2019 (1) TMI 1532 - HC - Income Tax

Disallowance u/s 40(a)(ia) - scope of amendment - whether the second proviso to Section 40(a)(ia) would have retrospective effect? - Held that - The said proviso was inserted w.e.f 1.4.2013 and in essence it provides that where an assessee fails to deduct whole or any part of the tax at source but is not deemed to be an assessee in default under the first proviso to Section 201(1) then for the purpose of clause 40(a)(ia) 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 payee. The Revenue would content that the benefit of this proviso would be available to the assessee only prospectively w.e.f. 1.4.2013. Various Courts however have seen this proviso as beneficial to the assessee and curative in nature. The leading judgment on this point is in the case of CIT Vs. Ansal Land Mark Township P Ltd 2015 (9) TMI 79 - DELHI HIGH COURT as held that Section 40(a)(ia) is not a penalty and insertion of second proviso is declaratory and curative in nature and would have retrospective effect form 1.4.2005 i.e the date from the main proviso 40(a)(ia) itself was inserted. Several High Courts have adopted the same lines. We may also note that the Supreme Court in the case of Hindustan Coca Cola Beverages P Ltd Vs. CIT 2007 (8) TMI 12 - SUPREME COURT OF INDIA even in absence of second proviso to Section 40(a)(ia) had noticed that the payee had already paid the tax. Under such circumstances the Court held that the payer / deductor can at best be asked to pay the interest on delay in depositing tax. - No question of law.

Summary

Issues:
1. Interpretation of the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961 regarding its retrospective effect.

Analysis:

The High Court was presented with a question regarding the retrospective effect of the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961. The proviso, inserted w.e.f. 1.4.2013, deals with the situation where an assessee fails to deduct tax at source but is not deemed as an assessee in default under the first proviso to Section 201(1). The Revenue argued that the proviso should be applicable only prospectively from 1.4.2013. However, various Courts, including the Division Bench of Delhi Court and several High Courts, have viewed this proviso as beneficial and curative in nature. The Delhi Court held that the proviso is declaratory and curative, with retrospective effect from 1.4.2005, the date when the main proviso 40(a)(ia) was inserted.

The High Court also referred to the Supreme Court's decision in the case of Hindustan Coca Cola Beverages P Ltd Vs. CIT, where even in the absence of the second proviso to Section 40(a)(ia), it was noted that the payee had already paid the tax. In such circumstances, the Court held that the payer/deductor could be asked to pay interest on the delay in depositing tax. Therefore, the Court found that the second proviso to Section 40(a)(ia) is not a penalty but beneficial to the assessee and has a retrospective effect. As a result, the Court concluded that no question of law arises in this case and dismissed the tax appeal filed by the Revenue.