+Ita 436/2016Pr Commissioner Of Income Tax - 11 v. Shri Dinesh Kumar Mathur

$~13*IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgement delivered on:24.01.2017 +ITA 436/2016PR COMMISSIONER OF INCOME TAX - 11 ..... Appellant Through:Mr. Zoheb Hossain, Advocate. Versus SHRI DINESH KUMAR MATHUR ..... RespondentThrough:Mr.KapilGoelandMr.MukulGupta, Advs. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI S. RAVINDRA BHAT (Oral):- 1.The question of law urged in this appeal is as follows: "Did the Income Tax Tribunal (ITAT) fall intoerror in holding that it was open to the assessee toclaim that payments made to a sister concern were notsubjecttoIDSunderSection194(C)inthecircumstances of the case?" 2.The assessee had, for the Assessment Year (A.Y.)2008-09,inter alia shown expenditure to the tune of about Rs.3,19,66,460/-which was paid to M/s. Aakriti Creation Pvt. Ltd. In the course ofregular assessments, the assessee explained that the expenditure wasincurred towards reimbursements of the cost of raw materials resourced by the payee which was a sister concern. The assessee isengaged in the business of manufacture and export of garments andaccessories and M/s Aakriti Creation Pvt. Ltd. does fabric work. TheA.O. disallowed the amount and added it back to the assessee’sreturns, bringing it to tax.The CIT(A) granted the relief to theassessee in view of the decision of the Tribunal in Grandprix Fab (P)Ltd. v. CIT (2010) 34 DTR 248. The ITAT confirmed that order. 3.Counsel for the Revenue urges that the text of Section 34(i)(ia)of the Act is clear that the payee has no choice but to deduct theamounts towards over payments highlighting that the deductor has thechoice under Section 195(2) of the Act. The learned counsel submitsthat if the individual assessee is examined of any outstanding amountas to which part of any payment is income, the entire meaning of taxcollection would be thrown into disarray. It was submitted that theITAT failed to take note of the fact that the second proviso to Section40(a)(ia) was introduced only w.e.f. 01.04.2013 by way of anamendment and that the grant of relief in the circumstances of thecase virtually made the statute prospective. The learned counsel forthe assessee relied upon the previous rulings of this Court particularlyupon Commissioner of Income Tax v. Dr. Jaideep Kumar Sharma,ITA 95/2015, decided on 19.11.2015; Commissioner of Income Tax v.Ansal Land Mark Township (P) Ltd., ITA 160/2015, decided on 26[th]August, 2015. 4.In Ansal Land Mark Township (P) Ltd. (supra), the CourtelaboratelyconsideredtheimpactofSection194Canditsinterpretation of Section 201 and 210 of the Act. Like in the Ansal Land Mark Township (P) Ltd. (supra), here too the deductee, i.e., M/sAakriti Creation Pvt. Ltd. has filed its returns which reflected theamounts claimed to be expenditure which were examined and afterwhich the assessment orders were framed.The Ansal Land MarkTownship (P) Ltd. (supra) had taken note of the Agra Bench of theITATdecisioninRajivKumarAgarwalv.ACIT,ITANo.337/Agra/2013. The Agra Bench had stated as follows: 4.In Ansal Land Mark Township (P) Ltd. (supra), the CourtelaboratelyconsideredtheimpactofSection194Canditsinterpretation of Section 201 and 210 of the Act. Like in the Ansal Land Mark Township (P) Ltd. (supra), here too the deductee, i.e., M/sAakriti Creation Pvt. Ltd. has filed its returns which reflected theamounts claimed to be expenditure which were examined and afterwhich the assessment orders were framed.The Ansal Land MarkTownship (P) Ltd. (supra) had taken note of the Agra Bench of theITATdecisioninRajivKumarAgarwalv.ACIT,ITANo.337/Agra/2013. The Agra Bench had stated as follows: “Deincentivizing a lapse and punishing a lapse aretwo different things and have distinctly different, andsometimes mutually exclusive, connotations. When weappreciate the object of scheme of section 40(a)(ia), ason the statute, and to examine whether or not, on a“fair, just and equitable” interpretation of law- as isthe guidance from Hon’ble Delhi High Court oninterpretation of this legal provision, in our humbleunderstanding,itcouldnotbean“intendedconsequence” to