TaxTMI 
TaxTMI 
2011 (9) TMI 258
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....rial on record we find that the said contribution received from the employees has been admittedly deposited after the due date under the respective Act but before the close of the previous year relevant to the assessment year under consideration. The Hon'ble Madras High Court in CIT v. Shri Ganapathy Mills Company Ltd. [2000] 243 ITR 879 (Mad.) has held that no disallowance can be made where the contribution is deposited late but within the grace period. In most of the cases the deposit has been made with in the grace period. The Hon'ble Delhi High Court in CIT v. Aimil Ltd. [2010] 321 ITR 508 (Delhi) has held that if the employees' share of contribution is paid before the due date of filing the return under section 139(1) of the Income-tax Act, 1961 (hereinafter called the Act), then no disallowance can be made. In view of the foregoing facts it is clear that the assessee deserves and is hereby allowed relief on this issue in the light of the above precedents. This ground is allowed. 4. Ground No. 4 about the confirmation of disallowance of Rs. 1,55,161 made by the A.O. under section 14A of the Act was not pressed by the learned A.R. The same is, therefore, dismisse....
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....12. The provision in question has been specifically given retrospective effect from assessment year 2010-11. Now the case of the assessee is that the amendment made by the Finance Act, 2010 should be given retrospective effect from 1-4-2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. In order to find answer to this question it would be relevant to note down the legislative history of the provision. 8. Section 40 has certain clauses providing for the amounts which are not deductible. Sub-clause (ia) of clause (a) of section 40 was inserted by the Finance (No.2) Act, 2004 with effect from 1st April, 2005 reading as under:- "40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computed the income chargeable under the head 'Profits and gains of business or profession'-. ** ** ** (ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour....
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....e that clause (a) of section 40 provides that in the case of any assessee (i) any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India; or in India to a non-resident, not being a company or to a foreign company on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200, shall not be allowed as deduction. There is a proviso to sub-clause (i) which provides that where in respect of any such sum, tax has been deducted in any subsequent year or has been deducted in the previous year but paid in a subsequent year after the expiry of the time prescribed under section 200(1), such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid. Sub-clause (i) of section 40(a) is there in the Income-tax Act, 1961 since inception. Alike provision was there in the 1922 Act also as a portion of proviso to section 10(2)(iii). The effect of sub-clause (i) of section 40(a) is that the a....
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....esident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been paid,- (A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or (B) in any other case, on or before the last day of the previous year. Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted- (A) during the last month of the previous year but paid after the said due date ; or (B) during any other month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid." ; 14. Here it is important to note that Chapter IV-D deals with the income under the head 'Profits and gains of business or profession' section 28 contains a list of items of income which shall be chargeable to i....
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.... such tax deducted at source is required to be deposited on the same day, in others on or before 7 days from the end of the month in which the deduction is made etc. Hence in no case the time limit for depositing the amount of tax deducted at source during the financial year is beyond 30th April, of the next financial year. This is the mandate of section 200(1) read with Rule 30. Reverting to section 40(a)(ia) as originally inserted, any tax deducted at source during the previous year relevant to assessment year 2005-06 was obliged to be paid either upto 31st March, 2005 and in certain cases where the time is available under section 200(1) , latest by 30th April, 2005 depending upon the provision under which tax is deducted. Failure to abide by such time limits caused disallowance under section 40(a)(ia) as per by the Finance (No.2) Act, 2004. 17. The Finance Act, 2008 brought out amendment to section 40(a)(ia) w.e.f. 1-4-2005 by relaxing earlier position to some extent. It made two categories of defaults causing disallowance on the basis of the period of the previous year in which tax was deductible. The first category of disallowances included the cases in which tax was deduct....
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....has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid." 20. From the above provision as amended by the Finance Act, 2010 with retrospective effect from 1st April, 2010 it can be seen that the only difference which this amendment has made is dispensing with the earlier two categories of defaults as per the Finance Act, 2008, as discussed in para 17 of this order, causing disallowance on the basis of the period of the previous year during which tax was deductible. The first category of disallowances included the cases in which tax was deductible and was so deducted during the last month of the previous year but there was failure to pay such tax on or before the due date specified in sub-section (1) of section 139. The Finance Act, 2010 has not tinkered with this position. The second category of the Finance Act, ....
