2013 (9) TMI 275 - HC - Income Tax

Amendments to Section 40(a)(ia) apply prospectively, allowing TDS deductions if paid by return due date under Section 139(1)

Commissioner of Income Tax XIII Versus Naresh Kumar, M/s Talbros (P) Ltd.

The HC held that the amendments to Section 40(a)(ia) by the Finance Act, 2010, are prospective and clarify that TDS payments made on or before the due ... Amendments made to Section 40(a)(ia) by Finance Act, 2010 - Retrospective effect or Prospective effect - TDS on amount paid on before 28th February not paid before 31st March - But deposited before due date of filing of return - Impact of non-compliance with TDS provisions on the deductibility of expenses - Held that:- Question whether the amendment is retrospective or prospective is vexed and rigid rule can be applied universally. Various rules of interpretation have developed in order to determine whether or not, an amendment is retrospective or prospective. Fiscal statutes imposing liabilities are governed by normal presumption that they are not retrospective. The cardinal rule is that the law to be applied, is that which is in force on the first day of the assessment year, unless otherwise mandated expressly or provided by necessary implication. The aforesaid dictum is based upon the principle that a new provision creating a liability or an obligation, affecting or taking away vested rights or attaching new disability is presumed to be prospective. However, it is accepted that Legislatures have plenary power to make retrospective amendments, subject to Constitutional restrictions. Section 43B deals with statutory dues and stipulates that the year in which the payment is made the same would be allowed as a deduction even if the assessee is following the mercantile system of accountancy. The proviso, however, stipulates that deduction would be allowed where the statutory dues covered by Section 43B stand paid on or before the due date of filing of return of income. Section 40(a)(ia) is applicable to cases where an assessee is required to deduct tax at source and fails to deduct or does not make payment of the TDS before the due date, in such cases, notwithstanding Sections 30 to 38 of the Act, deduction is to be allowed as an expenditure in the year of payment unless a case is covered under the exceptions carved out. The amended proviso as inserted by Finance Act, 2010 states where an assessee has made payment of the TDS on or before the due date of filing of the return under Section 139(1), the sum shall be allowed as an expense in computing the income of the previous year. The two provisions are akin and the provisos to Sections 40(a)(ia) and 43B are to the same effect and for the same purpose. Principle of matching which is disturbed by Section 40(a)(ia) of the Act, 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 as they have necessary cushion to absorb the effect. However, marginal and medium taxpayers, who work at low G.P. rate and when expenditure which becomes subject matter of an order under Section 40(a)(ia) is substantial, can suffer severe adverse consequences as is apparent from the case of Naresh Kumar. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Nevertheless the Section 40(a)(ia) has to be given full play keeping in mind the object and purpose behind the section. At the same time, the provision can be and should be interpreted liberally and equitable so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. Case of Naresh Kumar is not one of rare cases, but one of several cases as we find that Section 40(a)(ia) is invoked in large number of cases. It is apparent that the respondent assesse did not violate the unamended section 40(a)(ia) of the act - The amended provisions are clear and free from any ambiguity and doubt. They will help curtail litigation. The amended provision clearly support the expression “said due date” used in clause A of proviso to unamended section refers to time specified in Section 139(1) of the Act. The amended section 40(a)(ia) expands and further liberalises the statue when it stipulates that deductions made in the first eleven months of the previous year but paid before the due date of filing of the return, will constitute sufficient compliance. Following the decision in Rajinder Kumar [2013 (7) TMI 454 - DELHI HIGH COURT], Decided against Revenue. ISSUES: Whether the amendments made by Finance Act, 2010 to Section 40(a)(ia) of the Income Tax Act should be given retrospective effect.Interpretation of the proviso to Section 40(a)(ia) regarding timing of deduction and payment of tax deducted at source (TDS) for allowing expenditure deduction.The legal consequences of failure to deduct or pay TDS within prescribed timelines under Section 40(a)(ia).Whether Section 40(a)(ia) is a substantive or procedural provision for the purpose of retrospective application.Application of principles of statutory interpretation and fairness in construing retrospective effect of tax amendments.Whether the amended proviso to Section 40(a)(ia) aligns with the legislative intent to ensure compliance without causing disproportionate hardship. RULINGS / HOLDINGS: The amendments made by Finance Act, 2010 to Section 40(a)(ia) are to be given retrospective effect, as they are clarificatory and remedial, aimed at making the provision workable and reasonable.The expression 'said due date' in the proviso to Section 40(a)(ia) refers to the due date for filing the return under Section 139(1) of the Income Tax Act, not the date on which TDS must be deposited under Chapter XVII-B.Where tax is deducted during the previous year but paid after the due date, the expenditure shall be allowed as a deduction in the previous year in which such tax has been paid, thus shifting the year of deduction but not disallowing it altogether.Failure to deduct or pay TDS attracts mandatory consequences such as interest under Sections 201/201A, penalty under Sections 221 and 271C, and possible prosecution under Section 276B; however, Section 40(a)(ia) is not primarily a penal provision but a machinery provision to ensure compliance.Section 40(a)(ia), particularly the amendment, is procedural in nature as it regulates the timing and manner of allowing deductions, and does not impose new tax liabilities or extinguish vested rights.The amended proviso liberalizes the statute by allowing deductions if TDS is paid on or before the due date of filing the return, thus mitigating harsh consequences and aligning with the legislative purpose of augmenting TDS compliance.The appeals by Revenue challenging retrospective effect of the amendment and the Tribunal's interpretation are dismissed for lack of merit. RATIONALE: The Court applied principles of statutory interpretation distinguishing substantive and procedural law, holding that amendments to machinery provisions like Section 40(a)(ia) are procedural and may be given retrospective effect to make the law workable.Reference was made to prior authoritative decisions emphasizing that remedial or clarificatory amendments intended to remedy unintended consequences or supply omissions are to be construed as retrospective unless expressly prohibited.The Court relied on the legislative memorandum explaining the amendments, which stated the amendments were retrospective and aimed at ensuring compliance with TDS provisions without causing undue hardship.Principles of fairness and proportionality were emphasized, noting that strict literal application of Section 40(a)(ia) without regard to timing of TDS payment would lead to disproportionate and unintended hardship, especially for small and medium taxpayers.Comparative analysis was drawn with Section 43B of the Income Tax Act and relevant case law where retrospective effect was granted to similar provisos to avoid anomalies and to give effect to legislative intent.The Court rejected the Revenue's interpretation that 'said due date' means the date for TDS payment under Chapter XVII-B, holding instead that it refers to the due date for filing the return under Section 139(1), thus harmonizing the main section and proviso.The judgment underscores the need to construe tax statutes reasonably and pragmatically to effectuate the charging provisions and avoid rendering machinery provisions as 'iron rod' provisions causing malevolent results beyond legislative intent.