Appell v. Sh. Shivpal Singh Chaudhary, H

IN THE HIGH COURT OF PUNJAB AND HARYANA AT |CHANDIGARH. ITA No. 558 of 2017 (O&M)Date of decision: 05.07.2018 Pr. Commissioner of Income-Tax-2, Chandigarh .--.--Appell Vs. Sh. Shivpal Singh Chaudhary, H.No. 3121, Sector-28D, Chandigarh. ..-.Respondent CORAM: HON’ BLE MR. JUSTICE AJAY KUMAR MITTALHON’BLE MR. JUSTICE AVNEESH JHINGAN Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant-rEVeENUE.rEVeENUE. Ms. Radhika Suri, Senior Advocate with Mr. Manpreet SinghKanda, Advocate for the respondent-assessee. Ajay Kumar Mittal,J. 1)The appellant-revenue has filed the instant appeal under Section 260A of the Income Tax Act, 1961 (in short, “the Act’) against the order dated26.05.2017, Annexure A.3, passed by the Income Tax Appellate Tribunal,Chandigarh (in short, “the Tribunal’) in I.T.A. No.224/Chd/2017, for theassessment year 2012-13, claiming following substantial question of law:- “Whether on the facts and in the circumstances of the case andin law, the Hon’ble ITAT has erred in deleting the addition of S|95,31,276/- made under Section 40(1 )(ia) for non deductionof TDS on payment made tor job works by holding that thesecond proviso to Section 40(a)(ia) has a retrospective effectand is applicable to the applicant for the relevant assessmentyear whereas the said provisions of Section 40(a)(ia) areprospective in operation w.e.f. 01.04.2013 as also held by theHon’ble Kerala High Court in the case of Thomas GeorgeMuthoot Vs. CIT UTA No. 278 of 2014)?” oO oOA few facts relevant for the decision of the controversy involvedaS narrated in the appeal may be noticed. The assessee filed his return ofincome for the assessment year 2012-13 on 30.09.2012 declaring total incomeat zy1,25,96,920/-. Assessment was completed under Section 143(3) of the Act on 27.02.2015 at income oftS|2,45,41,840/- by making following additions:- (1) Addition ofzy1,90,626/- by invoking the provisions of Section|43B of the I.T. Act, 1961; (11) Addition ofS|95,31,276/- under section 40(a)(ia) for non-deduction of TDS on payment made for job work; (111) Addition ofzy54,045/- under section 4Q0(a)(ia) for nondeduction of TDS on professional charges paid to Sh. ManikGoyal; (iv) Addition ofS|3,47,743/- andS|21,313/- under section|40(a)(ia) for non-deduction of tax on interest paid to M/s L&TFinance Limited and M/s Tata Finance Ltd; (v) Disallowance of interest ofS|17,98,420/- on the ground thatthe assessee had paid interest free loans; (vi) Disallowance ofzy1,500/- being charity and donationCXAPCNSES. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] on all the additions except additionmentioned at Sr. No. (vi). Vide order dated 10.11.2016, Annexure A.2, the CIT(A) partly allowed the appeal filed by the assessee. The addition mentionedat Sr. No. (ii) above was deleted whereas the additions mentioned at Sr. Nos.(1) and (111) to (v) were confirmed. Not satisfied with the order, the appellant-revenue filed an appeal before the Tribunal, with reference to the additionmentioned at Sr. No. (ii) above. Vide order dated 26.05.2017, Annexure A.3,the Tribunal dismissed the appeal filed by the revenue. Hence, the instant appeal by the appellant-revenue. 3We have heard the learned counsel for the parties. 4The issue raised by the revenue before the Tribunal pertained tothe retrospectivity of the second proviso to Section 40(a)(ia) of the Act. TheSaid provision reads thus:- — “Provided further that where an assessee failed to deduct thewhole or any part of tax in accordance with the provisions ofChapter XVII-B on any such sum but is not deemed to be assesseein 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 theasssessee has deducted and paid the tax on such sum on the dateof furnishing of return of income by the resident payee referred toin the said proviso.”| appeal by the appellant-revenue. 3We have heard the learned counsel for the parties. 4The issue raised by the revenue before the Tribunal pertained tothe retrospectivity of the second proviso to Section 40(a)(ia) of the Act. TheSaid provision reads thus:- — “Provided further that where an assessee failed to deduct thewhole or any part of tax in accordance with the provisions ofChapter XVII-B on any such sum but is not deemed to be assesseein 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 theasssessee has deducted and paid the tax on such sum on the dateof furnishing of return of income by the resident payee referred toin the said proviso.”| Sub-clauses (1), (ia) and (ib) in Section 40(a) were substituted for clause (1) bythe Finance (No.2) Act, 2004 with effect from 1.4.2005. The second Proviso toSection 40(a)(ia) of the Act was inserted by Finance Act, 2012 with effectfrom 1 April 2013. According to the aforesaid Proviso, a fiction has beenintroduced where an assessee who had failed to deduct tax in accordance withthe provisions of Chapter XVII B of the Act, but is not deemed to be anassessee in default in terms of the first Proviso to sub section (1) of Section201 of the Act, then in such event, “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.” 