“ (I) Whether On The Facts And Circumstancesof The Case, The Income Tax Appellate Tribunalwas Right In Holding That The Disallowance Madeu/S 40(A)(Ia) For Non D v. Https://Hcservices.ecourts.gov.in/Hcservices

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HON'BLE MR. JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI T.C.A.No.374 of 2014 The Commissioner of Income Tax,Chennai.... Appellant /Appellantv. M/s. Western Agencies (Madrasw) Pvt. Ltd,109, Angappa Naicken Street,1st Floor, Chennai - 600 001. ... Respondent/Respondent Appeal preferred under Section 260A of the Income Tax Act,1636, against the order of the Income Tax Appellate Tribunal,Madras, "D" Bench, dated 06.11.2012 in I.T.A.No.636/Mds/2012 forthe Assessment Year 2005-06, against the order passed by theCommissioner of Income Tax (Appeals)VI, Chennai-34, made inITA.No.63/11-12 dt.23-12-2011 and against the order passed bythe Assistant Commissioner of Income Tax Company Circle III(3),Chennai-34, made in GIR No/PAN: dt.31-12-2007. For Appellant : Mr. M.Swaminathan Senior Standing Counsel For Respondent : Mrs. Sri Niranjani Srinivasan Challenging the order passed in I.T.A.No.636/Mds/2012 inrespect of the Assessment Year 2005-06. on the file of theIncome Tax Appellate Tribunal, Chennai,"D" Bench (for brevity,the Tribunal), the Revenue has filed the above appeal. 2. The above appeal was admitted on the followingsubstantial questions of law: https://hcservices.ecourts.gov.in/hcservices/ “ (i) Whether on the facts and circumstancesof the case, the Income Tax Appellate Tribunalwas right in holding that the disallowance madeu/s 40(a)(ia) for non deduction of tax at sourceontransportchargesamountingtoRs.4,57,10,818/- is to be allowed? (ii) Whether the finding of the Tribunal isright especially when the assessee remitted thetransport charges belatedly only on 04.04.2005and 07.04.2005 after the due dates and the samewas to be disallowed as per the provisions ofsection 40(a)(ia) of the Act and the amendmentinserted by Finance Act, 2010 was applicableprospectively only from 01.04.2010 and notapplicable to the assessment year 2005-06? (iii) Whether the disallowance made by theassessing officer as per the provisions of theAct as applicable for the assessment year 2005-06was followed and since the assessee company hasdeducted tax for the entire amount only in themonth of March and remitted the same on04.04.2005 and 07.04.2005 after the closer forthe relevant previous year?" 3. When the appeal is taken up for hearing, Mr.M.Swaminathan, learned Senior Standing Counsel appearing forthe appellant fairly submitted that the issues involved inthe present appeal are covered by the decision of the Hon'bleSupreme Court in the Judgment reported in (2018) 404 ITR 654(SC) [Commissioner of Income Tax, Kolkata v. Calcutta ExportCompany] wherein the Hon'ble Supreme Court held as follows:" 14) For deciding as to the retrospective effectof the amendment made by Finance Act, 2010, it isrequired to see the Section as it stands before andafter the amendment made through the Finance Act, 2010and the purpose of such insertion or amendment to thesaid provisions. The provisions of Section 40(a)(ia) came into force in the year 2005 which stood asunder:- “40. Amounts not deductible- Notwithstandinganything to the contrary in [Sections 30 to 38],the following amounts shall not be deducted incomputing the income chargeable under the head“Profits and gains of business or profession,-(a) in the case of any assessee- “40. Amounts not deductible- Notwithstandinganything to the contrary in [Sections 30 to 38],the following amounts shall not be deducted incomputing the income chargeable under the head“Profits and gains of business or profession,-(a) in the case of any assessee- (i)…… (ia) any interest, commission orbrokerage, rent, royalty, fees for professionalservices or fees for technical services payableto a resident, or amounts payable to acontractor or sub contractor, being resident,for carrying out any work (including supply oflabour for carrying out any work), on which taxis deductible at source under Chapter XVIIB andsuch tax has not been deducted or, afterdeduction, has not been paid during the previousyear, or in the subsequent year before theexpiry of the time prescribed under sub-section(1) of section 200; Provided that where inrespect of any such sum, tax has been deductedin any subsequent year or, has been deductedduring the previous year but paid in anysubsequent year after the expiry of the timeprescribed under sub-section (1) of section 200,such sum shall be allowed as a deduction incomputing the income of the previous year inwhich such tax has been paid.” 15) The purpose of bringing the said amendment to theexisting provision of Section has been highlighted inthe memorandum explaining the provision which reads asunder:-“With a view to augment compliance of TDSprovisions, it is proposed to extend theprovisions of the