AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2016 (10) TMI 1038
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion. The Assessing Officer accepted the income returned by the assessee. During the period relevant to assessment year under appeal, the assessee had paid rent of Rs. 1,15,90,000/- to M/s. Elpro International Ltd. without deducting any tax at source. The Pr. Commissioner of Income Tax issued notice u/s. 263 of the Act on 22-11-2015 to the assessee for not deducting tax at source on the rent paid to M/s. Elpro International Ltd. The contention of the assessee was that tax was not deducted on the basis of certificate issued by Department. On perusal of records it was found that certificate dated 24-09-2009 issued by the Department u/s. 197 of the Act was with respect to deduction of TDS at lesser rate i.e. 0.75% plus S.C. & E.C., as applicable. The Pr. Commissioner of Income Tax held that the Assessing Officer has erred in not disallowing the expenditure of Rs. 1,15,90,000/- u/s. 40(a)(ia) of the Act which has resulted in under assessment of income including interest u/s. 234B of the Act. The assessee was declared as assessee in default for non-deduction of TDS. The Pr. Commissioner of Income Tax further held that the second proviso to section 40(a)(ia) inserted by Finance Act, 2012....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tax should have simply set aside the assessment order and remitted the matter back to Assessing Officer to look into the provisions applicable with respect to TDS vis-à-vis rent paid by the assessee to M/s. Elpro International Ltd. 3.1 The ld. AR submitted that the Hon'ble Kerala High Court in the case of Prudential Logistics And Transports Vs. Income Tax Officer (supra) has held that the second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is prospective in nature and is effective from 01-04-2013. The Hon'ble Delhi High Court on the other hand in subsequent judgment delivered on 26-08-2015 in ITA No. 160/2015 in the case of Commissioner of Income Tax Vs. Ansal Land Mark Township (P) Ltd. [377 ITR 635 (Delhi)] has upheld the view of Agra Bench of the Tribunal holding the said proviso is declaratory and curative and has retrospective effect from 1st April, 2005. The ld. AR further placed reliance on the following decisions of the Tribunal to support his contentions : i. New Alignment Vs. Income Tax Officer, 69 taxmann.com 122 (Kolkata-Trib.); ii. Reliance Communication Ltd. Vs. Assistant Commissioner of Income Tax (TDS), 69 taxmann.co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rival sides and have perused the orders of the authorities below. The only issue in the present appeal arising from the arguments made on behalf of both the sides is; Whether the second proviso to section 40(a)(ia) inserted by Finance Act, 2012, is applicable retrospectively or w.e.f. 01-04-2013. Before we proceed with the issue it would be relevant to first refer to the amendment brought in by the Finance Act, 2012 to section 40(a)(ia) by way of insertion of proviso. "40. Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of any assessee- xxxxxxxxxx xxxxxxxxxx (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, [ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent to the tune of Rs. 1,15,90,000/- to M/s. Elpro International Ltd. No tax has been deducted on the aforesaid payment by the assessee. The assessee was supposed to deduct tax at source @ 0.75%, in accordance with the low rate tax certificate issued by the Department. The Assessing Officer during the scrutiny assessment proceedings failed to take into consideration the rent paid by the assessee without deduction of tax at source. The Pr. Commissioner of Income Tax invoked the provisions of section 263 and directed the Assessing Officer to make disallowance u/s. 40(a)(ia) of the Act. While issuing aforesaid directions the Pr. Commissioner of Income Tax held that the assessee is not eligible to claim the benefit of the second proviso to section 40(a)(ia) inserted by Finance Act, 2012 as the amendment is effective from 01-04-2013. The Pr. Commissioner of Income Tax has further placed reliance on the decision of Hon'ble Kerala High Court in the case of Prudential Logistics And Transports Vs. Income Tax Officer (supra) to fortify his view. The contention of the assessee is that the amendment to section 40(a)(ia) by way of insertion of the second proviso is applicable with retrospec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Township (P) Ltd. (supra). 9. One of the contentions of the ld. DR is that in the cases cited on behalf of the assessee, the decision rendered by Hon'ble Kerala High Court has not been considered. We find that Raipur Bench of the Tribunal in the case of R K P Company Vs. Income Tax Officer (supra) has considered the decision of Hon'ble Kerala High Court in the case of Thomas George Muthoot Vs. CIT (supra), in which the judgment rendered in the case of Prudential Logistics And Transports Vs. Income Tax Officer (supra) was considered. The Raipur Bench by following the judgment of Hon'ble Delhi High Court held that the amendment is retrospective in nature. The relevant extract of the findings of Raipur Bench of the Tribunal are reproduced here-in-below : "4. We find that Hon'ble Delhi High Court has specifically approved the stand taken by a coordinate bench of this Tribunal, in the case of Rajeev Kumar Agarwal Vs ACIT [(2014) 149 ITD 363 (Agra)], and upheld the action of the Tribunal in following the same. 9. ............................ Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pens to be the CIT(A) authoring the impugned order and who was on duty as CIT(DR) before us, had three points to make- first, that there are decisions in support of the stand of the Assessing Officer's stand, by way of Hon'ble Kerala High Court's decision in the case of Thomas George Muthoot Vs CIT [(2015) 63 taxmann.com 99 (Kerala)]; second, that even if insertion of second proviso to Section 40(a)(ia) can be construed as retrospective in effect, the corresponding rule in the Income Tax Rules 1962 is not, and has not been held to be, retrospective, and the second proviso to Section 40(a)(ia) cannot, therefore, be give retrospective effect; and, third, that there is no decision on this issue by Hon'ble jurisdictional High Court and, as such, the stand of the Assessing Officer cannot be faulted. 7. As for Hon'ble Kerala High Court's decision in the case of Thomas George Muthoot (supra), undoubtedly, outside the jurisdiction of Hon'ble Kerala High Court and outside the jurisdiction of Hon'ble Delhi High Court- which has decided the issue in favour of the assessee, there are conflicting decisions on the issue of restrospectivity of second proviso to Section 40(a)(ia). It is t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as no application. The rule of resolving ambiguity in favour of the assessee does not also apply where the interpretation in favour of assessee will have to treat the provisions unconstitutional, as held in the matter of State of M.P. vs. Dadabhoy's New Chirmiry Ponri Hill Colliery Co. Ltd. AIR 1972 (SC) 614. Therefore, what follows is that in the peculiar circumstances of the case and looking to the nature of the provisions with which we are presently concerned, the view expressed by the Hon'ble Delhi High Court in the case of Ansal Landmark (supra), which is in favour of assessee, is required to be followed by us. Revenue does not, therefore, derive any advantage from Hon'ble Kerala High Court's decision in the case of Thomas George Muthoot (supra)." 10. It is a well settled law that where two divergent views are possible and both the views are equally convincing, the view in favour of the assessee must be adopted. Thus, applying the ratio laid down by the Hon'ble Supreme Court of India in the case of CIT Vs. Vegetable Products Ltd. (supra) we accept the contentions of the assessee and hold that the second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is appli....