Assessee not required to deduct TDS from payments made taxable by retrospective amendments

The Bombay HC upheld the Tribunal's decision favoring the assessee on two issues. First, regarding TDS u/s 195 on payments to non-residents for sampling and consultancy services, the court held that the assessee could not be expected to deduct tax at source from payments that became taxable only due to retrospective amendments by Finance Act 2010, applying the principle that law does not demand the impossible. Second, concerning expenditure on temple repairs and school construction, the court ruled these were allowable revenue expenditures incurred for business exigencies to maintain cordial relations with villagers around mining areas, as no capital asset was acquired by the assessee.

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Issues Involved:
1. Deletion of addition under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Deletion of disallowance of expenditure on renovation of temples.
3. Deletion of disallowance of donation to school for building construction.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 40(a)(ia) of the Income Tax Act, 1961
The Tribunal deleted the addition of Rs. 6,94,32,433/- made on account of disallowance under Section 40(a)(ia). The Respondent Assessee had made payments to non-residents for sampling and analysis of cargo and professional consultancy fees, believing these were not taxable under the IT Act or relevant DTAA. The AO and CIT (A) disagreed, citing Explanation to Section 9(1)(vii) and the retrospective amendment by the Finance Act, 2010. The Tribunal, however, sided with the Assessee, referencing the principle that one cannot be expected to comply with a law that was not in force at the time of the transaction. This view was supported by the Supreme Court’s decision in Engineering Analysis Centre of Excellence (P) Ltd. and the precedent set in Ajit Ramakant Phatarpekar.

Issue 2: Deletion of Disallowance of Expenditure on Renovation of Temples
The AO disallowed Rs. 81,16,257/- for temple renovations, deeming it capital expenditure. The CIT (A) upheld this, citing the large quantum of the expense. The Tribunal overturned this, recognizing the expenditure as necessary for maintaining good relations with villagers around the mining area, thus qualifying as revenue expenditure. The Tribunal found no capital asset was acquired, aligning with the principle that business exigency justifies such expenses.

Issue 3: Deletion of Disallowance of Donation to School for Building Construction
Similarly, the AO disallowed Rs. 20,00,000/- for a school donation, also deemed capital expenditure. The CIT (A) upheld this, again citing the large quantum. The Tribunal found the expenditure necessary for maintaining local goodwill, thus allowable as revenue expenditure. The Tribunal noted that the quantum of expenditure is irrelevant if it serves business purposes and does not create a capital asset.

Conclusion:
The High Court upheld the Tribunal’s findings, emphasizing that the Respondent could not be expected to comply with retrospective tax laws and that expenditures aimed at maintaining good business relations and not resulting in capital assets are allowable as revenue expenses. The appeal was dismissed with no substantial question of law arising.

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