2011 (10) TMI 755 - AT - Income Tax

Appeal dismissed for failure to deduct TDS, Tribunal upholds disallowance, no retrospective application allowed

The appeal against the CIT's order under section 263 of the Income Tax Act for the assessment year 2006-07 was dismissed by the Tribunal. The Tribunal ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the assessment order is erroneous and prejudicial to the revenue under the revisionary power where the assessee failed to deduct TDS timely and remitted TDS late, thereby attracting disallowance under section 40(a)(ia). 2. Whether late deduction and late remittance of TDS in the assessment year in question attract disallowance under section 40(a)(ia) despite subsequent deposit of tax before the return filing due date. 3. Whether the amendment to section 40(a)(ia) effected by the Finance Act, 2010 has retrospective/curative effect so as to negate disallowance for years prior to the express retrospective period specified by the amendment. 4. The precedential weight of the Special Bench decision holding that the Finance Act, 2010 amendment to section 40(a)(ia) does not have retrospective effect, as against other judicial decisions cited by the assessee. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of revision under section 263 for failure to deduct/late remit TDS resulting in disallowance under section 40(a)(ia) Legal framework: Section 263 authorizes revision where an assessment order is erroneous in law and prejudicial to the interests of the revenue. Section 40(a)(ia) disallows expenditure where tax is required to be deducted at source under specified provisions (e.g. sections 194C, 194J) but is not deducted, or is deducted but not paid to Government within the prescribed time. Interpretation and reasoning: The Tribunal examined dates of payment/credit to numerous payees (May 2005-February 2006) and found that TDS was deducted/paid only on 31.3.2006 for 170 payment instances. Since deduction under sections 194C and 194J is triggered at the time of credit or payment, whichever is earlier, the failure to deduct at those earlier dates and the delay in remittance meant condition(s) of section 40(a)(ia) were satisfied. The AO's omission to disallow such expenditure therefore rendered the assessment order erroneous and prejudicial to revenue, justifying exercise of power under section 263. Precedent treatment: The Tribunal applied the statutory tests in light of textual provisions of sections 194C/194J and 40(a)(ia) rather than relying on competing case law proffered by the assessee; it treated the AO's omission as a legal error prejudicial to revenue. Ratio vs. Obiter: Ratio - where payments/credits precede deduction/remittance, section 40(a)(ia) disallowance is properly attracted and failure by AO to apply it makes the assessment order erroneous and prejudicial to revenue; thus revision under section 263 is justified. No separate or dissenting view was expressed. Conclusion: Revision under section 263 was valid and the direction to disallow the expenditure under section 40(a)(ia) was justified on facts where deduction/credit pre-dated the date of deduction/remittance. Issue 2 - Effect of subsequent deposit before return filing and applicability of proviso to section 40(a)(ia) Legal framework: Section 40(a)(ia) contains a proviso (as in force for relevant years) permitting claim of expenditure in a subsequent year where tax has been deducted and paid to Government beyond prescribed period but within specified timelines, subject to conditions. Interpretation and reasoning: The Tribunal acknowledged that the assessee deposited tax on 31.3.2006 and that such deposit beyond the prescribed period may permit claim of the expenditure in the subsequent year (2007-08) under the proviso. However, for the assessment year 2006-07 the provisions attract disallowance because deduction/credit occurred earlier and remittance was late. Ratio vs. Obiter: Ratio - late deposit does not cure disallowance for the year in which deduction/credit occurred; it merely enables possible deduction in a subsequent year if proviso conditions are met. This formed part of the operative reasoning. Conclusion: The late deposit does not avert disallowance in the year 2006-07; it may only enable the assessee to claim the expenditure in the subsequent year subject to the proviso's conditions. Issue 3 - Whether the Finance Act, 2010 amendment to section 40(a)(ia) is remedial/retrospective so as to avoid disallowance for earlier years Legal framework: The amendment to section 40(a)(ia) by Finance Act, 2010 specified retrospective application from the assessment year expressly stated by the legislation; retrospective or curative operation depends on legislative intent and any express provision. Precedent Treatment: The Tribunal accepted and applied the Special Bench decision which held that the 2010 amendment does not have retrospective effect beyond the expressly stated period and is not curative of earlier years. The assessee's reliance on other decisions (various High Courts/Tribunal Benches) asserting remedial/retrospective effect was considered but not accepted as overruling the Special Bench authority relied upon by the revenue. Interpretation and reasoning: The Tribunal relied on the Special Bench's analysis of legislative intent and the statutory language showing that the amendment was made expressly applicable from assessment year 2010-11 and not demonstrably curative of earlier years. Notes on Clauses and memorandum accompanying the Finance Bill did not indicate an intention to relax provisions retrospectively to the assessment year 2005-06. On that basis, the Tribunal rejected the contention that the amendment should be treated as retrospectively curative back to 2005-06. Ratio vs. Obiter: Ratio - the 2010 amendment to section 40(a)(ia) is not retrospective/curative to prior assessment years beyond the period expressly provided by the amendment; accordingly it cannot be relied upon to negate disallowance for the relevant earlier assessment year. Conclusion: The plea that the 2010 amendment is remedial/retrospective is rejected; the amendment does not negate disallowance for the assessment year in question. Issue 4 - Precedential weight of Special Bench decision vs. other authorities cited by the assessee Legal framework: Conflicting judicial decisions require selection of binding or persuasive authority; Special Bench decisions of the Tribunal carry substantial precedential weight within the Tribunal's jurisdiction. Interpretation and reasoning: The Tribunal explicitly relied upon the Special Bench decision which directly addressed the retrospective effect of the 2010 amendment and concluded non-retrospectivity beyond the specified period. The Tribunal found that reasoning authoritative and controlling over the assessee's cited decisions which were either distinguishable or insufficient to displace the Special Bench view. Ratio vs. Obiter: Ratio - where a controlling Special Bench decision addresses the precise legal question (retrospective effect of the amendment), that decision governs and supersedes conflicting, non-controlling decisions for purposes of adjudication in the Tribunal. Conclusion: The Special Bench decision was held to govern the question of retrospectivity and the assessee's contrary authorities did not persuade the Tribunal to depart from that view. Final Disposition On the combined application of sections 194C/194J and 40(a)(ia), the Tribunal upheld the revision under section 263 directing disallowance for late/non-deduction and late remittance of TDS for the assessment year in question; the subsequent Finance Act, 2010 amendment was held not to have retrospective curative effect to negate that disallowance, and the appeal was dismissed.