2018 (5) TMI 356 - SC - Income Tax

Section 40(a)(ia) amendment applies retrospectively from Assessment Year 2005-2006 following Allied Motors precedent on curative amendments

The SC held that the Finance Act, 2010 amendment to Section 40(a)(ia) of the IT Act should apply retrospectively from Assessment Year 2005-2006, when the ... Section 40(a)(ia) - retrospective effect - curative amendment - tax deduction at source (TDS) - provision supplying an obvious omission Section 40(a)(ia) - retrospective effect - curative amendment - tax deduction at source (TDS) - Whether the amendment made by the Finance Act, 2010 to Section 40(a)(ia) of the Income Tax Act operates retrospectively so as to apply to Assessment Year 2005-2006 and thereby permit deduction where TDS, though deducted in the previous year, was deposited by the due date for filing the return. - HELD THAT: - The Court examined the original insertion of Section 40(a)(ia), the amendments made by the Finance Act, 2008 and the further relaxation by the Finance Act, 2010, and the stated legislative purpose of securing TDS compliance while avoiding disproportionate hardship to bona fide taxpayers. The 2008 amendment remedied difficulties faced by deductors who deducted TDS in the last month of the previous year by allowing deposit by the due date for filing returns and was given retrospective effect from 01.04.2005. The 2010 amendment further relaxed the timelines to permit deposit of TDS made during the previous year by the due date of filing the return; although the Memorandum to the Finance Bill stated the amendment would take effect from 01.04.2010 (applying to Assessment Year 2010-11), the Court held that the amendment is curative - remedying unintended and onerous consequences and supplying an obvious omission - and therefore should be given retrospective operation to the date of insertion of Section 40(a)(ia). Reliance was placed on this Court's precedent treating similar provisos as retrospective when they cure unintended consequences (Allied Motors (P.) Ltd. and follow-up decisions). Applying that principle, the Court held that the 2010 amendment must be interpreted liberally and equitably so that assessees who deducted TDS and deposited it by the due date for filing the return in the relevant year are not subjected to disproportionate disallowance, and consequently the assessee in the present case, having deposited TDS on 01.08.2005 in accordance with the due date under Section 139, is entitled to the deduction. [Paras 27, 28, 29, 30, 31] The amendment effected by the Finance Act, 2010 to Section 40(a)(ia) is to be given retrospective effect from the date of insertion of the provision (Assessment Year 2005-2006), and the assessee is entitled to claim the deduction as held by the Tribunal and the High Court. Final Conclusion: Appeals dismissed. The High Court judgment upholding entitlement of the assessee to claim deduction (in respect of TDS deposited by the due date) is affirmed; parties to bear their own costs. Issues Involved:1. Retrospective application of the amendment made by the Finance Act, 2010 to Section 40(a)(ia) of the Income Tax Act, 1961.2. Interpretation of the legislative intent behind the amendment.Issue-wise Detailed Analysis:1. Retrospective Application of the Amendment:The primary issue was whether the amendment made by the Finance Act, 2010 to Section 40(a)(ia) of the IT Act is retrospective in nature and thus applicable to the Assessment Year 2005-06.The court noted that the amendment aimed to mitigate hardships faced by taxpayers who had deducted and paid TDS, albeit late. The amendment allowed TDS to be deposited by the due date for filing the return of income, thus providing additional time to the deductors. The memorandum explaining the Finance Bill, 2010 specified that the amendment would apply from the Assessment Year 2010-11. However, the court observed that the amendment was curative and intended to remedy unintended consequences, thus requiring retrospective application.The court referenced the decision in Allied Motors (P) Ltd. vs. CIT, Delhi (1997) 224 ITR 677 (SC), which held that amendments of a curative nature should be applied retrospectively to ensure reasonable interpretation and to serve the object behind the enactment.2. Interpretation of Legislative Intent:The court examined the legislative intent behind Section 40(a)(ia) and its subsequent amendments. Initially, the section aimed to ensure compliance with TDS provisions by disallowing deductions for expenses where TDS was not deducted or deposited within the prescribed time. However, this caused hardships, especially for tax deducted in the last month of the previous year, where the due date for payment was only seven days later.To address these issues, the Finance Act, 2008 amended the section to allow deductions if TDS was paid before the due date of filing the return. This amendment was given retrospective effect from 01.04.2005. Despite this, hardships persisted for taxpayers who deducted TDS in the earlier months but deposited it late.The Finance Act, 2010 further relaxed the provisions by allowing all TDS made during the previous year to be deposited by the due date of filing the return. The court noted that the legislative intent was not to punish taxpayers but to ensure tax compliance. Thus, the 2010 amendment aimed to remove the hardships and should be interpreted as having retrospective effect.The court concluded that the amendment by the Finance Act, 2010 should be applied retrospectively from the date of insertion of Section 40(a)(ia), i.e., from the Assessment Year 2005-06. This interpretation ensures that taxpayers who substantially complied with TDS provisions by deducting and paying TDS, even if late, are not unduly penalized.Judgment:The Supreme Court upheld the High Court's decision, stating that the amendment made by the Finance Act, 2010 to Section 40(a)(ia) of the IT Act is retrospective in nature and applies from the Assessment Year 2005-06. Consequently, the assessee was allowed to claim the benefit of the amendment, and the appeals were dismissed. All connected appeals and applications were disposed of accordingly, with parties bearing their own costs.