S. 40(a)(ia) - CURATIVE AMENDMENT TO REMOVE UNINTENDED HARDSHIP IS RETROSPECTIVE – THE SUPREMEN COURT RE-AFFIRMS THE RULE.

[CA DEV KUMAR KOTHARI]

Recent case law:

Commissioner of Income Tax, Kolkata Versus M/s Calcutta Export Company 2018 (5) TMI 356 - SUPREME COURT

Cases referred in above:

1. Commissioner of Income Tax Versus M/s. Alom Extrusions Limited - 2009 (11) TMI 27 - SUPREME COURT – followed on aspect of retrospective operation.
2. Commissioner Of Income Tax And Another Versus Amrit Banaspati Co. Ltd. - 2001 (8) TMI 112 - SUPREME Court  followed on aspect of retrospective operation.
3. Whirlpool of India Ltd. Versus Commissioner of Income-Tax - 2000 (2) TMI 15 - SUPREME Court - followed on aspect of retrospective operation.
4. Allied Motors Private Limited Versus Commissioner of Income-Tax - 1997 (3) TMI 9 - SUPREME Court followed on aspect of retrospective operation.
5. Commissioner Of Income Tax, Kolkata-Xii, Kolkata Versus M/s. Calcutta Export Company - 2012 (9) TMI 1137 - CALCUTTA HIGH COURT - affirmed
6. Assistant Commissioner of Income Tax, Circle-34, Versus M/s. Calcutta Export Company, - 2012 (2) TMI 647 - ITAT KOLKATA - affirmed
7. Bharati Shipyard Ltd. Versus Deputy Commissioner of Income-tax, Circle 3 (1) - 2011 (9) TMI 258 - ITAT MUMBAI  - Disapproved.

Preamble:

S.40.a.ia was inserted w.e.f. 01.04.2005. Initially it caused difficulties in its operations and difficulties were unintended. Even though there was compliance by assesse in the matter of depositing TDS, still disallowance was attracted. First amendment was made in 2008 that also did not remove un-intended hardship, then another amendment was made in 2010.

The matter before the Supreme Court was on issue of retrospective operation of the amendment.

As usual, tax department did not apply amended provisions retrospectively and disputes arose. Many of Tribunals and then High Courts have taken view that the amendment will apply retrospectively. That is majority view.

However, some benches of Tribunal held that the amendment is not retrospective as in memorandum it is stated to be effective from 01.04.2010. The department found its strength in such judgment of Tribunal and preferred appeal before Tribunal, then before High Courts, and ultimately before the Supreme Court.

The provision has only effect of deferring deduction:

The provision of S. 40a.i.a has mostly effect of deferring deduction by one or two years. Major part of TDS is deposited by tax-deductors  only in few cases deposit of TDS is deferred due to financial problems. Still there is not much delay. Therefore, so fare revenue is concerned, the impact of provision to disallow in one year and allow in another year is not significant.

Similar is case in relation to S. 43B.

Such provision need not be made part of computation of income. In fact provision for levy of interest, and penalty are sufficient to promote compliance.

Only for few assesses who default and make delayed deposits (the amount may not be more than 5% of total) there should not be made provisions for disallowance. This un-necessarily make computations and   filing of return, processing, intimation and assessment procedure.

The impact on revenue is not at all over a period of time. This is because an amount disallowed in one year becomes allowable in, generally subsequent year and in rare cases of difficulties there can be deferral of few years.

When the policy is to accept most of Return of Income and scrutinise few (about 5%) such provisions should be omitted.

Provision to put check on few, caused hardship to many:

We find that provisions like S.43B, 40 a.i. have caused difficulties to many (around 97%) for defaults by few tax payers who are not likely to exceed 3%, as per a sample considered by author.

  Conclusions from judgment:

1. The precedence in form of the judgment in case ofAllied Moters (1997 (3) TMI 9 - SUPREME Court) is a binding precedence.
2. In that case it was held thatthe proviso to s.43B ensured reasonable interpretation and retrospective effect would serve the object behind the enactment. The aforesaid view has consistently been followedin (a)Whirlpool of India Ltd., vs. CIT, New Delhi  2000 (2) TMI 15 - SUPREME Court = (2000) 245 ITR 3, (b)CIT vs. Amrit Banaspati 2001 (8) TMI 112 - SUPREME Court = (2002) 255 ITR 117 and (c)CIT vs. Alom Enterprises Ltd. 2009 (11) TMI 27 - SUPREME COURT =  (2009) 319 ITR 306.
3. The rule of retrospective effect, for provision intended to remove hardship is well established.
4. that the amended provision of Sec 40(a)(ia) of the IT Act should be interpreted liberally and equitable andshould be applies retrospectively from the date when Section 40(a)(ia) was inserted i.e., with effect from the Assessment Year 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates.

What was desirable?

As per author, it was desirable that:

First of all S.40 a. ia was not at all required. Tax department could have enforced compliance of deposit of TDS by applying other provisions. In fact the person from whose income tax is deducted himself is vigilant to force the deductor to deposit TDS and issue TDS certificate. Furthermore, the provision only deferred deduction, so there was not much effect on revenue over a period of two years.

Even if such provision was desired, it should have been drafted carefully so as to avoid un-intended hardships. When hardship was felt, the resultant  amendment should have been made retrospective w.e.f. 01.04.2005 because the amendment was curative and was to remove un-intended hardships to assesses. This is as per well settled legal position. Even if amendment was stated to be applicable w.e.f. 01.04.2010, when Tribunals decided that the amendment is retrospective,  the CBDT could have issued circular and instructions to apply the provision w.e.f. 01.04.2005. However, no such circular was issued. This led to lot of hardship to assesses, and even to Tax authorities because they had to raise demands knowing very well that these demands are likely to be vacated.

This could have reduced hardship of tax payers, unjust demands, and litigation.