Commissioner of Income Tax Kolkata Xii vs M/s Calcutta Export Company

HELD: 1.1 The provisions of Section 40(a)(ia) of the Income Tax Act, 1961 came into force in the year 2005. The intention of the legislature was not to punish the assessee is further reflected from a bare reading of the provisions of Section 40(a)(ia). It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the tax deducted at source was duly deposited with the government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government. However, it caused some genuine and apparent hardship to the assessees especially in respect of tax deducted at source in the last month of the previous year, the due date for payment of which as per the time specified in Section 200 (1) of IT Act was only on 7th of April in the next year. The assessee in such case, thus, had a period of only seven days to pay the tax deducted at source from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure under Section 40(a)(ia) of IT Act. [Paras 14, 16, 17] [740-B; 741-B-E]

1.2 With a view to mitigate this hardship, Section 40(a)(ia) was amended by the Finance Act, 2008. The amendments made by the Finance Act, 2008 provided that no disallowance under Section 40(a)(ia) of the IT Act shall be made in respect of the expenditure incurred in the month of March if the tax deducted at source on such expenditure has been paid before the due date of filing of the return. The amendment was given retrospective operation from the date of 01.04.2005 i.e., from the very date of substitution of the provision. Therefore, the assessees were, after the said amendment in 2008, classified in two categories namely; one; those who have deducted that tax during the last month of the previous year and two; those who have deducted the tax in the remaining eleven months of the previous year. It was provided that in case of assessees falling under the first category, no disallowance under Section 40(a) (ia) of the IT Act shall be made if the tax deducted by them during the last month of the previous year has been paid on or before the last day of filing of return in accordance with the provisions of Section 139(1) of the IT Act for the said previous year. In case, the assessees are falling under the second category, no disallowance under Section 40(a)(ia) of IT Act where the tax was deducted before the last month of the previous year and the same was credited to the government before the expiry of the previous year. The net effect was that the assessee could not claim deduction for the TDS amount in the previous year in which the tax was deducted and the benefit of such deductions can be claimed in the next year only. [Paras 18-20] [741-F; 742-E-H; 743-A]

1.3 The amendment though had addressed the concerns of the assessees falling in the first category but with regard to the case falling in the second category, it was still resulting into unintended consequences and causing grave and genuine hardships to the assessees who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns under Section 139(1) of the IT Act. The disability to claim deductions on account of such lately credited sum of TDS in assessment of the previous year in which it was deducted, was detrimental to the small traders who may not be in a position to bear the burden of such disallowance in the present Assessment Year. In order to remedy this position and to remove hardships which were being caused to the assessees belonging to such second category, amendments were made in the provisions of Section 40(a) (ia) by the Finance Act, 2010. [Paras 21, 22] [743-B-D]

1.4 Section 40(a)(ia), was amended by Finance Act, 2010, with effect from 01.04.2010. The Finance Act, 2010 further relaxed the rigors of Section 40(a)(ia) to provide that all TDS made during the previous year can be deposited with the Government by the due date of filing the return of income. The idea was to allow additional time to the deductors to deposit the TDS so made. However, the Memorandum explaining the provisions of the Finance Bill, 2010 expressly mentioned as follows: “This amendment is proposed to take effect retrospectively from 1st April, 2010 and will, accordingly, apply in relation to the Assessment Year 2010-2011 and subsequent years.” [Paras 23-25] [743-E; 744-A-B]

1.5 TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of Section 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, should not be allowed to be converted into an iron rod provision which metes out stern punishment and results in malevolent results, disproportionate to the offending act and aim of the legislation. Legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced but the magnitude of punishment must not be disproportionate by what is required and necessary. The consequences and the injury caused, if disproportionate do and can result in amendments which have the effect of streamlining and correcting anomalies. The amendments made in 2008 and 2010 were steps in the said direction only. Legislative purpose and the object of the said amendments were to ensure payment and deposit of TDS with the Government. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section, is required to be read into the Section to give the Section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the Section as a whole. [Paras 26, 27] [744-D-H]

1.6 The purpose of the amendment made by the Finance Act, 2010 is to solve the anomalies that the insertion of Section 40(a)(ia) was causing to the bona fide tax payer. The amendment, even if not given operation retrospectively, may not materially be of consequence to the Revenue when the tax rates are stable and uniform or in cases of big assessees having substantial turnover and equally huge expenses and necessary cushion to absorb the effect. However, marginal and medium taxpayers, who work at low gross product rate and when expenditure which becomes subject matter of an order under Section 40(a)(ia) is substantial, can suffer severe adverse consequences if the amendment made in 2010 is not given retrospective operation i.e., from the date of substitution of the provision. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Such could not be the intention of the legislature. Hence, the amendment made by the Finance Act, 2010 being curative in nature required to be given retrospective operation i.e., from the date of insertion of the said provision. The amended provision of Sec 40(a)(ia) of the IT Act should be interpreted liberally and equitable and applies retrospectively from the date when Section 40(a)(ia) was inserted i.e., with effect from the Assessment Year 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. Since the assessee had filed its returns on 01.08.2005 i.e., in accordance with the due date under the provisions of Section 139 IT Act, hence, is allowed to claim the benefit of the amendment made by Finance Act, 2010 to the provisions of Section 40(a)(ia) of the IT Act. [Paras 28 and 30] [745-A-D, G-H; 746-A-B]

Allied Motors (P.) Ltd etc. v. CIT, Delhi (1997) 224 ITR

677 (SC) – relied on.

Bharati Shipyard Ltd. v. Deputy CIT (Decision dated 09.09.2011 of ITAT in ITA No. 404/Mumb/2009); CIT v. Ansal Land Mark Township Pvt. Ltd. (Decision of Delhi High Court in ITA No. 160/2015) ; Whirlpool of India Ltd. v. CIT, New Delhi (2000) 245 ITR 3 ; CIT v. Amrit Banaspati (2002) 255 ITR 117 ; CIT v. Alom Enterprises Ltd. (2009) 319 ITR 306

– referred to.