TaxTMI 
TaxTMI 
2014 (12) TMI 613
X X X X Extracts X X X X
X X X X Extracts X X X X
....e disallowance made u/s.40(a)(ia) of the Act deserves to be deleted applying the law as amended. 3. The factual details with regard to the appeal and cross-objection are as follows. The assessee is an individual. He is a PWD registered contractor carrying on the business of civil construction. He was awarded Govt, contracts for construction of canals etc. For the purpose of executing the work, the assessee engaged certain contractors. In the course of assessment proceedings for the AY 2005-06, the AO noticed that the assessee had made payment of RS.99,95,152 to Sri Dayananda Amin and a sum of Rs. 32,38,300 to D.Y. Uppar. According to the AO, the aforesaid payments were made to the sub-contractor by the assessee for carrying out works on behalf of the assessee and therefore the assessee was under an obligation to deduct tax at source on such payments under the provisions of section 194C(2) of the Act. Since the assessee had not deducted tax at source on such payments, the AO invoking the provisions of section 40(a)(ia) of the Act disallowed the claim of the assessee for deduction of the aforesaid sum while computing income from business. Accordingly, income from business stood en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y Hon'ble ITAT Bangalore Bench. The Hon'ble Tribunal analyzed the intention of the Legislature in removing the phrase "paid" or "credited" that were in the Bill and finally retained only "payable". After detailed analysis which was concluded by majority by the Hon'ble Special Bench that the Legislature consciously replaced the word "amounts credited or paid" with the word "payable" in the final enactment. By this, the Legislative intend has been made clear that only outstanding amounts are the provisions for expenses liable for TDS under Chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under Chapter XVII-B of the Act. While interpreting the word "payable" in section 40(a)(ia), the meaning of the word statute must be understood in its natural, ordinary or popular sense and constitute according to the grammatical meaning. The word "payable" used in Section 40(a)(ia) of the Act is to be assigned strict interpretation in view of the object of legislation which is intended from the replacement of the words in the proposed and enacted provision from the word "amount credited or paid" to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee drew our attention to the insertion to the second proviso to section 40(a)(ia) of the Act by the Finance Act, 2012 w.e.f. 1.4.2013 and submitted that where tax is paid by the recipient then no disallowance u/s. 40(a)(ia) should be made as per the second proviso referred to above. It was his submission that the aforesaid proviso though stated to be w.e.f. 1.4.2013 should be construed as having operation with retrospective effect from 1.4.2005 when the provisions of section 40(a)(ia) of the Act were first introduced. It was his submission that the provisions are intended to remove hardship which was never contemplated and therefore should be construed as having retrospective operation. In this regard, reliance was placed by the Id. counsel for the assessee on the decision of Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 and in the case of CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 wherein the Hon'ble Supreme Court in the context of amendments to the provisions of section 43B of the Act took the view that the amendment were intended to remove hardship and though they were not stated to be retrospective in operation, will a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clause (vii) of sub-section (1) of section 9; (iii) "professional services" shall have the same meaning as in clause (a) of the Explanation to section 194J; (iv) "work" shall have the same meaning as in Explanation III to section 194C;' The Memorandum explaining the provisions in the Finance Bill explained the rationale of the insertion of the new provision in following words :- "With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of section 40(a)(i) to payments of interest, commission or brokerage, fees for professional services or fees for technical services to residents, and payments to a resident contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVII-B. It is also proposed to provide that where in respect of payment of any sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, the sum of payment shall be allowed in computing the incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as deductible and was so deducted during the first eleven months of the previous year, that is, up to February, 2005, the disallowance was to be made if the assessee failed to pay it before 31st March, 2005. 16. Then came the amendment to section 40(a)(ia) by the Finance Act, 2010 with retrospective effect from 1st April, 2010. The provision so amended, now reads as under :- "(ia) any 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, 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 deducted or; after deduction, 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e by the earlier provision. The Special Bench by its order dated 9.9.2011, however, held that the amendment carried out by the Finance Act, 2010 with retrospective effect from assessment year 2010-2011 cannot be held to be retrospective from assessment year 2005-2006. The Special Bench held that the amendment brought out by the Finance Act, 2010 to section 40(a)(ia) w.e.f. 01.04.2010, is not remedial and curative in nature. 19. Prior to the decision of the Special Bench, identical issue had come up for consideration before the ITAT Kolkata Bench in the case of Virgin Creations v. ITO, IT Appeal No. 267/Kol/2009 for AY 05-06. The issue that arose for consideration was disallowance of expenses u/s.40(a)(ia) claimed as deduction while computing income from business being embroidery charges, dyeing charges, interest on loan and freight charges without deducting tax at source. The Embroidery charges were paid between 22nd may, 2004 to 30.11.2004. Tax had been deducted at source but were paid to the Government only on 28.10.2005 and not within the time contemplated by Section 200(1) of the Act. The dyeing charges were paid between 5.4.2004 to 20.8.2004. Tax was deducted at source but ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t in the case of Allied Motors Pvt. Ltd. (supra) and Mom Extrusions Ltd. (supra) and the same therefore would apply retrospectively w.e.f. 1st April, 2005. In the case of