2019 (9) TMI 733 - HC - Income Tax

Court rules Section 40(a)(ia) proviso clarificatory, retrospective. Disallowance not justified if recipient pays tax.

The court held that the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961, inserted by the Finance Act, 2012, is clarificatory and ... Disallowance u/s 40(a)(ia) - Additions for non-deduction of TDS - retrospectively or prospectivity - second proviso to Section 40(a)(ia) of the Act inserted by Finance Act, 2012 whether is clarificatory and retrospective in nature - whether disallowance under Section 40(a)(ia) of the Act by the Tribunal is justifiable where the recipient of the amount has already discharged his tax liability therein? - HELD THAT:- Keeping in mind, the judgment of the Hon’ble Apex Court in Vatika Township Private Ltd [2014 (9) TMI 576 - SUPREME COURT] the principle of fairness, we find no reason to deviate from the decision of the Hon’ble Delhi High Court in the case of Ansal Land Mark Township Pvt. Ltd. [2015 (9) TMI 79 - DELHI HIGH COURT] in which it was held that the second proviso to Section 40 (a) (ia) of the Act is declaratory and curative in nature and has retrospective effect from 1st April 2005, merits acceptance. No substantial question of law arises - Decided in favour of the Assessee Issues Involved:1. Whether the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961, inserted by Finance Act, 2012, is clarificatory and retrospective in nature.2. Whether the disallowance under Section 40(a)(ia) by the Tribunal is justifiable where the recipient of the amount has already discharged their tax liability.Issue-wise Detailed Analysis:1. Retrospectivity and Clarificatory Nature of the Second Proviso to Section 40(a)(ia):The substantial question of law was whether the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961, inserted by the Finance Act, 2012, is clarificatory and retrospective in nature. The appellants argued that the specific date prescribed for the effect of the second proviso (01.04.2013) does not allow for retrospective interpretation. They relied on judgments from the Kerala High Court in Prudential Logistics and Transports vs. Income Tax Officer, Kozhikode, and Thomas George Muthoot vs. The Commissioner of Income Tax, which did not support retrospective application.Conversely, the respondents contended that the payments made to sub-contractors were already taxed in their returns, resulting in no actual revenue loss. They argued that the second proviso was intended to cure the shortcomings of Section 40(a)(ia) and should be applied retrospectively from April 1, 2005. They cited several judgments, including the Delhi High Court's decision in Commissioner of Income-Tax v. Ansal Land Mark Township P. Ltd. and the Supreme Court's ruling in Commissioner of Income-Tax v. Calcutta Export Company, which supported the retrospective application.The court referred to the rationale behind the insertion of the second proviso, stating that it is declaratory and curative in nature, and should be given retrospective effect from April 1, 2005. This was based on the understanding that the provision aimed to ensure that an expenditure should not be disallowed if the corresponding income has been taxed. The court also highlighted the judgment of the Supreme Court in CIT v. Vatika Township Private Ltd., which emphasized that beneficial provisions should be applied retrospectively.2. Justifiability of Disallowance under Section 40(a)(ia):The court examined whether the disallowance under Section 40(a)(ia) by the Tribunal was justifiable where the recipient had already discharged their tax liability. The court noted that several High Courts, including the Delhi High Court in CIT v. Ansal Land Mark Township P. Ltd., had held that the second proviso should be applied retrospectively, thus supporting the view that disallowance is not justified if the recipient has paid the tax.The court also referred to the judgment of the Bombay High Court in the case of Perfect Circle India Pvt. Ltd., which aligned with the Delhi High Court's view and emphasized that the second proviso should be given retrospective effect. Additionally, the court mentioned the Supreme Court's observation in Hindustan Coca Cola Beverages P Ltd v. CIT that if the payee had already paid the tax, the payer could only be asked to pay interest on the delayed deposit of tax.In light of these judgments, the court concluded that the disallowance under Section 40(a)(ia) was not justified if the recipient had already discharged their tax liability.Conclusion:The court answered the substantial question of law against the Revenue and in favor of the assessee, subject to the result of the Civil Appeal No.1248/2016 pending before the Supreme Court in the case of Commissioner of Income Tax, Uttar Pradesh vs. M/s Tide Water Marine INTL. Inc., Delhi. The income tax appeal was disposed of accordingly.