Amendment in Section 40(a)(ia) vide Finance Act, 2010 are retrospective

A.Y. Garment International Private Ltd. Vs DCIT (Karnatka High Court)

Whether the Tribunal was justified in law in holding that the amendment made by Finance Act, 2010 in the provisions of Section 40(a)(ia) of the Income-tax Act, 1961 is not retrospective in operation on the facts and circumstances of the case?

The issue whether the aforesaid amendment being curative in nature has retrospective operation was considered by the Supreme Court in the case of CALCUTTA EXPORT COMPANY supra and it was held that the purpose of amendment made by Finance Act, 2010 is to solve the anomalies and proviso was inserted to remedy unintended consequences and to make the provision workable. It was further held that 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. Thus, it was held that amendment made by Finance Act, 2010 in Section 40(a)(ia) being curative in nature is required to be given retrospective operation. The aforesaid decision was followed by a division bench of this Court in the case of SANTOSH KUMAR SHETTY supra. The issue with regard to retrospectivity of Section 40(a)(ia) is no longer res integra and is answered in favour of the assessee by the Supreme Court.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2005-06. The appeal was admitted by a bench of this Court vide order dated 26.06.2013 on the following substantial questions of law:

(i) Whether the Tribunal was justified in law in holding that the amendment made by Finance Act, 2010 in the provisions of Section 40(a)(ia) of the Income-tax Act, 1961 is not retrospective in operation on the facts and circumstances of the case?

(ii) Whether the Tribunal was justified in law in reversing the well reasoned order of the learned Commissioner of Income-tax (Appeals) on the facts and circumstances of the case?

(iii) Without prejudice whether the Tribunal was justified in law in not holding the appellant is liable to deduct tax at source only on the amount payable on the end of the financial year as per provisions of section 40(a)(i) and 40(a)(ia) of the Act on the facts and circumstances of the case?

(iv) Without prejudice whether the Tribunal was justified in law in not holding that unless there is a proceeding initiated under chapter XVII-B in respect of the contravention of said chapter invoking the provisions of section 40(a)(i) and 40(a)(ia) is not valid in law on the facts and circumstances of the case?

(v) Whether the Tribunal was justified in law in refusing to rectify under section 254(2) of the Act, the order dated 4.4.2012 passed by the Tribunal allowing the appeal preferred by the revenue on the facts and circumstance of the case?

(vi) Whether the authorities below justified in law in levying interest under Section 234B and 234C of the Act on the facts and circumstances of the case?

2. Facts leading to filing of the appeal briefly stated are that the assessee is a private limited company carrying on the business of manufacture and export of ready made garments. The assessee for the Assessment year 2005-06 filed the return of income on 30.10.2005 declaring loss of Rs.29,69,644/-. The return of income was processed under Section 143(1) of the Act and thereafter the case was selected for scrutiny and notice under Section 143(2) of the Act was issued on 17.10.2006. The assessing officer by an order passed under Section 143(3) of the Act disallowed a sum of Rs.55,17,037/- being expenditure incurred, by invoking provisions of Section 40(a)(ia) of the Act. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 13.09.2010 inter alia held that amendment brought about in the Finance Act, 2010 in Section 40(a)(ia) of the Act is retrospective in nature and deleted the addition made by the assessing officer.

3. The revenue preferred an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’ for short). The tribunal vide order dated 04.04.2012 by placing reliance on decision of the special bench of the tribunal in M/S BHARATHI SHIPYARD LTD. VS. DCIT, 11 ITR (TRIB) 599 (Mum) held that the provisions of Section 40(a)(ia) of the Act as amended by Finance Act, 2010 are not retrospective in nature and reversed the order of the Commissioner of Income Tax (Appeals) and allowed the appeal preferred by the revenue. The assessee thereupon filed a Miscellaneous petition under Section 254(2) of the Act. The tribunal vide order dated 23.11.2012 dismissed the miscellaneous petition. In the aforesaid factual background, the assessee has approached this court.

4. Learned Senior Counsel for the assessee submitted that the first substantial question of law is no longer res integra, as the same has already been answered by Supreme Court in CIT VS. CALCUTTA EXPORT COMPANY, 404 ITR 654 (SC), wherein it has been held that amendment in Section 40(a)(ia) brought about by Finance Act, 2010 is curative in nature and has retrospective operation. In view of aforesaid enunciation of law, the first substantial question of law framed by a bench of this court has to be answered in favour of the assessee and the remaining questions of law need not be dealt with if the first substantial question of law is answered in favour of the assessee as they have been rendered academic. Learned Senior Counsel has also referred to a decision of this court in CIT VS. SANTOSH KUMAR SHETTY, 227 TAXMAN 170 (KARNATAKA). On the other hand, learned counsel for the revenue was unable to dispute the legal proposition laid down by the Supreme Court in the case of CALCUTTA EXPORT COMPANY supra.

5. We have considered the submissions made on both the sides and have perused the record. Before proceeding further, it is apposite to take note of Section 40(a)(ia) as amended by Finance Act, 2010, which reads as under:

Section 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, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

6. The issue whether the aforesaid amendment being curative in nature has retrospective operation was considered by the Supreme Court in the case of CALCUTTA EXPORT COMPANY supra and it was held that the purpose of amendment made by Finance Act, 2010 is to solve the anomalies and proviso was inserted to remedy unintended consequences and to make the provision workable. It was further held that 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. Thus, it was held that amendment made by Finance Act, 2010 in Section 40(a)(ia) being curative in nature is required to be given retrospective operation. The aforesaid decision was followed by a division bench of this Court in the case of SANTOSH KUMAR SHETTY supra. The issue with regard to retrospectivity of Section 40(a)(ia) is no longer res integra and is answered in favour of the assessee by the Supreme Court.

7. In view of aforesaid enunciation of law by the Supreme Court, the first substantial question of law is answered in favour of the assessee and against the revenue. In view of our answer to substantial question of law, the remaining substantial questions of law are rendered academic and therefore, it is not necessary to answer the same. In view of the preceding analysis, the order passed by the Income Tax Appellate Tribunal cannot be sustained in the eye of law, it is hereby quashed.

In the result, the appeal is allowed.