section 40(a)(ia) to paymentsof interest, commission or brokerage, fee forprofessional services or fee for technicalservices to the residents and payments to aresidential contractor or sub-contractor forcarrying out any work (including supply oflabour for carrying out any work), on which taxhas not been deducted or after deduction, hasnot been paid before the expiry of the timeprescribed under sub-section(1) of section 200and in accordance with the provisions of otherprovisions of Chapter XVII-B.” 16) The purpose is very much clear from the abovereferred explanation by the memorandum that it camewith a purpose to ensure tax compliance. The fact thatthe intention of the legislature was not to punish theassessee is further reflected from a bare reading ofthe provisions of Section 40(a)(ia) of the IT Act. Itonly results in shifting of the year in which the expenditure can be claimed as deduction. In a casewhere the tax deducted at source was duly depositedwith the government within the prescribed time, thesaid amount can be claimed as a deduction from theincome in the previous year in which the TDS wasdeducted. However, when the amount deducted in the formof TDS was deposited with the government after theexpiry of period allowed for such deposit then thedeductions can be claimed for such deposited TDS amountonly in the previous year in which such payment wasmade to the government. 17) However, it has caused some genuine and apparenthardship to the assesses especially in respect of taxdeducted at source in the last month of the previousyear, the due date for payment of which as per the timespecified in Section 200 (1) of IT Act was only on 7 thof April in the next year. The assessee in such case,thus, had a period of only seven days to pay the taxdeducted at source from the expenditure incurred in themonth of March so as to avoid disallowance of the saidexpenditure under Section 40(a)(ia) of IT Act. 18) With a view to mitigate this hardship, Section 40(a)(ia) was amended by the Finance Act, 2008 and theprovision so amended read as under:- 17) However, it has caused some genuine and apparenthardship to the assesses especially in respect of taxdeducted at source in the last month of the previousyear, the due date for payment of which as per the timespecified in Section 200 (1) of IT Act was only on 7 thof April in the next year. The assessee in such case,thus, had a period of only seven days to pay the taxdeducted at source from the expenditure incurred in themonth of March so as to avoid disallowance of the saidexpenditure under Section 40(a)(ia) of IT Act. 18) With a view to mitigate this hardship, Section 40(a)(ia) was amended by the Finance Act, 2008 and theprovision so amended read as under:- “40. Notwithstanding anything to the contraryin Sections 30 to 38, the following amountsshall not be deducted in computing the incomechargeable under the head “profit and gains ofbusiness or profession (ia) any interest,commission or brokerage, rent, royalty, fees forprofessional services or fees for technicalservices payable to a resi-dent, or amountspayable to a contactor or sub-contractor, beingresident, for carrying out any work (includingsupply of labour for carrying out any work), onwhich tax is deductible at source under ChapterXVII-B and such tax has not been deducted orafter deduction has not been paid- (A) in a case where the tax was deductibleand was so deducted during the last month of theprevious year, on or before the due datespecified in sub-section (1) of section 139; or (B) in any other case, on or before thelast day of the previous year; Provided that where in respect of any such sum, tax hasbeen deducted in any subsequent year, or has beendeducted (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 paidafter the end of the said previous year, such sum shallbe allowed as a deduction in computing the income of theprevious year in which such tax has been paid.” 19) The above amendments made by the Finance Act, 2008thus provided that no disallowance under Section 40 (a)(ia) of the IT Act shall be made in respect of theexpenditure incurred in the month of March if the taxdeducted at source on such expenditure has been paidbefore the due date of filing of the return. It isimportant to mention here that the amendment was givenretrospective operation from the date of 01.04.2005i.e., from the very date of substitution of theprovision. 