2019 (11) TMI 1373 - AT - Income Tax

Addition u/s 40(a)(ia) - whether the amendment is having the retrospective effect or not? - AR before us submitted that the above proviso inserted in the Act to be a curative one having retrospective effect and the assessee is entitled the benefit of 30% disallowance as against 100% disallowance made by the AO and confirmed by the CIT(A)? - HELD THAT - On careful perusal of the amendment brought to the Section 40(a)(ia) of the Act by the Finance Act, 2014 w.e.f. 01.04.2015, it is clear that the intent of legislature to reduce the hardship, it is proposed that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed. The Hon ble Supreme Court in the case of Allied Motors (P) Ltd. 1997 (3) TMI 9 - SUPREME COURT has held that amendment was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation. Finally, after considering various case laws, the Hon ble Supreme Court held that the purpose of amendment would not serve its object in such a situation unless, it is construed as retrospective. We direct the AO to restrict the 100% disallowance confirmed by the CIT(A) to the extent of 30% only taking into account the actual claim of the assessee in its profit and loss account. We order accordingly. Thus, the sole ground of appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Interpretation and application of Section 40(a)(ia) of the Income Tax Act.
2. Disallowance of expenses due to non-deposit of TDS within the specified time.
3. Retrospective applicability of the amendment to Section 40(a)(ia) by the Finance Act, 2014.

Issue-wise Detailed Analysis:

1. Interpretation and Application of Section 40(a)(ia) of the Income Tax Act:
The primary issue revolves around the interpretation of Section 40(a)(ia) of the Income Tax Act, which pertains to the disallowance of certain expenses if the TDS (Tax Deducted at Source) is not deposited within the stipulated time. The assessee claimed expenses under various heads, including labour charges, architect fees, and commission, which were disallowed by the AO (Assessing Officer) due to non-compliance with TDS deposit requirements. The CIT(A) partially upheld this disallowance, reducing it from ?39,62,695 to ?35,46,286, acknowledging that ?4,16,409 was not claimed as an expense in the profit and loss account.

2. Disallowance of Expenses Due to Non-deposit of TDS within the Specified Time:
The AO disallowed the expenses under Section 40(a)(ia) because the assessee failed to deposit the TDS deducted from payments on time. The CIT(A) confirmed the disallowance but reduced the amount, recognizing that a portion of the expenses was not claimed in the profit and loss account. The assessee argued that the disallowance should be limited to 30% as per the amended provisions of Section 40(a)(ia) by the Finance Act, 2014, which they contended should have retrospective effect.

3. Retrospective Applicability of the Amendment to Section 40(a)(ia) by the Finance Act, 2014:
The assessee argued that the amendment to Section 40(a)(ia), which restricts the disallowance to 30% instead of 100%, should be applied retrospectively. They cited various case laws, including decisions from the Gauhati, Kolkata, and Delhi Benches of the Tribunal, which supported the view that the amendment is curative and should be applied retrospectively. The Tribunal agreed with the assessee, referencing the Supreme Court's decision in the case of CIT vs. Calcutta Export Company, which held that curative amendments should be applied retrospectively to avoid undue hardship to the assessee. The Tribunal concluded that the disallowance should be restricted to 30% of the actual expenses claimed in the profit and loss account, thereby partly allowing the assessee's appeal.

Conclusion:
The Tribunal directed the AO to restrict the disallowance to 30% of the actual expenses claimed by the assessee in the profit and loss account, following the retrospective application of the amendment to Section 40(a)(ia) by the Finance Act, 2014. The appeal was partly allowed, providing relief to the assessee from the 100% disallowance initially imposed.