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....n clauses and Memorandum explaining the provision while introducing Finance Bill, 2010 as under :- Notes on clauses "Clause 12 of the Bill seeks to amend section 40 of the Income-tax Act relating to amounts not deductible. Under the existing provisions contained in sub-clause (ia) of clause (a) of the aforesaid section, non-deduction of tax or non-payment of tax after deduction on payment of any sum by way of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or sub-contractor, being resident, results in the disallowance of the said sum, in the computation of income of the payer, on which tax is required to be deducted under Chapter XVII-B. It is proposed to amend sub-clause (ia) of clause (a) of the aforesaid section to provide that disallowance under the said sub-clause will be attracted, if, after deduction of tax during the previous year, the same has not been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139. The proviso to the said sub-clause provides that where in re....
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.... proposed to amend the section for providing that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139 of the Act. 25. It can thus be noticed that the amendment to section 40(a)(ia) by the Finance Act, 2010 has been specifically made retrospectively applicable from the assessment year 2010-11. It has no where been expressly set out that the amendment is curative or merely declaratory of the previous law. The intention of the legislature as gathered from the Notes on clauses and the Memorandum explaining the provisions of the Finance Bill does not particularly indicate any relaxation in the provision retrospectively from assessment year 2005-06 by providing that the expenditure on which due tax was deducted up to February, 2005 but paid before the due date specified in section 139(1) of the Act shall not suffer any disallowance in the assessment year 2005-06. 26. There can be no denial to the fact that merely because a provision has been expressly made prospective, can still, in certain circumstances, be retrospective. In order ....
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....ce Minister, taking into consideration all such pre-budget representations, has given the relaxation in the terms indicated above. To further strengthen his case, the ld. AR also submitted that the due deduction of tax at source coupled with a little late deposit should be viewed as substantial compliance with the TDS provisions inasmuch as the Government's interest was not affected in any manner as the tax was deducted and paid to it even though a bit belatedly. He relied on certain judgments in support of the contention that the amendment by the Finance Act, 2010 be considered as retrospective from the date of insertion of section 40(a)(ia) as it was aimed at mitigating hardship to the assessees. 27. In the opposition the learned Departmental Representative contended that there was no need to consider the amendment made by the Finance Act, 2010 as retrospective from assessment year 2005-06 for the reason that Notes on clauses and the Memorandum explaining the provisions in Finance Bill 2010 clearly indicate that the amendment will take effect retrospectively from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. He stat....
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....ature while introducing the provision is gathered, inter alia, from the Finance Bill, Memorandum explaining the provision of the Finance Bill. 29.a Now we will espouse the cases relied on by both the sides to bolster their respective points of view on the retrospective or prospective operation of the amendment made by the Finance Act, 2010 to section 40(a)(ia). The first case relied by the learned A.R. in support of his contention about the amendment having retrospective effect from assessment year 2005-06 is the judgment of the Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 section 43B was inserted in the Act with effect from 1-4-1984. At the time of insertion it provided that notwithstanding anything contained in any provision of the Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the assessee by way of tax, duty, cess or fee etc. or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund etc. shall be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee irrespective of the previous year in which t....
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.... 29.b. It can, therefore, be easily seen that the amendment to section 43B by the Finance Act, 1987 has been held to be retrospective on the ground that it was made to remove unintended consequences of the section and to make it workable, notwithstanding the fact that such proviso was inserted with effect from 1st April, 1988. 29.c. The next judgment relied by the learned A.R. is that of the Hon'ble Supreme Court in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306. There was second proviso to section 43B which provided that no deduction shall be allowed in respect of clause (b), namely, any sum payable by the assessee as an employer by way of contribution to provident fund etc. unless it was actually paid on or before the due date as defined in Explanation below clause (va) of section 36(1). Explanation to section 36(1)(va) defines the "due date" to mean the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued there under or under any standing order, award, contact of service or otherwise. The result of clause (b) read with second pr....
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....this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by Parliament only with effect from April 1, 2004, would become curative in nature, hence, it would apply, retrospectively, with effect from April 1, 1988". On page 315 of the report, the Hon'ble Supreme Court further noted that if the Departmental contention about giving prospective effect to the amendment was given effect to it would result into hardship and invidious discrimination `as certain assessees will be denied deduction for all times and they would lose the benefit of deduction even in the year in which they pay the contributions to the welfare funds'. It was, therefore, held that this amendment, being curative, was retrospective. 29.d. On going through this case also it becomes abundantly clear that the second proviso resulted in implementation problems and the effect of considering the amendment as prospective would have led to denial of deduction in certain cases for all times despite the payment having been made subsequently. It was under such circumstances that the omission of the second proviso and the consequential amendment to the f....