20) Therefore, the assesses were, after the saidamendment in 2008, classified in two categories namely;one; those who have deducted that tax during the lastmonth of the previous year and two; those who havededucted the tax in the remaining eleven months of theprevious year. It was provided that in case of assesseesfalling under the first category, no disallowanceunder Section 40(a) (ia) of the IT Act shall be made ifthe tax deducted by them during the last month of theprevious year has been paid on or before the last day offiling of return in accordance with the provisionsof Section 139(1) of the IT Act for the said previousyear. In case, the assessees are falling under thesecond category, no disallowance under Section 40(a)(ia) of IT Act where the tax was deducted before thelast month of the previous year and the same wascredited to the government before the expiry of theprevious year. The net effect is that the assessee couldnot claim deduction for the TDS amount in the previousyear in which the tax was deducted and the benefit ofsuch deductions can be claimed in the next year only. 21) The amendment though has addressed the concerns ofthe assesses falling in the first category but withregard to the case falling in the second category, it 21) The amendment though has addressed the concerns ofthe assesses falling in the first category but withregard to the case falling in the second category, it was still resulting into unintended consequences andcausing grave and genuine hardships to the assesses whohad substantially complied with the relevant TDSprovisions by deducting the tax at source and by payingthe same to the credit of the Government before the duedate of filing of their returns under Section 139(1) ofthe IT Act. The disability to claim deductions onaccount of such lately credited sum of TDS in assessmentof the previous year in which it was deducted, wasdetrimental to the small traders who may not be in aposition to bear the burden of such disallowance in thepresent Assessment Year. 22) In order to remedy this position and to removehardships which were being caused to the assesseesbelonging to such second category, amendments have beenmade in the provisions of Section 40(a) (ia) bythe Finance Act, 2010. 23) Section 40(a)(ia), as amended by Finance Act, 2010,with effect from 01.04.2010 and now reads as under:“4(a)(ia) any interest, commission or brokerage,rent, royalty, fees for professional services orfees for technical services payable to aresident, or amounts payable to a contractor orsub-contractor, being resident, for carrying outany work (including supply of labour forcarrying out any work), on which tax isdeductible at source under Chapter XVII-B andsuch tax has not been deducted or; afterdeduction, has not paid on or before the duedate specified in sub-section (1) of Section139: Provided that where in respect of any such sum, tax hasbeen deducted in any subsequent year, or has beendeducted during the previous year but paid after the duedate specified in sub-section (1) of section 139, suchsum shall be allowed as a deducted in computing theincome of the previous year in which such tax has beenpaid.” 24) Thus, the Finance Act, 2010 further relaxed therigors of Section 40(a)(ia) of the IT Act to providethat all TDS made during the previous year can bedeposited with the Government by the due date of filingthe return of income. The idea was to allow additional https://hcservices.ecourts.gov.in/hcservices/ time to the deductors to deposit the TDS so made.However, the Memorandum explaining the provisions of theFinance Bill, 2010 expressly mentioned as follows: “Thisamendment is proposed to take effect retrospectivelyfrom 1st April, 2010 and will, accordingly, apply inrelation to the Assessment Year 2010-11 and subsequentyears.” 25) The controversy surrounding the above amendment waswhether the amendment being curative in nature should beapplied retrospectively i.e., from the date of insertionof the provisions of Section 40(a)(ia) or to beapplicable from the date of enforcement. https://hcservices.ecourts.gov.in/hcservices/ time to the deductors to deposit the TDS so made.However, the Memorandum explaining the provisions of theFinance Bill, 2010 expressly mentioned as follows: “Thisamendment is proposed to take effect retrospectivelyfrom 1st April, 2010 and will, accordingly, apply inrelation to the Assessment Year 2010-11 and subsequentyears.” 25) The controversy surrounding the above amendment waswhether the amendment being curative in nature should beapplied retrospectively i.e., from the date of insertionof the provisions of Section 40(a)(ia) or to beapplicable from the date of enforcement. 26) TDS results in collection of tax and the deductordischarges dual responsibility of collection of tax andits deposition to the government. Strict complianceof Section 40(a)(ia) may be justified keeping in viewthe legislative object and purpose behind the provisionbut a provision of such nature, the purpose of which isto ensure tax compliance and not to punish the taxpayer, should not be allowed to be converted into aniron rod provision which metes out stern punishment andresults in malevolent results, disproportionate to theoffending act and aim of the legislation. Legislaturecan and do experiment and intervene from time to timewhen they feel and notice that the existing provision iscausing and creating unintended and excessive hardshipsto citizens and subject or have resulted in greatinconvenience and uncomfortable results. Obedience tolaw is mandatory and has to be enforced but themagnitude of punishment must not be disproportionate bywhat is required and necessary. The consequences and theinjury caused, if disproportionate do and can result inamendments which have the effect of streamlining andcorrecting anomalies. As discussed above, the amendmentsmade in 2008 and 2010 were steps in the said directiononly. Legislative purpose and the object of the saidamendments were to ensure payment and deposit of TDSwith the Government. 