Department In This Appeal, The Tribunal Considered The Following Question Inappeal Of The Revenue Which Was Raised As An Additional Ground By Thedepartment v. Crescent Construction Co

PRIYARAJESHSOPARKAR Digitally signed byPRIYA RAJESHSOPARKARDate: 2022.08.0213:52:17 +0530 1 Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.667 OF 2018 Pr. Commissioner of Income Tax-28 … Appellant V/s. Crescent Construction Co. … Respondent --- Mr.Akhileshwar Sharma for the Appellant.Ms.Aasifa Khan for the Respondent. --- CORAM : DHIRAJ SINGH THAKUR AND ABHAY AHUJA, JJ. DATE : JULY 29, 2022. ORAL ORDER : (Per Abhay Ahuja, J.) 1.This is an appeal relating to assessment year 2005-06 filed by therevenue under section 260A of the Income Tax Act, 1961 (“the Act”) seekingto challenge the order of the Tribunal dated 26[th] May, 2017 and proposingthe following questions as substantial questions of law:- “a.Whether on the facts and circumstances of the case andin law, the Hon’ble Tribunal was correct in holding that theassessee disclosed true and correct facts in the return ofincome whereas the facts related to further disallowance u/s40(a)(ia) of the Income Tax Act, 1961 was not available in thereturn of income and therefore, there was failure on the partof the assessee within the meaning of proviso to section 147of the Income Tax Act, 1961? b.Whether on the facts and circumstances of the case andin law, the Hon’ble Tribunal was correct in holding that thedisallowance u/s 40(a)(ia) of the Income Tax Act, 1961 cannotbe made in assessment year under consideration i.e. A.Y.2005-06 as the assessee paid TDS within the due date prescribed u/s 139(1) of the Income Tax Act, 1961 withoutappreciating that the amendment to section 40(a)(ia) of theIncome Tax Act, 1961 by Finance Act, 2010 w.e.f. 01.04.2010was prospective and is not applicable for A.Y. 2005-06? c.Whether on the facts and circumstances of the case andin law, the Hon’ble Tribunal was correct in not appreciatingthe fact that the assessee was granted relief ofRs.3,97,76,005/- u/s 40(a)(ia) of the Income Tax Act, 1961 inA.Y. 2006-07 based on the provision applicable for A.Y.2005-06 and accordingly, an amount of Rs.3,97,76,005/- wasrequired to be disallowed u/s 40(a)(ia) of the Income Tax Act,1961 in A.Y. 2005-06?” 2.Earlier, before the Tribunal, the assessee as well as the revenue filedcross appeals against the order of the CIT (Appeals). The assesseechallenged the reopening of the assessment whereas the revenue challengedthe deletion of the disallowance/addition made under section 40(a)(ia) ofthe Act by the CIT (Appeals). The argument with respect to the reopeningwas that the reopening cannot be done beyond the period of four years.The Tribunal after considering the law on the subject with respect to thefacts of this case and after considering the rival contentions observed thatthere is no justification in reopening the assessment beyond the period offour years. Tribunal accordingly allowed the appeal of the assessee holdingthat reopening of assessment was not valid beyond four years when thematerial facts were duly disclosed by the assessee and the tax deducted atsource was deposited in the state exchequer before due date of filing ofreturn. It appears that finding on this issue has not been challenged in thisappeal. Coming to the issue relating to the section 40(a)(ia) raised by the department in this appeal, the Tribunal considered the following question inappeal of the revenue which was raised as an additional ground by thedepartment :- “On the facts and in the circumstances of the case and in law,the Ld. Commissioner of Income Tax (Appeal) is not justifiedas the assessee has been allowed relief of Rs.3,97,76,005/- inAssessment Year 2006-07 on account of disallowance made u/s 40(a)(ia) of the Act in Assessment Year 2005-06, resultantlythe deduction has been allowed twice.” department in this appeal, the Tribunal considered the following question inappeal of the revenue which was raised as an additional ground by thedepartment :- “On the facts and in the circumstances of the case and in law,the Ld. Commissioner of Income Tax (Appeal) is not justifiedas the assessee has been allowed relief of Rs.3,97,76,005/- inAssessment Year 2006-07 on account of disallowance made u/s 40(a)(ia) of the Act in Assessment Year 2005-06, resultantlythe deduction has been allowed twice.” 3. The Tribunal after considering the various submissions observed thatsince the amendment of section 40(a)(ia) is retrospective with effect from1[st] April, 2005, payment of TDS can be deposited in the state exchequer onor before the last date of filing of return under section 139(1) of the Act forthe relevant assessment year and such a deduction has to be allowed. TheTribunal relied upon the decision of the Calcutta High Court in the case ofVirgin Creations(order dated 23[rd] November, 2011 in ITA No.302 of 2011)as well as the decision of the Bombay High Court in the case ofCommissioner of Income Tax, Vidarbha Vs. Smt. Godavaridevi Saraf Bombay[1]as well as decision of the Delhi High Court in the case of Commissioner ofIncome Tax Vs. Rajinder Kumar2 observing that no contrary facts werebrought to their notice by the revenue establishing that the deduction underthe said section had been granted twice to the assessee, and that a mereclaim /allegation is not enough, but has to be substantiated with facts, theTribunal upheld the decision of the CIT (appeals) and dismissed the appeal 1113 ITR 589 Bombay2(2013) 90 DTR (Del) 2972(2013) 90 DTR (Del) 297 4913 itxa 667-18-os of the revenue. The addition of Rs.5,30,91,745/- made by the AssessingOfficer under section 40(a)(ia) of the Act was legitimate in view of theamendment to section 40(a)(ia) and its first proviso by the Finance Act,2010 with effect from 1[st] April, 2010. 