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....ividual deposits is not hit by section 40(b), if the person is a partner not in his individual capacity but as representing HUF. The same view was taken in Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753 (SC). However in Rashik Lal & Co. v. CIT [1998] 229 ITR 458 (SC), somewhat contrary view was expressed. That is how the matter came up before the Larger Bench of the Hon'ble Supreme Court in Kanji Shivji & Co.'s case (supra). In this case it has been held that Explanation 2 to section 40(b) is declaratory and retrospective in operation by affirming the judgments in the cases of Brij Mohan Das Laxman Das (supra) and Suwalal Anandilal Jain (supra). 29.h The reasoning for holding the amendment to be retrospective in this case is the Legislative recognition of different capacities an individual may hold. When a person is partner representing his HUF, any transactions with that person in individual capacity are to be treated as distinct from the transactions with HUF. It is this recognition of the theory of different capacities of an individual ab initio, that the Hon'ble Supreme Court held that Explanation 2 only clarified the intent of the legislature and did not grant....
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....ward the loss to eight years could not divest the assessee of the vested right which had accrued to him. In other words, it was submitted that the amendment effected in 1957 was not retrospective in operation. When the matter finally came up before the Hon'ble Supreme Court, the assessee's contention was repelled by holding that the loss incurred in assessment year 1950-51 could not be set off against the income of assessment year 1960-61 as the law to be applied is that in force in the relevant assessment year and the law as existing in assessment year 1960-61 has restricted the carry forward up to eight years only. 32.c From this judgment it can be seen that the contention of the assessee about the retrospective operation of the amendment carried out by the Finance Act, 1957 was rejected on the ground that it was neither expressly nor by necessary implication provided that the amendment will have retrospective effect. 32.d In J.K. Synthetics Ltd. v. CTO [1994] 119 CTR (SC) 222 the question was about the charging of interest on delayed payments under the Rajasthan Sales-tax Act. The Hon'ble Supreme Court held that ordinarily the charging section, which fixes the ....
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....e amendment is made applicable with retrospective effect, such amendment to the substantive provision is to be regarded as prospective barring out cases in which it is explanatory or clarificatory on one hand or it aims at removing the unintended consequences. 34. It is the sole prerogative of the legislature to enact, modify and repeal any law and also to introduce any amendment as retrospective or prospective. All provisions of the Act are brought out with a particular object in mind. Soft provisions, in the shape of incentives etc., are usually aimed at specific growth, like that of a particular industry or particular area. On the other hand, the so-called harsh provisions are aimed at mobilizing resources for utilizing them in welfare measures and for general growth of the nation, such as that of health and education of its citizens and making available better infrastructure etc. Any provision in a fiscal statute may be described as harsh from the angle of the taxpayers, when it either causes some additional burden on the pockets of tax payers in terms of more outflow of money in the shape of tax, interest and penalty or it casts an obligation, fulfilment of which is not fea....
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....ure, is limited. It extends to cases where the legislative intent has later been made explicit which was earlier implicit in the provision or the existing provision led to the unintended consequences and made the intention of the legislature unworkable. Any amendment which has not been given retrospective effect by the legislature, can't be construed as retrospective on the solitary ground that the original provision caused some hardship to the assessees. The relevant criteria to be taken into consideration for arriving at the decision about the retrospective or prospective effect of a later provision, is to unearth the intention of the legislature at the time of introducing the original provision and not whether it caused hardship to the taxpayers. If it was very well known at the time of inserting the original provision that it is going to be harsh, then any subsequent relaxation in it will not be retrospective unless expressly stated. The reason for not holding such later amendment as retrospective is manifest that the legislature in its wisdom intended to impose a harsh levy. In such a case the judicial or quasi judicial authorities cannot help the situation by grabbing the....
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....o the provision in the attainment of that purpose, certain outcomes which were never desired or intended by the legislature, also follow. Any amendment to remove such unintended effects, is also always considered to be retrospective from the date of the insertion of the main provision. 38. The second category of cases are to be differentiated from the first category. In both these categories, there is no difficulty in implementing the provision as such. Whereas, the first category refers to the cases in which the intention of the legislature behind the provision was not properly understood, the second refers to the cases in which while giving effect to such provision, certain unintended consequences follow. The cases of Allied Motors (P.) Ltd. (supra) and Alom Extrusions Ltd. (supra) fit into this second category of cases. In Allied Motors (P.) Ltd.'s case (supra) the amendment was held to be retrospective on the ground that it was impossible to pay sales-tax for the last quarter before the close of the year as the liability to pay would arise only on or after 1st April. As it could never have been the intention of the legislature to require the assessee to do impossible, th....