27) A proviso which is inserted to remedy unintendedconsequences and to make the provision workable, aproviso which supplies an obvious omission in theSection, is required to be read into the Section to givethe Section a reasonable interpretation and requires tobe treated as retrospective in operation so that a reasonable interpretation can be given to the Section asa whole. 28) The purpose of the amendment made by the FinanceAct, 2010 is to solve the anomalies that the insertionof section 40(a)(ia) was causing to the bona fide taxpayer. The amendment, even if not given operationretrospectively, may not materially be of consequence tothe Revenue when the tax rates are stable and uniform orin cases of big assessees having substantial turnoverand equally huge expenses and necessary cushion toabsorb the effect. However, marginal and mediumtaxpayers, who work at low gross product rate and whenexpenditure which becomes subject matter of an orderunder Section 40(a)(ia) is substantial, can suffersevere adverse consequences if the amendment made in2010 is not given retrospective operation i.e., from thedate of substitution of the provision. Transferring orshifting expenses to a subsequent year, in such cases,will not wipe off the adverse effect and the financialstress. Such could not be the intention of thelegislature. Hence, the amendment made by the FinanceAct, 2010 being curative in nature required to be givenretrospective operation i.e., from the date of insertionof the said provision. 29) Further, in Allied Motors (P) Limited (supra), thisCourt while dealing with a similar question with regardto the retrospective effect of the amendment madein section 43-B of the Income Tax Act,1961 has held thatthe new proviso to Section 43B should be givenretrospective effect from the inception on the groundthat the proviso was added to remedy unintendedconsequences and supply an obvious omission. The provisoensured reasonable interpretation and retrospectiveeffect would serve the object behind the enactment. Theaforesaid view has consistently been followed by thisCourt in the following cases, viz., Whirlpool of IndiaLtd., vs. CIT, New Delhi (2000) 245 ITR 3, CIT vs. AmritBanaspati (2002) 255 ITR 117 and CIT vs. AlomEnterprises Ltd. (2009) 319 ITR 306. 30) Hence, in light of the forgoing discussion and thebinding effect of the judgment given in Allied Moters(supra), we are of the view that the amended provisionof Sec 40(a)(ia) of the IT Act should be interpretedliberally and equitable and applies retrospectively from the date when Section 40(a)(ia) was inserted i.e., witheffect from the Assessment Year 2005-2006 so that anassessee should not suffer unintended and deleteriousconsequences beyond what the object and purpose of theprovision mandates. As the developments with regard tothe Section recorded above shows that the amendment wascurative in nature, it should be given retrospectiveoperation as if the amended provision existed even atthe time of its insertion. Since the assessee has filedits returns on 01.08.2005 i.e., in accordance with thedue date under the provisions of Section 139 IT Act,hence, is allowed to claim the benefit of the amendmentmade by Finance Act, 2010 to the provisions of Section40(a)(ia) of the IT Act." 4. On a reading of the Judgment of the Hon'ble SupremeCourt cited supra, it is clear that the Hon'ble Apex Court hadalready decided the issue in favour of the assessee. 5. Mrs. Sri Niranjani Srinivasan, learned counsel appearingfor the respondent submitted that the Judgment of the Hon'bleSupreme Court cited supra may be followed and the appeal may bedismissed. 6. In view of the submissions made by the learned counselon either side, following the ratio laid down by the Hon'bleSupreme Court in the Judgment reported in (2018) 404 ITR 654(SC) [cited supra] the questions of law are decided againstthe revenue and in favour of the assessee. The Tax CaseAppeal is dismissed. No costs. Sd/- Assistant Registrar//True Copy// RjTo 1.The Income Tax Appellate Tribunal, Chennai,"D" Bench. Chennai,"D" Bench. 2.The Commissioner of Income Tax (Appeals)VI, Chennai-34. Chennai-34. 3.The Assistant Commissioner of Income Tax, Company Circle III(3), Chennai-34. Company Circle III(3), Chennai-34. +1cc to Mr.G.Baskar, Advocate, S.R.No.17728 +1cc to Mr.M.Swaminathan, Advocate, S.R.No.18134 T.C.A.No.374 of 2014 BS(CO)CB(19/04/2021)