4.Now therefore do the questions as proposed raise any substantialquestion(s) of law. 5.A brief background would be useful. The assessee had made paymenton account of sub-contracting, expenses, transporters, machine hiringcharges etc.. Out of the payments to sub-contractors, the Assessing Officerfound that tax deducted at source (TDS) was deposited beyond due datesprescribed under chapter XVII-B but before the due date of furnishing ofreturn of income. The Assessing Officer disallowed a total of Rs.5,30,91,742/-on various accounts under section 40(a)(ia) of the Act. The disallowance wasstated to be in view of the decision of the Tribunal in the case of Bharati Vs.Deputy CIT[1]. 6.When the matter came up before the CIT(A), the CIT(A), observingthat there was no dispute that the assessee had incurred certain expenseson which it shall liable to deduct TDS and there being no dispute that thesaid amount was deposited within the due date of filing of the return ofincome, held that no disallowance could be made for delayed deposit of tax1142 ITD 53 at source for the previous year in which tax was deducted. Since as per theamended section 40(a)(ia) where tax deducted at source at any point of time during the previous year is deposited by the deductor on or before thedue date of filing return of income under Section 139(1) of the Act, 7. The relevant portion of section 40(a)(ia) alongwith the first proviso quoted as under :- “40. Notwithstanding anything to the contrary in sections30 to 38, the following amounts shall not be deducted incomputing the income chargeable under the head “Profitsand gains of business or profession:- (a) In the case of any assessee-- (ia) Thirty percent of any sum payable to a resident onwhich tax is deductible at source under Chapter XVII-B andsuch tax has not been deducted or, after deduction has notbeen paid on or before the due date specified in sub-section(1) of section 139: time during the previous year is deposited by the deductor on or before thedue date of filing return of income under Section 139(1) of the Act, 7. The relevant portion of section 40(a)(ia) alongwith the first proviso quoted as under :- “40. Notwithstanding anything to the contrary in sections30 to 38, the following amounts shall not be deducted incomputing the income chargeable under the head “Profitsand gains of business or profession:- (a) In the case of any assessee-- (ia) Thirty percent of any sum payable to a resident onwhich tax is deductible at source under Chapter XVII-B andsuch tax has not been deducted or, after deduction has notbeen 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 beendeducted in any subsequent year, or has been deducted duringthe previous year but paid after the due date specified insub-section (1) of section 139, thirty percent of such sum shall be allowed as a deduction in computing the income of theprevious year in which such tax has been paid: The above provision has been substituted by the Finance Act, 2010 w.r.e.f. 1-4-2010. Prior to its substitution, proviso , as substituted by the Finance Act, 2008, w.e.f. 1-4-2005, read as under: Provided that where in respect of any such sum, tax hasbeen deducted in any subsequent year, or has been deducted-- (A) during the last month of the previous year but paidafter the said due date; or (B) during any other month of the previous year but paid afterthe end of the said previous year; such sum shall be allowed as a deduction in computing theincome of the previous year in which such tax has beenpaid.” Priya Soparkar 6 913 itxa 667-18-os 8. The proviso was originally inserted by Finance Act, 2008 withretrospective effect from April 1, 2005. The proviso was again amended byFinance Act, 2010 with effect from April 1, 2010. A bare perusal of theaforesaid proviso clearly indicates that the amendment is retrospective innature which means that if the TDS has been deposited prior to filing of thereturn then there shall be no disallowance. The Supreme Court in the case of Commissioner of Income Tax Vs. Calcutta Export Company[1] has clearlyobserved that the amended provision of section 40(a)(ia) should beinterpreted liberally and equitably and applied retrospectively from the datewhen section 40(a)(ia) with effect from assessment year 2005-06 so thatan assessee should not suffer unintended and deleterious consequencesbeyond the object and purpose of the provision mandates. The Apex Courtobserved that as the developments with regard to the section show that theamendment was curative in nature, it should be given retrospectiveoperation as if the amended provision existed even at the time of itsinsertion. In the facts of that case, it was held that since the assessee filedits return on 1[st] August, 2005 i.e. in accordance with the due date underthe provisions of section 139, the claim of the benefit of the amendmentmade by Finance Act, 2010 to the provisions of section 40(a)(ia) wasallowed. The following paragraphs of the decision of the Apex Court arerelevant and are quoted as under :- “18) With a view to mitigate this hardship, Section 40(a)(ia)wasamended by the Finance Act, 2008 and the provision so amendedread as under:-amended by the Finance Act, 2008 and the provision so