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....carried out to the substantive provision taking away certain benefit to the assessees in terms of extended period for setting off of the brought forward losses. The case of Varadaraja Theatre (P.) Ltd. (supra) is based on facts in which the subsequent amendment granted a benefit to the assessee which was not available as per the earlier provisions. Thus we have noticed that in both types of cases in which the later provision has taken away some right which was earlier available or granted some benefit which was not earlier available, such amendments have been held to be prospective from the dates of insertion as these were neither clarificatory nor intended to remove any unintended hardships. 41. From the above discussion it clearly emerges that there is a clear distinction between the cases in which the later amendment is impliedly retrospective or prospective. That is probably the reason that a question was raised before the Hon'ble Supreme Court in CIT v. Varas International (P.) Ltd. [2006] 283 ITR 484 for deciding as to whether : "For the amendment of a statute to be construed as being retrospective, should not the amended provision itself indicate, either in t....
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....amount of expenditure in the year of incurring it. Simultaneous with the disallowance, proviso provides that the deduction of the expenditure shall be allowed in the subsequent year when the deducted tax is paid. To put it simply if there is no deduction of tax at source or after deduction it is paid beyond the previous year or within the time specified under section 200(1), the income of the first year increases but at the same time the income of the subsequent year is reduced on the payment of tax. It is well-known that each year is a separate and independent unit of assessment. The potential deduction in a later year cannot be allowed to reduce the income for the earlier year and vice versa. Total income of an assessee for each year has to be computed as per the provisions of the Act insofar as they apply. It is neither desirable nor permissible to mix up the assessment of two years by claiming that since the deduction shall become permissible in second year, the AO should grant the deduction in the first year and ignore it in the second year. If this view point is accepted then many provisions of the Act shall become otiose. It is incumbent upon the AO to separately compute tot....
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.... Act, 2010 has mitigated the unintended hardship which was earlier caused to the assessee and hence it should be given retrospective effect from the date of insertion of the provision. 44. We do not find any force in this contention. The reason is that there is no doubt that some intended difficulty has been caused by the Finance Act, 2004 on the introduction of section 40(a)(ia). We are calling it hardship to the assessee from a different angle as with the insertion of this provision the expenditure otherwise deductible has become non-deductible in the year of incurring on its failure to deduct tax at source or pay such tax after deduction within the stipulated period. At the same time we are calling it as "intended" for the reason that the legislature in its wisdom brought out this provision with a view to augment compliance of the TDS provisions. The objective sought to be achieved by bringing out section 40(a)(ia) is the augmentation of the TDS provision. If in attaining this main objective of augmentation of such provision, the assessee suffers disallowance of any amount in the year of default, which is otherwise deductible, the legislature allowed it to continue. This is t....
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....oviding for the remedial relief in the subsequent year in which tax has been paid, also exists. 45. We are unable to appreciate the contention raised on behalf of the assessee that the undue hardship caused to the assessee has been relaxed by the legislature with the amendment carried out by the Finance Act, 2010. The so called hardship as caused with the insertion of section 40(a)(ia) with effect from 1st April, 2005 is still continuing as such. The effect of amendment by the Finance Act, 2010 is limited only to extending the time available for deposit of tax in the second category of cases from the last day of the previous year to the time specified under section 139(1) of the Act. Thus it is vivid that the amendment by the Finance Act, 2010 is not aimed at removing any unintended hardship to the assessee, but to relax the intended hardship to some extent by increasing the time available for deposit of tax in one category of cases. When the amendment does not remove the unintended hardship or is not explanatory, the same cannot be held to be retrospective unless it is specifically provided. We again revert to the case of Varadharaja Theatre (P.) Ltd. (supra) laying down the te....