5.It would be expedient to reproduce first Proviso to Section 201(1)of the Act, which was introduced with effect from Ist July 2012. It reads thus:-_ Provided that any person, including the principal officer of acompany, who fails to deduct the whole or any part of the tax in,accordance with the provisions of this Chapter on the sum paid to4 resident or on the sum credited to the account of a resident shallnot be deemed to be an assessee in default 1n respect of such tax ifsuch resident- 1) has furnished his return of income under section 139; (11) has taken into account such sum for computing income in suchreturn of income; and > (111) has paid the tax due on the income declared by him in such|return of income; © And the person furnishes a certificate to this effect from an|accountant in such form as may be prescribed.” © 6.The purpose of insertion of the first Proviso to Section 201(1) ofthe Act is to benefit the assessee. It stipulates that where a person who hasfailed to deduct tax at source on the sum paid to a resident or on the sumcredited to the account of the resident, such person shall not be deemed to bean assessee in default in respect of such tax, provided the resident hasfurnished the return of income under Section 139 of the Act and has taken intoaccount such sum for computing income in the return of income and paid taxdue on the income declared by him in such return of income. | JUndoubtedly, a mandatory requirement exists under Chapter XVIIB of the Act to deduct tax at source under certain eventualities. Consequencesfor failure to deduct or pay tax deducted at source within the time permissibleunder the statute have been spelt out in Section 201 of the Act. However, under first Proviso to Section 201(1) of the Act inserted with effect from Ist July,2012, exception has been carved out which shows the intention of thelegislature not to treat the assessee as a person in default subject to fulfillmentof the conditions as stipulated thereunder. No different view can be takenregarding introduction of Second Proviso to Section 40(a)(ia) of the Act witheffect from 01.4.2013. This Proviso is also intended to benefit the assessee bycreating legal fiction in his favour and not to treat him in default of deductingtax at source under certain contingencies and that it shall be presumed that theassessee had deducted and paid tax on such sum on the date of furnishing ofthe return of income by the resident/payee. first Proviso to Section 201(1) of the Act inserted with effect from Ist July,2012, exception has been carved out which shows the intention of thelegislature not to treat the assessee as a person in default subject to fulfillmentof the conditions as stipulated thereunder. No different view can be takenregarding introduction of Second Proviso to Section 40(a)(ia) of the Act witheffect from 01.4.2013. This Proviso is also intended to benefit the assessee bycreating legal fiction in his favour and not to treat him in default of deductingtax at source under certain contingencies and that it shall be presumed that theassessee had deducted and paid tax on such sum on the date of furnishing ofthe return of income by the resident/payee. S |From legal analysis of first Proviso to Section 201(1) and secondProviso to Section 40(a)(ia) of the Act, it is discernible that according to boththe provisos, where the payee/resident has filed its return of income disclosingthe payment received by it or receivable by it, and has also paid tax on suchincome, the assessee would not be treated to be a person in default andpresumption would arise in his favour as noted above.| OQNow the question that would require an answer is whether theinsertion of Second Proviso to Section 40(a)(ia) of the Act with effect from IstApril 2013 will apply to assessment year 2012-13 being retrospective. — 10.Similar issue regarding second Proviso to Section 40(a)(ia) of theAct is prospective or retrospective in nature, came up for consideration beforeDelhi high Court inCIT vs. Ansal Land Mark township Private Limited,(2015) 377 ITR 635(Delhi). The High Court approving the decision of theAgra Bench of ITAT in ITA No.337/Agra/2013|(Rajiv Kumar Aggarwal vs.ACIT)wherein it was held that the second proviso to Section 40(a)(ia) of the, Act is declaratory and curative in nature and should be given retrospectiveeffect from Ist April, 2005, in para 13, had recorded as under:- “13. Turning to the decision of the Agra Bench of ITAT inRajiv.Kumar Agarwal v. ACIT(supra ) , the Court finds that it has|undertaken a thorough analysis of the second proviso toSection./0(a)a) of the Act and also sought to explain the rationalebehind its insertion. In particular, the Court would like to refer topara 9 of the said order which reads as under: © "On a conceptual note, primary justification for such adisallowance is that such a denial of deduction is to.compensate for the loss of revenue by corresponding incomenot being taken into account in computation of taxableincome in the hands of the recipients of the payments. Such apolicy motivated deduction restrictions should, therefore, notcome into play when an assessee is able to establish thatthere 1s no actual loss of revenue. This disallowance does|deincentivize not deducting tax at source, when such taxdeductions are due, but, so far as the legal framework isconcerned, this provision 1s not for the purpose of penalizingfor the tax deduction at source lapses. There are separatepenal provisions to that effect. Deincentivizing a lapse andpunishing a lapse are two different things and have distinctlydifferent, and sometimes mutually exclusive, connotations.When we appreciate the object of scheme of section40(a)(1a), as on the statute, and