amendedread as under:- “18) With a view to mitigate this hardship, Section 40(a)(ia)wasamended by the Finance Act, 2008 and the provision so amendedread as under:-amended by the Finance Act, 2008 and the provision so amendedread as under:- “40. Notwithstanding anything to the contrary in Sections 30to 38, thefollowing amounts shall not be deducted in computing the incomechargeable under the head “profit and gains of business or profession (ia)any interest, commission or brokerage, rent, royalty, fees for professionalservices or fees for technical services payable to a resident, or amountspayable to a contractor or sub-contractor, being resident, for carrying outany work (including supply of labour for carrying out any work), onwhich tax is deductible at source under Chapter XVII-B and such tax hasnot been deducted or after deduction has not been paid- (A) in a case where the tax was deductible and was so deducted duringthe last month of the previous year, on or before the due date specifiedin 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 deductedin any subsequent year, or has been deducted (A) during the last month of the previous year but paid after the saiddue date; or (B) during any other month of the previous year but paid after the endof the said previous year, such sum shall be allowed as a deduction incomputing the income of the previous year in which such tax has beenpaid.” 19) The above amendments made by the Finance Act, 2008 thusprovided that no disallowance under Section 40(a) (ia) of the IT Actshall be made in respect of the expenditure incurred in the month ofMarch if the tax deducted at source on such expenditure has been paidbefore the due date of filing of the return. It is important to mentionhere that the amendment was given retrospective operation from thedate of 01.04.2005 i.e., from the very date of substitution of theprovision. 20) Therefore, the assesses were, after the said amendment in 2008,classified in two categories namely; one; those who have deducted thattax during the last month of the previous year and two; those who havededucted the tax in the remaining eleven months of the previous year. Itwas provided that in case of assessees falling under the first category,no disallowance under Section 40(a)(ia) of the IT Actshall be made ifthe tax deducted by them during the last month of the previous year hasbeen paid on or before the last day of filing of return in accordance withthe provisions of Section 139(1)of the IT Act for the said previousyear. In case, the assessees are falling under the second category, nodisallowance under Section 40(a)(ia)of IT Act where the tax wasdeducted before the last month of the previous year and the same was credited to the government before the expiry of the previous year. Thenet effect is that the assessee could not claim deduction for the TDSamount in the previous year in which the tax was deducted and thebenefit of such deductions can be claimed in the next year only. 21) The amendment though has addressed the concerns of the assessesfalling in the first category but with regard to the case falling in thesecond category, it was still resulting into unintended consequences andcausing grave and genuine hardships to the assesses who hadsubstantially complied with the relevant TDS provisions by deductingthe tax at source and by paying the same to the credit of theGovernment before the due date of filing of their returns under Section139(1)of the IT Act. The disability to claim deductions on account ofsuch lately credited sum of TDS in assessment of the previous year inwhich it was deducted, was detrimental to the small traders who maynot be in a position to bear the burden of such disallowance in thepresent Assessment Year. 21) The amendment though has addressed the concerns of the assessesfalling in the first category but with regard to the case falling in thesecond category, it was still resulting into unintended consequences andcausing grave and genuine hardships to the assesses who hadsubstantially complied with the relevant TDS provisions by deductingthe tax at source and by paying the same to the credit of theGovernment before the due date of filing of their returns under Section139(1)of the IT Act. The disability to claim deductions on account ofsuch lately credited sum of TDS in assessment of the previous year inwhich it was deducted, was detrimental to the small traders who maynot be in a position to bear the burden of such disallowance in thepresent Assessment Year. 22) In order to remedy this position and to remove hardships whichwere being caused to the assessees belonging to such second category,amendments have been made in the provisions of Section 40(a)(ia) bytheFinance Act, 2010. 23) Section 40(a)(ia), as amended by Finance Act, 2010, with effectfrom 01.04.2010 and now reads as under: “4(a)(ia) any interest, commission or brokerage, rent, royalty, fees forprofessional services or fees for technical services payable to a resident,or amounts payable to a contractor or sub-contractor, being resident, forcarrying out any work (including supply of labour for carrying out anywork), on which tax is deductible at source under Chapter XVII-B andsuch tax has not been deducted or; after deduction, has not paid on orbefore the due date specified in sub-section (1) of Section 139: Provided that where in respect of any such sum, tax has been deductedin any subsequent year, or has been deducted during the previous yearbut paid after the due date specified in sub-section (1) of section 139,such sum shall be allowed as a deducted in computing the income ofthe previous year in which such tax has been paid.” 24) Thus, the Finance Act, 2010 further relaxed the rigors of Section40(a)(ia)of the IT Act to provide that all TDS made during the previousyear can be deposited with the Government by the due date of filing thereturn of income. The idea was to allow additional time to the deductorsto deposit the TDS so made. However, the Memorandum explaining theprovisions of the Finance Bill, 2010 expressly mentioned as follows:“This amendment is proposed to take effect retrospectively from 1stApril, 2010 and will, accordingly, apply in relation to the Assessment Year 2010-11 and subsequent years.” 