but also for disallowance of expense. The subject has through the amendment of Finance Act, 2012 got some much needed relief.

Brief History

As per the original section if tax is not deducted or after deduction has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 for the expenses in the form of 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, the expense shall be disallowed.

The finance act, 2008 provided some relief to the tax payer. It extended the time limit upto which TDS could be deposited. It divided the payments into 2 categories: one relating to the payments before the month of march and the second relating to those payments on which tax was deductible in march. For the first category, tax could be deposited before the end of financial year and for the second category, tax could be deposited before the fling of return.

The finance act, 2010 brought in further relief by extending the time limit of payment of TDS for all transactions covered in the section upto due date of filing of return. The amendment was effective from April 1, 2010

The finance Act, 2012 has further rationalised the section and provided that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and the payee:

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and furnishes a certificate to this effect from an accountant in such form as may be prescribed, then in that case for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013- 14 and subsequent assessment years.

MAIN ISSUE

 Now the main issue lies is the date from which the amendment shall be effective, i.e. whether it be given a retrospective effect from April 1, 2005, i.e. the date of applicability of the section or w.e.f. Finance Act, 2012.

Observations

It would be relevant to know that in catena of decisions by various benches of tribunal and Calcutta High Court in CIT v Virgin Creations it has been held that amendment by Finance Act 2010 would operate retrospectively. The Calcutta High Court, has held  in the context of section 40(a)(ia) that the amendment is remedial in nature and designed to eliminate  unintended consequences which may cause undue hardship to the taxpayers and is of clarificatory in nature and, therefore, has to be treated as retrospective with effect from 1st April, 2005. It is a well settled law that when a provision is inserted as a remedy to make the provision workable, it is required to be considered to be applicable retrospectively.

 Hence in the absence of any higher  court ruling or a contrary ruling, the  amendment to section 40(a)(ia)  made by Finance Act, 2010 is being applied retrospectively.

If the tax provisions are literally interpreted as per the plain meaning conveyed by the language in the provisions, the effect would be that for the earlier periods the expenditure would be denied if the tax has been not deducted, even if paid in to the Government treasury, which would lead to unjust enrichment.

Fiscal laws are expected to be strictly construed. The words must say what they mean and nothing more must be implied or read in to. Yet, the above rule of strict interpretation is not so absolute and gives way in exceptional circumstances. For instance, in the case of K.P. Verghese vs. ITO 131 ITR 597 (SC) the Supreme Court was concerned with the capital gains provisions of section 52[2] of the Income-tax Act. As per the language in the said provisions, if the market value of a capital asset transferred exceeded the value of sale consideration declared by the assessee by 15% or more, the Assessing Officer is entitled to take the market value as the sale consideration.

The issue was that whether these provisions can be invoked even if it was not proved that the assessee has understated his sale consideration.

The Supreme Court held as under:—

“The task of interpretation of statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be “drafted with divine prescience and perfect clarity”.

The court held that if the provisions are literally interpreted and applied, it would manifest unjust results which may not be the intention of the lawmaker. The purpose of the section, being to prevent the leakage of capital gains understatement should be applied not merely when the FMV exceeds the sale price but also when there is understatement of sale price.

In numerous cases, the court has shifted its base to reasonable interpretation generally when the intent of law is not being met through literal interpretation.

Conclusion

The main intent of inserting the section was to make the assessee tax compliant and prevent bogus transactions. It was never meant to result into such hazardous results. It is also clear from the fact that the legislation allows deduction of expense in the subsequent years when the tax is deposited. TDS is only a mode of recovery, which was inserted for early tax collection. Once it is recovered it cannot be taxed again.

The memorandum explaining the Finance Ac, 2012 also states, “In order to rationalise the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.”

It is clear from the language used, that it has been introduced as a remedy for the malady being faced by the tax payers and is clarificatory in nature. The provision is not intended for giving punitive action on non compliance and in my opinion should be treated as retrospective in effect.