2017 (6) TMI 181 - AT - Income Tax

Addition u/s 40(a)(ia) - whether the amendment made by Finance Act, 2012, in respect of the Provisions of Sec.40(a)(ia) which is effective from 01.04.2013 is retrospective in nature? - Held that - The issue in this appeal is covered in favour of the Revenue by the decision of the Hon ble Supreme Court in the case of Palam Gas Service vs. CIT (2017 (5) TMI 242 - SUPREME COURT ) wherein the decision of the Special Bench in the case of Merilyn Shipping & Transport (2012 (4) TMI 290 - ITAT VISAKHAPATNAM) and the Hon ble Allahabad High Court decision CIT vs. Vector Shipping Services Ltd reported 2013 (7) TMI 622 - ALLAHABAD HIGH COURT had been reversed weehein held When the entire scheme of obligation to deduct the tax at source and paying it over to the Central Government is read holistically, it cannot be held that the word payable occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. - Decided in favour of revenue

Summary

Issues Involved:
1. Deletion of addition under Section 40(a)(ia) of the Income Tax Act.
2. Retrospective applicability of amendments made by the Finance Act, 2012.
3. Reasonableness of payments to relatives under Section 40(A)(2).

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40(a)(ia) of the Income Tax Act:
The primary issue in this appeal was whether the CIT(A) was right in deleting the addition of ?1,19,15,350 under Section 40(a)(ia) on the grounds that no TDS was deducted for mining and processing charges. The CIT(A) had relied on the decisions of the Special Bench of the Income Tax Appellate Tribunal in the case of Merilyn Shipping & Transport and the Allahabad High Court in the case of CIT vs. Vector Shipping Services Ltd. However, the Supreme Court in the case of Palam Gas Service vs. CIT reversed these decisions, holding that Section 40(a)(ia) covers not only amounts payable but also those actually paid. Therefore, the CIT(A)'s decision to grant relief based on the aforementioned judgments was overturned, and the Revenue's appeal was allowed.

2. Retrospective Applicability of Amendments Made by the Finance Act, 2012:
The Revenue contended that the CIT(A) erred in holding that the amendment made by the Finance Act, 2012, effective from 01.04.2013, was retrospective in nature. The Supreme Court in the case of Gem Granite Vs. CIT and other High Court decisions had established that beneficial provisions do not imply retrospective effect unless explicitly stated. The Tribunal upheld this view, indicating that the CIT(A) failed to appreciate the legal precedent that amendments are not retrospective unless expressly stated.

3. Reasonableness of Payments to Relatives under Section 40(A)(2):
The Revenue also argued that the CIT(A) erred in deleting the addition proposed by the AO under Section 40(A)(2) without proving the reasonableness of the payments made to relatives by the assessee. The Supreme Court in the case of Nund & Samonta Co.Pvt Ltd., Vs. CIT had held that the reasonableness of such payments must be substantiated. However, the Tribunal did not provide a separate detailed discussion on this issue in the judgment, focusing primarily on the Section 40(a)(ia) issue.

Conclusion:
The Tribunal concluded that the CIT(A)'s order could not be sustained due to the Supreme Court's reversal of the Merilyn Shipping & Transport and Vector Shipping Services Ltd decisions. Consequently, the appeal filed by the Revenue was allowed, and the addition under Section 40(a)(ia) was reinstated. The judgment emphasized that the purpose of Section 40(a)(ia) is to ensure tax compliance, applicable to both payable and paid amounts, and that amendments are not retrospective unless explicitly stated.