R.B. Jodha Mal Kuthiala 82 ITR 570, it was held by the Hon'ble Supreme Court that a proviso which is inserted to remedy unintended consequences and to make the provision workable, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. In the present case, the amount of tax deducted at source from the freight charges during the period 01/04/2005 to 28/02/2006 was paid by the Assessee in the month of July and August 2006 i.e., well before the due date of filing of its return of income for the year under consideration. This being the undisputed position, we hold that the disallowance made by the A.O. and confirmed by the learned CIT(A) on account of freight charges by invoking the provisions of Section 40(a)(ia) is not sustainable as per the amendments made in the said provisions by the Finance Act, 2010 which, being remedial/curative in nature, have retrospective application", we find no reason to deviate from the decisions of the ITAT'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso." 22. Since provisions of Section 40(a)(ia) as amended by Finance Act, 2012 is linked to Section 201 of the Act, in which proviso was inserted, it is necessary to look into those provisions which read thus: "Sec.201: (1) Where any person, including the principal officer of a company - (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of Section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (i) payee has furnished his return of income under section 139; (ii) payee has taken into account such sum for computing income in such return of income; and (iii) payee has paid the tax due on the income declared by him in such return of income, and the payer furnishes a certificate to this effect from an accountant in such form as may be prescribed. 25. The question is as to whether the amendment made as above is prospective or retrospective w.e.f. 1.4.2005 when the provisions of Sec.40(a)(ia) were introduced. Keeping in view the purpose behind the proviso inserted by the Finance Act, 2012 in section 40(a)(ia) of the Act, it can be said to be declaratory and curative in nature and therefore, should be given retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. In CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306, the Hon'ble Supreme Court had to deal with the question, whether omission (deletion) of the second proviso to s. 43B of the IT Act, 1961, by the Finance Act, 2003, operated w.e.f. 1st April, 2004, or whether it operated retrospectively w.e.f. 1st April, 1988? Pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es and as a result of representations made by the industry, the amendment of 2003 was carried out which deleted the second proviso and also made first proviso applicable to contribution to employees welfare funds referred to in S. 43B(b). '15. We find no merit in these civil appeals filed by the Department for the following reasons : firstly, as stated above, s. 43B (main section), which stood inserted by Finance Act, 1983, w.e.f. 1st April, 1984, expressly commences with a non obstante clause, the underlying object being to disallow deductions claimed merely by making a book entry based on mercantile system of accounting. At the same time, s. 43B (main section) made it mandatory for the Department to grant deduction in computing the income under s. 28 in the year in which tax, duty, cess, etc., is actually paid. However, Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under the Provident Fund Act, Municipal Corporation Act (octroi) and other tax laws. Therefore, by way of first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....April, 1984, when s. 43B stood inserted. This is how the question of retrospectivity arose in Allied Motors (P) Ltd. etc. (supra). This Court, in Allied Motors (P) Ltd. etc. (supra) held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this Court, in Allied Motors (P.) Ltd. etc. (supra), held that the first proviso was curative in nature, hence, retrospective in operation w.e.f. 1st April, 1988. It is important to note once again that, by Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about an uniformity in tax, duty, cess and fee on the one hand vis-a-vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act, 2003, is retrospective in operation. Moreover, the judgment in Allied Motors (P) Ltd. etc. (supra) is delivered by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction." 17. For the aforestated reasons, we hold that Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate w.e.f. 1st April, 1988 (when the first proviso came to be inserted). For the above reasons, we find no merit in this batch of civil appeals filed by the Department which are hereby dismissed with no order as to costs.' 26. We are of the view that the reasoning of the Hon'ble Supreme Court in the case of Alom Extrusions Ltd. (supra) will equally to the amendment to Sec.40(a)(ia) of the Act whereby a second proviso was inserted in sub-clause (ia) of clause (a) of Section 40 by the Finance Act, 2012, w.e.f. 1-4-2013. The provisions are intended to remove hardship. It was argued on behalf of the revenue that the existing provisions allow deduction in the year of payment and to that extent there is no hardship. We are of the view that the hardship in such an event would be taxing an Assessee on a higher income in one year and taxing him on lower income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and not to amounts already paid during the year. This view is not correct for two reasons. Firstly, a strict reading of s. 40(a)(ia) shows that all that it requires is that there should be an amount payable of the nature described, which is such on which tax is deductible at source but such tax has not been deducted or if deducted not paid before the due date. The provision nowhere requires that the amount which is payable must remain so payable throughout during the year. If the assessee's interpretation is accepted, it would lead to a situation where the assessee who though was required to deduct the tax at source but no such deduction was made or more flagrantly deduction though made is not paid to the Government, would escape the consequence only because the amount was already paid over before the end of the year in contrast to another assessee who would otherwise be in similar situation but in whose case the amount remained payable till the end of the year. There is no logic why the legislature would have desired to bring about such irreconcilable and diverse consequences. Secondly, the principle of deliberate or conscious omission is applied mainly when an existing provi....