to examine whether or not, ona "fair, just and equitable" interpretation of law- as is theguidance from Hon'ble Delhi High Court on interpretation ofthis legal provision, in our humble understanding, it couldnot be an "intended consequence" to disallow’ theexpenditure, due to non deduction of tax at source, even 1n asituation in which corresponding income is brought to tax inthe hands of the recipient. The scheme of Section 40(a)(1a),as we see it, 1S aimed at ensuring that an expenditure shouldnot be allowed as deduction in the hands of an assessee In a/ situation in which income embedded in such expenditure hasremained untaxed due to tax withholding lapses by theassessee. It 1s not, in our considered view, a penalty for taxwithholding lapse but it is a sort of compensatory deductionrestriction for an income going untaxed due to taxwithholding lapse. The penalty for tax withholding lapse perse 18 Separately provided for in Section 271 C, and, section40(a)(1a) does not add to the same. The provisions of Section40(a)(1a), as they existed prior to insertion of second proviso’thereto, went much beyond the obvious intentions of thelawmakers and created undue hardships even in cases inwhich the assessee's tax withholding lapses did not result inany loss to the exchequer. Now that the legislature has beencompassionate enough to cure these shortcomings ofprovision, and thus obviate the unintended hardships, such anamendment in law, in view of the well settled legal positionto the effect that a curative amendment to avoid unintended|consequences 1s to be treated as retrospective in nature eventhough it may not state so specifically, the insertion ofsecond proviso must be given retrospective effect from thepoint of time when the related legal provision wasintroduced. In view of these discussions, as also for thedetailed reasons set out earlier, we cannot subscribe to theview that it could have been an "intended consequence" topunish the assessees for non deduction of tax at source bydeclining the deduction in respect of related payments, evenwhen the corresponding income 1s duly brought to tax. Thatwill be going much beyond the obvious intention of thesection. Accordingly, we hold that the insertion of secondproviso to Section 40(a)(1a) 1s declaratory and curative innature and it has retrospective effect from Ist April, 2005,being the date from which sub clause (1a) of section 40(a)was inserted by the Finance (No. 2) Act, 2004." 11.We are in agreement with the view of the Delhi High Court in Ansal Land Mark Township Pvt. Limited’scase (Supra) approving the| reasoning of the Agra Bench of the ITAT whereby holding the rationale behindthe insertion of the second Proviso to Section 40(a)(ia) of the Act and that it ismerely declaratory and curative and thus, applicable retrospectively witheffect from Ist April, 2005. 12. |Having crystallised the legal position, we proceed to examine thefactual matrix. In the present case, the assessee during the year in questiondebitedzy98,99, 141/- on account of job work, out of whichZL95,31,276/- was|paid to M/s Jhandu Construction Company without deduction of tax. TheAssessing Officer took the view that the said payment should have been madeonly after deduction of tax at source. As per the provisions of the relevantStatute, in view of the assessee’s failure to deduct tax at source, the AssessingOfficer disallowed payment in question under Section 40(a)(ia) of the Act. Theassessee filed an appeal before the CIT(A) pleading that in view of the secondproviso to Section 40(a)(ia) of the Act, payment should not have beendisallowed. The CIT(A) after considering the submissions of the assessee andgoing through the evidence on record found that the assessee had filedconfirmation from the party that the payment made by him to|M/s ShanduConstruction Companyhad been reflected in its return of income. Thus, theCIT(A) rightly decided the issue in favour of the assessee which has beenupheld by the Tribunal. 13.)In all fairness to the learned counsel for the revenue, it needs to benoticed that she had relied upon two decisions of the Kerala High Court inPrudential Logistics and Transports vs. Income Tax Officer, (2014) 364 ITR|689 and|Thomas George Muthoot vs. CIT,(2015) 32 RCR(Civil) 506,|wherein it has been held that second Proviso to Section 40(a)(ia) of the Actwith effect from 01.4.2013 was prospective and not retrospective. With respect, we are unable to subscribe to the aforesaid contrary view of the Kerala High Court in the aforesaid two decisions. | 13.)In all fairness to the learned counsel for the revenue, it needs to benoticed that she had relied upon two decisions of the Kerala High Court inPrudential Logistics and Transports vs. Income Tax Officer, (2014) 364 ITR|689 and|Thomas George Muthoot vs. CIT,(2015) 32 RCR(Civil) 506,|wherein it has been held that second Proviso to Section 40(a)(ia) of the Actwith effect from 01.4.2013 was prospective and not retrospective. With respect, we are unable to subscribe to the aforesaid contrary view of the Kerala High Court in the aforesaid two decisions. | 14.In view of the above, accordingly, substantial question of law asclaimed stands answered against the revenue and in favour of the assessee. Consequently, the appeal stands dismissed. | (Ajay Kumar Mittal)Judge July 05, 2018| Whether speaking/reasoned Whether reportable (Avneesh Jhingan)Judge Yes.Yes