2012 (7) TMI 304 - AT - Income Tax

Disallowing u/s 40(a)(ii) of the Income Tax Act - whether amount of advance made to the contractor for acquisition of its capital asset more so when the same has been adjusted within 3 months and tax has been deducted and deposited before the filing of the return is bad in law Held that - Assessee had deducted tax at source out of payments made to contractor which was deposited before 8.7.2008 - due date for filing return of income of the assessee was 30.09.2008 - once the tax has been deducted and deposited by the assessee before the due date of filing return of income, there is no merit in disallowing the expenditure relatable to such tax deducted at source - appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Legality of the order passed by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals).
2. Disallowance of Rs. 1,01,33,953 under section 40(a)(ia) of the Income Tax Act due to non-deduction of tax at source under section 194C.
3. Applicability of section 40(a)(ia) to amounts paid versus payable.
4. Retrospective application of the amendment to section 40(a)(ia) by the Finance Act, 2010.

Issue-Wise Detailed Analysis:

1. Legality of the Order Passed by the Assessing Officer and Upheld by the Commissioner of Income Tax (Appeals):
The assessee challenged the legality of the order passed by the Assessing Officer, which was upheld by the Commissioner of Income Tax (Appeals), Chandigarh. The order was contested on the grounds of being "bad in law and beyond all the cannons of law and justice."

2. Disallowance of Rs. 1,01,33,953 Under Section 40(a)(ia) of the Income Tax Act:
The core issue in the appeal was the disallowance made by the Assessing Officer under section 40(a)(ia) for non-deduction of tax at source under section 194C. The assessee, a cooperative society, had made an advance payment of Rs. 1,21,75,828 to M/s Deepak Builders for the procurement of materials for construction projects. The payment was made on 22.02.2008, and the TDS was deducted and deposited before the due date of filing the return of income on 30.09.2008. The Assessing Officer allowed an adjustment of Rs. 20,41,875 but disallowed Rs. 1,01,33,953 for non-deduction of tax at source.

3. Applicability of Section 40(a)(ia) to Amounts Paid Versus Payable:
The Tribunal examined whether section 40(a)(ia) applies to amounts paid during the year or only to amounts payable as of 31st March. The Special Bench of Vishakhapatnam in Merilyn Shipping & Transports v. Addl. CIT [2012] held that section 40(a)(ia) applies only to amounts payable as of 31st March and not to amounts already paid during the year. The Tribunal found that since the assessee had made the payment during the year, the disallowance under section 40(a)(ia) was not applicable.

4. Retrospective Application of the Amendment to Section 40(a)(ia) by the Finance Act, 2010:
The Tribunal considered whether the amendment to section 40(a)(ia) by the Finance Act, 2010, which allowed deductions if TDS was deposited before the due date of filing the return, was retrospective. The Special Bench of Mumbai Tribunal in Bharati Shipyard Ltd. v. Dy. CIT held that the amendment was not retrospective. However, the Hon'ble Calcutta High Court in CIT v. Virgin Creations held that the amendment was retrospective. The Tribunal followed the Calcutta High Court's decision, holding that since the assessee had deducted and deposited the TDS before the due date of filing the return, the disallowance was not warranted.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the Assessing Officer to allow the claim of expenditure of Rs. 1,01,33,953. The Tribunal concluded that the provisions of section 40(a)(ia) were not applicable to the amounts paid during the year and that the amendment to section 40(a)(ia) by the Finance Act, 2010, was retrospective, allowing deductions if TDS was deposited before the due date of filing the return.