25) The controversy surrounding the above amendment was whetherthe amendment being curative in nature should be appliedretrospectively i.e., from the date of insertion of the provisions ofSection 40(a)(ia)or to be applicable from the date of enforcement. Year 2010-11 and subsequent years.” 25) The controversy surrounding the above amendment was whetherthe amendment being curative in nature should be appliedretrospectively i.e., from the date of insertion of the provisions ofSection 40(a)(ia)or to be applicable from the date of enforcement. 26) TDS results in collection of tax and the deductor discharges dualresponsibility of collection of tax and its deposition to the government.Strict compliance of Section 40(a)(ia)may be justified keeping in viewthe legislative object and purpose behind the provision but a provisionof such nature, the purpose of which is to ensure tax compliance andnot to punish the tax payer, should not be allowed to be converted intoan iron rod provision which metes out stern punishment and results inmalevolent results, disproportionate to the offending act and aim of thelegislation. Legislature can and do experiment and intervene from timeto time when they feel and notice that the existing provision is causingand creating unintended and excessive hardships to citizens and subjector have resulted in great inconvenience and uncomfortable results.Obedience to law is mandatory and has to be enforced but themagnitude of punishment must not be disproportionate by what isrequired and necessary. The consequences and the injury caused, ifdisproportionate do and can result in amendments which have the effectof streamlining and correcting anomalies. As discussed above, theamendments made in 2008 and 2010 were steps in the said directiononly. Legislative purpose and the object of the said amendments wereto ensure payment and deposit of TDS with the Government. 27) A proviso which is inserted to remedy unintended consequencesand to make the provision workable, a proviso which supplies anobvious omission in the Section, is required to be read into the Sectionto give the Section a reasonable interpretation and requires to be treatedas retrospective in operation so that a reasonable interpretation can begiven to the Section as a whole. 28) The purpose of the amendment made by the Finance Act, 2010 is tosolve the anomalies that the insertion of section 40(a)(ia)was causingto the bonafide tax payer. The amendment, even if not given operationretrospectively, may not materially be of consequence to the Revenuewhen the tax rates are stable and uniform or in cases of big assesseeshaving substantial turnover and equally huge expenses and necessarycushion to absorb the effect. However, marginal and medium taxpayers,who work at low gross product rate and when expenditure whichbecomes subject matter of an order under Section 40(a)(ia)issubstantial, can suffer severe adverse consequences if the amendmentmade in 2010 is not given retrospective operation i.e., from the date ofsubstitution of the provision. Transferring or shifting expenses to asubsequent 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 curativein nature required to be given retrospective operation i.e., from the dateof insertion of the said provision.” 9.In view of the above decision of the Apex Court, it would not benecessary for us to deal with the other decisions cited by the Tribunal. the financial stress. Such could not be the intention of the legislature.Hence, the amendment made by the Finance Act, 2010 being curativein nature required to be given retrospective operation i.e., from the dateof insertion of the said provision.” 9.In view of the above decision of the Apex Court, it would not benecessary for us to deal with the other decisions cited by the Tribunal. 10.We observe that in the case at hand there are concurrent findings offact of the CIT(A) and the Tribunal that the subject TDS in the present casewas deposited in the state exchequer before the due date of filing of returnwhich is not disputed by the revenue. Also no material or facts have beenbrought before us even to suggest that the deduction has been grantedtwice to the assessee. Therefore, there cannot be any disallowance on thiscount. The Assessing Officer could not have made a disallowance ofRs.5,30,91,745/- under section 40(a)(ia) of the Act in view of theretrospective nature of the proviso to the said section. We do not find anyerror apparent or perversity in the order of the Tribunal in confirming theorder of the CIT (A) holding that no disallowance is called for under section40(a)(ia) of the Act. 11.In the circumstances, the appeal does not raise any substantialquestions of law. Appeal therefore stands dismissed. No costs. (ABHAY AHUJA, J.) (DHIRAJ SINGH THAKUR, J.)