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....tive effect from 1st April, 2010, the deduction of expenditure can be allowed only in the year of its incurring if the tax has been deducted and paid on or before the due date under section 139(1) and further the proviso applies to cases in which the same is paid beyond the due date under section 139(1) so as to allow deduction in computing the income of the previous year in which such tax has been paid. He submitted that the assessee's case will fall outside the prescription of the proviso to section 40(a)(ia) as amended by the Finance Act, 2010 as the amount is actually paid in July 2009 which is not beyond but before the due date under section 139(1). It was thus submitted that the assessee will neither get deduction in assessment year 2009-10 nor in assessment year 2010-11. 48. This submission is devoid of any force. The legislature has employed the words 'such sum' in the language of the proviso and not 'any sum'. These words in the proviso talk of the sum referred to in the main provision of sub-clause (ia) of section 40(a). The words 'such sum' have tightly tied the proviso with the main provision. It is imperative to note the proviso to sub-cl....
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....40(a)(ia) together with its proviso as prevailing in a particular year which governs the non-deductibility of expenditure in one year and then its deductibility in the later year. Because of the thread of 'such sum' in the language of proviso, it becomes impermissible to look at the main provision as amended by the Finance Act, 2008 for making disallowance of expenditure and then at the proviso as amended by the Finance Act, 2010 for allowing expenditure in the subsequent year of payment. The situation would have been otherwise, if the expression 'any sum' had been used in the language of the proviso instead of 'such sum'. In that case any amount of expenditure, on which tax deducted had been paid in a particular year, irrespective of the year of incurring expenditure, would have got deduction in such year of payment of tax. It is only in that case that payment of tax made in July 2009 would have suffered complete disallowance both in the assessment year's 2009-10 and 2010-11. But fortunately, position is not so as the deduction will be permissible to the assessee in assessment year 2010-11 going by the provision as amended by the Finance Act, 2008. 5....
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....he return. This will allow most deductors additional time up to September of the next financial year. At the same time, I propose to increase the interest charged on tax deducted but not deposited by the specified date, from 12 per cent to 18 per cent per annum." [Emphasis supplied] 52. A careful perusal of the above para of the speech indicates that it has two components. First is the partial relaxation in the time limit for deposit of tax as discussed above in this order and the second is the simultaneous increase in the interest rate. Use of the words 'At the same time' after the relaxation of the time limit for depositing the tax and before the mention of increase in the interest rate on tax deducted but not deposited by the specified date, fairly indicates that both have been linked with each other. Same thing appears from the Memorandum explaining the provisions in the Finance Bill, reproduced above in para 23 of this order, which is in two paras. Whereas para A. explains about the partial relaxation in the time limit for deposit of tax so as to escape disallowance, para B. provides for the increase in the interest rate on tax deducted but not deposited by the spec....
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....ent of the expenditure in the shape of tax and interest etc. for a mere non-deduction of tax at the rate of 1 per cent of the contract payments. The ld. AR further put forth that the loss caused to the assessee by making disallowance in the current year could not be made good by allowing deduction in the subsequent year on payment of such tax as, in certain cases, it may take several years to absorb the loss caused by the heavy deduction granted in the subsequent year without there being corresponding income. In the backdrop of these submissions, it was vigorously argued that the retrospective effect to the amendment made by the Finance Act, 2010 from the date of insertion of section 40(a)(ia), that is, assessment year 2005-06, was the need of the hour. 54. We are not impressed with these submission for ruling the latest amendment to section 40(a)(ia) as having retrospective operation from 1-4-2005. Primarily we find that none of these submissions really deal with the retrospective or prospective effect of the amendment made by the Finance Act, 2010. Rather these depict the hardships caused to the assessee by the very insertion of section 40(a)(ia). All these hardships, such as ....
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....al consequences would follow and it would call for disallowance under section 40(a)(ia) in the year of incurring the expenditure. In the like manner, in the year under appeal, if the tax deducted at source up to February, 2005 had been deposited up to 31st March, it would have amounted to compliance of the provision, but the late deposit even on 1st April, 2005 would amount to non-compliance warranting interference by section 40(a)(ia) entailing disallowance of expenditure in the assessment year 2005-06. However the fact that the assessee deposited it beyond the prescribed period, would amount to compliance of the prescription of the proviso, entitling the assessee to deduction in the assessment year 2006-07. 55. Further if we proceed with the hypothesis of substantial compliance even on late deposit not causing any disallowance under section 40(a)(ia) in the year of incurring the expenditure, it will make the proviso redundant. When we consider the mandate of section 40(a)(ia) in entirety, it becomes apparent that it has two ingredients, viz. , first, the disallowance of expenditure due to non-deduction or non-deposit of tax deducted at source in time and second, the allowing o....