disallow the expenditure, due to nondeduction of tax at source, even in a situation in whichcorresponding income is brought to tax in the hands ofthe recipient. The scheme of Section 40(a)(ai), as wesee it, is aimed at ensuring that an expenditure shouldnot be allowed as deduction in the hands of anassessee in a situation in which income embedded insuch expenditure has remained untaxed due to taxwithholding lapses by the assessee.It is not, in ourconsidered view, a penalty for tax withholding lapsebut it is a sort of compensatory deduction restrictionfor an income going untaxed due to tax withholdinglapse. The penalty for tax withholding lapse per se isseparately provided for in Section 271C, and , section40(a)(ai) does not add to the same. The provisions ofSection 40(a)(ai), as they existed prior to insertion ofsecond proviso thereto, went much beyond the obviousintentionsofthelawmakersandcreatedunduehardships even in cases in which the assessee’s taxwithholding lapses did not result in any loss to the exchequer.Nowthatthelegislaturehasbeencompassionate enough to cure these shortcomings ofprovision, and thus obviate the unintended hardships,such an amendment in law, in view of the well settledlegal position to the effect that a curative amendmentto avoid unintended consequences is to be treated asretrospective in nature even though it may not state sospecifically,the insertion of second proviso must begiven retrospective effect from the point of time whenthe related legal provision was introduced. In view ofthese discussions, as also for the detailed reasons setout earlier, we cannot subscribe to the view that itcould have been an “intended consequence” to punishthe assessees for non deduction of tax at source bydeclining the deduction in respect of related payments,even when the corresponding income is duly brought totax.That will be going much beyond the obviousintention of section.Accordingly, we hold that theinsertion of second proviso to Section 40(a)(ia) isdeclaratory and curative in nature and ithasretrospective effect from 1[st]April, 2005, being the datefrom which sub clause (ia) of Section 40(a) wasinserted by the Finance (No.2) Act, 2004.” 5.In the present case too, the Court is of the opinion that since theamounts received by the payee, i.e., M/s Aakriti Creation Pvt. Ltd.were reported by it in the regular course of assessments, thedisallowance of the entire amounts, under Section 40(a)(ia) of the Actin effect would render one payment which constitutes a transactionliable to income tax, twice over. Considering that Parliamentremedied the law by amendment through insertion of the secondproviso, in cases such as the present one, where the AO can have easyaccess to the returns of the payee, in the larger interest of the assesseeand the Revenue, it would be appropriate that the A.O. examines the 5.In the present case too, the Court is of the opinion that since theamounts received by the payee, i.e., M/s Aakriti Creation Pvt. Ltd.were reported by it in the regular course of assessments, thedisallowance of the entire amounts, under Section 40(a)(ia) of the Actin effect would render one payment which constitutes a transactionliable to income tax, twice over. Considering that Parliamentremedied the law by amendment through insertion of the secondproviso, in cases such as the present one, where the AO can have easyaccess to the returns of the payee, in the larger interest of the assesseeand the Revenue, it would be appropriate that the A.O. examines the figures with relation to the exact claim of payments toward the rawmaterials. The AO would examine, if necessary, the returns andrelative documents pertaining to the payee M/s Aakriti Creation Pvt.Ltd. 6.Withtheseobservations,thematterisremandedforreconsideration; in the event the A.O. is satisfied that the claimtowards the payment of Rs.3,19,66,460/- doesnot include anyincome component but in fact constitutes reimbursement, the questionof application of Section 40(a)(ia) would not arise. 7.The appeal is partly allowed in the above terms. S. RAVINDRA BHAT, J JANUARY 24, 2017/acm NAJMI WAZIRI, J