2018 (3) TMI 1022 - HC - Income Tax

Additions made u/s 40(a)(ia) - resident-receiver of amounts, paid tax on such receipts; even when the payer has failed to deduct tax at source - assessee in default - Held that - To avail of the beneficial provisos under Sections 40(a)(ia) & 201(1), there should be (i) return of income under Section 139(ii), with computation of income including such amounts received, as also (ii) payment of tax on such income. Only if all the three conditions are satisfied, would the beneficial provision be applicable to an assessee who failed to deduct tax at source. In the present case, admittedly, resident-receiver to whom the assessee paid or credited the lease rent has filed a return belatedly and not paid any tax due on the income declared. When there is no tax paid on the income declared; even if for reason of a loss return, there cannot be any claim raised by the assessee in default to absolve him from the consequences flowing from Sections 201(1) and 40(a)(ia). He will then be treated as an assessee in default and would be liable to pay the amount of TDS with interest as also subject to the expenses being disallowed. Additional ground urged on the basis of Section 43(2) - Held that - The term paid has been defined as an amount paid or actually incurred and hence in the case of a loss return, even if there is no actual payment, the loss return, which does not raise a liability to pay, has to be liberally construed is the argument. The definition clause is with reference to income from profits and gains of business . By the specific words employed in sub-section(2) of Section 43, this is with reference to the method of accounting; which is either on accrual or receipt. There is no ground raised on the basis of the method of accounting of the assessee, herein and the contention is only to be rejected. The definition clause has nothing to do with Section 201(1) or the determination of an assessee in default . We cannot countenance the further argument of the learned Senior Counsel that the appellant/ assessee should be considered as a charitable educational institution under Section 12AA. Admittedly, the assessee had applied for such registration only in the year 2011-12. The application for condonation of delay for the previous years stood rejected. There is no question of any exemption allowed in a year in which such registration was not available; especially by this Court exercising jurisdiction under Section 260A - Decided in favour of the Revenue. Liability of the assessee under Section 201(1) being treated as an assessee in default confirmed - Decided in favour of the revenue

Issues Involved:
1. Quantum addition under Section 40(a)(ia).
2. Recovery of tax deduction at source (TDS) under Section 201(1).
3. Retrospective application of the second proviso introduced by Finance Act, 2012.
4. Exemption for a charitable educational institution under Section 12AA.
5. Limitation of recovery to interest on TDS amounts.

Issue-wise Detailed Analysis:

1. Quantum Addition under Section 40(a)(ia):
The appellant/assessee credited lease rent to a lessor but did not deduct tax under Chapter XVII-B of the Income Tax Act, 1961. The Tribunal did not delete the additions made under Section 40(a)(ia), despite the appellant arguing that the second proviso introduced by Finance Act, 2012, read with the first proviso of sub-Section (1) of Section 201, should absolve them from being treated as an assessee in default if the resident receiving the amounts paid the tax. The Court noted that the amendments to Section 40(a)(ia) and Section 201(1) were intended to alleviate hardship where the resident-receiver paid tax on such receipts, even if the payer failed to deduct tax at source. However, the Court upheld the Tribunal's decision, emphasizing that the resident-receiver had filed a loss return and did not pay any tax on the income declared, thus not satisfying the conditions for the beneficial provision.

2. Recovery of Tax Deduction at Source (TDS) under Section 201(1):
The appellant was treated as an assessee in default under Section 201(1) for failing to deduct and remit TDS. The Court reiterated that for the beneficial provisos under Sections 40(a)(ia) and 201(1) to apply, the resident-receiver must have filed a return of income, included the amounts received, and paid the tax due on such income. Since the resident-receiver in this case filed a loss return and did not pay any tax, the appellant could not be absolved from the consequences under Sections 201(1) and 40(a)(ia).

3. Retrospective Application of the Second Proviso Introduced by Finance Act, 2012:
The appellant argued that the proviso inserted by Finance Act, 2012, should be considered curative and applied retrospectively. However, the Court noted that two Division Benches had previously held that the proviso to Section 40(a)(ia) is only prospective. Even if the amendment were found to be curative, it would not benefit the appellant as the resident-receiver had not paid tax on the income declared.

4. Exemption for a Charitable Educational Institution under Section 12AA:
The appellant sought exemption as a charitable educational institution under Section 12AA for the assessment years prior to 2011-2012, despite their application for condonation of delay being rejected. The Court held that there is no question of granting such exemption for years when registration was not available, especially under the jurisdiction of Section 260A of the Income Tax Act.

5. Limitation of Recovery to Interest on TDS Amounts:
The appellant cited the Hindustan Coca Cola Beverage (P) Ltd. case, arguing that recovery should be confined to the interest payable on TDS amounts. However, the Court distinguished the facts of the present case, noting that in Hindustan Coca Cola, the resident-receiver had paid the tax due on the income. In contrast, the resident-receiver in the present case filed a loss return and did not pay any tax, thus the appellant could not be absolved from paying the amount of TDS with interest.

Conclusion:
The Court answered all questions of law against the assessee and in favor of the Revenue, rejecting the Income Tax Appeals and emphasizing that the appellant could not benefit from the provisos under Sections 40(a)(ia) and 201(1) due to the resident-receiver's failure to pay tax on the declared income. The appellant was also not entitled to exemption under Section 12AA for the years prior to their registration as a charitable educational institution.

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