2019 (8) TMI 1498 - HC - Income Tax

Disallowance under section 40(a)(ia) - Whether second proviso to section 40(a)(ia) of the Act inserted by the Finance Act, 2012 is clarificatory and retrospective in nature? - HELD THAT - As decided in ANSAL LAND MARK TOWNSHIP (P) LTD. 2015 (9) TMI 79 - DELHI HIGH COURT the second proviso to Section 40(a) (ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-Section (1) of Section 201 of the Act, then, in such event, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso As relyng on Agra Bench of ITAT in Rajiv Kumar Agarwal v. ACIT 2014 (6) TMI 79 - ITAT AGRA in which it was held that the second proviso to Section 40 (a) (ia) of the Act is declaratory and curative in nature and has retrospective effect from 1st April 2005, merits acceptance. No substantial question of law arises - Decided in favour of the Assessee

Summary

Issues Involved:
1. Retrospective application of the second proviso to section 40(a)(ia) of the Income-tax Act, 1961.
2. Justifiability of disallowance under section 40(a)(ia) when the recipient has discharged tax liability.

Detailed Analysis:

1. Retrospective Application of the Second Proviso to Section 40(a)(ia):

The core issue is whether the second proviso to section 40(a)(ia) of the Income-tax Act, inserted by the Finance Act, 2012, is clarificatory and retrospective in nature. The Revenue argued that the specific date prescribed for the proviso's effect, April 1, 2013, precludes any retrospective interpretation. They relied on judgments from various High Courts, including Prudential Logistics and Transports v. ITO, Thomas George Muthoot v. CIT, and Smt. Deeva Devi v. Pr. CIT.

Conversely, the respondent-assessee contended that the proviso should be given retrospective effect from April 1, 2005, as it is a beneficial provision intended to cure the shortcomings of section 40(a)(ia). They cited judgments from five High Courts supporting this view, including CIT v. Ansal Land Mark Township P. Ltd., Pr. CIT v. Manoj Kumar Singh, Pr. CIT v. Perfect Circle India Pvt. Ltd., and Pr. CIT v. Shivpal Singh Chaudhary.

The court referred to the rationale behind the insertion of the second proviso, as explained by the Agra Bench of the Income-tax Appellate Tribunal in Rajeev Kumar Agarwal v. Addl. CIT, which emphasized that the disallowance under section 40(a)(ia) aims to compensate for revenue loss due to non-deduction of tax at source. The court found that the proviso is declaratory and curative, intended to prevent undue hardship when the recipient has already paid the tax.

2. Justifiability of Disallowance under Section 40(a)(ia):

The court examined whether disallowance under section 40(a)(ia) is justifiable when the recipient has discharged their tax liability. The respondent-assessee argued that there is no actual revenue loss since the payments to sub-contractors were offered to tax in their respective returns. They cited the judgment of the Delhi High Court in CIT v. Ansal Land Mark Township P. Ltd., which held that the second proviso is declaratory and curative, thus should be given retrospective effect from April 1, 2005.

The court also referred to the judgment of the Supreme Court in CIT v. Calcutta Export Company, which supported the view that curative amendments should be applied retrospectively to avoid unintended hardships. Additionally, the court noted that the Bombay High Court in Pr. CIT v. Perfect Circle India Pvt. Ltd. and the Allahabad High Court in Pr. CIT v. Manoj Kumar Singh had similarly held that the second proviso should be given retrospective effect.

The court concluded that the second proviso to section 40(a)(ia) is indeed declaratory and curative, intended to address the hardships caused by the original provision. Therefore, it should be applied retrospectively from April 1, 2005.

Conclusion:

The court answered the substantial question of law against the Revenue and in favor of the assessee, holding that the second proviso to section 40(a)(ia) is clarificatory and retrospective in nature. The disallowance under section 40(a)(ia) is not justifiable when the recipient has already discharged their tax liability. The judgment is subject to the result of Civil Appeal No. 1248 of 2016 pending before the Supreme Court in CIT v. Tide Water Marine International Inc. The income-tax appeal was disposed of accordingly.