2015 (9) TMI 79 - HC - Income Tax

Second Proviso to Section 40(a)(ia) Has Retrospective Effect from April 2005, Benefiting Assessees Filing Returns

The HC held that the second proviso to Section 40(a)(ia), inserted by the Finance Act 2012 effective from 1 April 2013, has retrospective effect from 1 ... Retrospective operation of curative and declaratory amendment - second proviso to Section 40(a)(ia) of the Income Tax Act - assessee not to be treated as assessee in default where payee files return and pays tax - disallowance under Section 40(a)(ia) for failure to deduct tax at sourcePrior adjudication binding on identical questions - Questions (a) to (e) in the memorandum of appeal, which were answered in the earlier order in ITA No. 162 of 2015, are taken to be answered in favour of the assessee for the present assessment years. - HELD THAT: - The Court recorded that the points raised as questions (a) to (e) in the Revenue's memorandum of appeal have already been decided in favour of the assessee by its order dated 2 March 2015 in ITA No. 162 of 2015 relating to an earlier assessment year, and consequently those questions 'for the present AYs also stand answered in favour of the Assessee and against the Revenue.' The Court treated that prior determination as dispositive for those framed questions in the present appeals and declined to reopen or relitigate those issues. [Paras 4]The previously decided questions (a) to (e) are applied to AY 2008-09 and AY 2009-10 in favour of the assessee.Second proviso to Section 40(a)(ia) of the Income Tax Act - retrospective operation of curative and declaratory amendment - assessee not to be treated as assessee in default where payee files return and pays tax - deletion of additions made for failure to deduct tax at source - The second proviso to Section 40(a)(ia) is declaratory and curative and, on the facts, operates to preclude disallowance where the payee has filed returns and paid tax; the ITAT's deletion of additions is sustainable. - HELD THAT: - The Court examined the effect of the second proviso to Section 40(a)(ia), noting it creates a legal fiction treating the assessee as having deducted and paid tax where the payee-who filed returns and paid tax-qualifies under the first proviso to Section 201(1). Observing that both provisos are intended to benefit the assessee and operate to avoid a disallowance where there is no actual loss of revenue, the Court accepted the reasoning of the Agra Bench of the ITAT in Rajiv Kumar Agarwal v. ACIT that the proviso is remedial/curative and should be given retrospective effect (from 1 April 2005, the date from which sub-clause (ia) was inserted). Applying that principle to the present appeals, where it was not disputed that the payee had filed returns and offered the sum to tax, the Court found no legal infirmity in the ITAT's order deleting the additions made for alleged failure to deduct tax at source and upheld the ITAT's conclusion. [Paras 9, 13, 14, 15, 16]The second proviso to Section 40(a)(ia) is declaratory/curative and operates (on the facts) to negate the disallowance; the ITAT's deletion of additions is upheld and the appeals are dismissed.Final Conclusion: The High Court dismissed the Revenue's appeals challenging the ITAT's deletion of additions for AY 2008-09 and AY 2009-10: previously decided questions were applied in favour of the assessee, and the Court accepted that the second proviso to Section 40(a)(ia) operates as a curative/declaratory provision (protecting deduction where the payee has filed return and paid tax), leaving the ITAT's order intact. Issues:- Appeal against common order dated 21st July 2014 passed by ITAT for AYs 2008-09 and 2009-10- Disallowance of payment made by Assessee to APIL under Section 194J- Retrospectivity of the second proviso to Section 40(a) (ia) of the ActAnalysis:1. The appeals by the Revenue were against the ITAT's order for AYs 2008-09 and 2009-10. The questions raised by the Revenue concerning the deletion of certain additions were answered in favor of the Assessee in a previous order. Another issue raised was about the retrospectivity of the second proviso to Section 40(a) (ia) of the Act.2. The main issue was the disallowance of payment made by the Assessee to APIL under Section 194J. The Assessee argued that due to the insertion of the second proviso to Section 40(a) (ia) of the Act, the payment could not have been disallowed. The Assessee relied on a decision by the Agra Bench of ITAT, which held that the second proviso is declaratory and curative in nature and should have retrospective effect from 1st April 2005.3. The second proviso to Section 40(a) (ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. It introduces a legal fiction where an Assessee failing to deduct tax is not deemed in default under certain conditions. The Court analyzed the provisions of Section 40(a) (ia) and Section 210 (1) of the Act, emphasizing that the intention was not to penalize the Assessee if the payee has filed returns and paid tax on the income.4. The Agra Bench of ITAT's reasoning on the second proviso was accepted by the Court. It concluded that the proviso is declaratory and curative, with retrospective effect from 1st April 2005. Consequently, the Court found no legal infirmity in the ITAT's order and dismissed the appeal, stating that no substantial question of law arises in the present case.