2016 (10) TMI 1038 - AT - Income Tax

Income Tax Tribunal: Retrospective Application of Section 40(a)(ia) Proviso

The Tribunal held that the second proviso to section 40(a)(ia) of the Income Tax Act is retrospective, following the Delhi High Court's decision. It ... Disallowance u/s. 40(a)(ia) - retrospectivity - Whether the second proviso to section 40(a)(ia) inserted by Finance Act, 2012, is applicable retrospectively or w.e.f. 01-04-2013? - Held that:- It is a well settled law that where two divergent views are possible and both the views are equally convincing, the view in favour of the assessee must be adopted. Thus, applying the ratio laid down by the Hon'ble Supreme Court of India in the case of CIT Vs. Vegetable Products Ltd. (1973 (1) TMI 1 - SUPREME Court ) we accept the contentions of the assessee and hold that the second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is applicable retrospectively w.e.f. 01-04-2005. Jurisdiction by CIT Tax u/s. 263 of the Act - payment of rent without tds deduction - Held that:- We find that the Assessing Officer during the assessment proceedings has failed to consider the payment of rent without deduction of tax at source and/or without ascertaining the fact whether the tax has been paid by the recipient of the rent. The ld. AR has placed on record a copy of Form No. 26A at pages 20 to 22 of the paper book to show that M/s. Elpro International Ltd. has paid tax on rental income received from the assessee. However, this fact requires verification. Therefore, we deem it appropriate to modify the impugned order and direct the Assessing Officer to pass fresh order after considering the fact that rent payment has been made by the assessee to M/s. Elpro International Ltd. without deducting tax at source and its implications under the provisions of the Act. The Assessing Officer shall pass assessment order in accordance with law, after affording sufficient opportunity of hearing to the assessee. Issues Involved:1. Non-deduction of tax at source (TDS) on rent paid by the assessee.2. Applicability of the second proviso to section 40(a)(ia) of the Income Tax Act, 1961.3. Jurisdiction of Pr. Commissioner of Income Tax under section 263 of the Income Tax Act.Detailed Analysis:1. Non-deduction of TDS on Rent Paid by the Assessee:The assessee, engaged in marketing and sale of products of YM Group, filed its return of income for the assessment year 2010-11, declaring a total income of Rs. 5,56,78,600/-. During the relevant period, the assessee paid rent of Rs. 1,15,90,000/- to M/s. Elpro International Ltd. without deducting tax at source. The Pr. Commissioner of Income Tax issued a notice under section 263 of the Act for this non-deduction of TDS. The assessee contended that the non-deduction was based on a certificate issued by the Department for a lesser rate of TDS (0.75% plus S.C. & E.C.). However, the Pr. Commissioner of Income Tax held that the Assessing Officer erred by not disallowing the expenditure under section 40(a)(ia) of the Act, resulting in under-assessment of income.2. Applicability of the Second Proviso to Section 40(a)(ia):The primary issue was whether the second proviso to section 40(a)(ia), inserted by the Finance Act, 2012, is applicable retrospectively or from 01-04-2013. The Pr. Commissioner of Income Tax, relying on the judgment of the Hon'ble Kerala High Court in Prudential Logistics And Transports Vs. Income Tax Officer (364 ITR 689), held that the proviso is prospective and effective from 01-04-2013. The assessee argued that the proviso should be applied retrospectively, citing the Hon'ble Delhi High Court's decision in Commissioner of Income Tax Vs. Ansal Land Mark Township (P) Ltd. (377 ITR 635), which held the proviso to be declaratory and curative, thus having retrospective effect from 1st April 2005.3. Jurisdiction of Pr. Commissioner of Income Tax under Section 263:The Pr. Commissioner of Income Tax invoked section 263 to set aside the assessment order, directing the Assessing Officer to reconsider the non-deduction of TDS on rent. The Tribunal noted that the Assessing Officer failed to consider whether TDS was deducted on the rent paid by the assessee. The Tribunal found that the Pr. Commissioner of Income Tax correctly invoked section 263 but should have directed the Assessing Officer to verify if the recipient had paid tax on the rental income.Conclusion:The Tribunal agreed with the assessee's contention that the second proviso to section 40(a)(ia) is retrospective, following the Delhi High Court's decision. It directed the Assessing Officer to verify if M/s. Elpro International Ltd. had paid tax on the rental income received from the assessee. If verified, no disallowance under section 40(a)(ia) would be warranted. The appeal was partly allowed, and the case was remitted to the Assessing Officer for fresh adjudication in light of these observations.