2013 (7) TMI 454 - HC - Income Tax

Violation of Section 40(a)(ia) - TDS not paid in same financial year on Professional payments - Cash system of accountancy followed - Tribunal deleted addition u/s 40(a)(ia) - Held that - Assessee paid professional payments in March, 2007 and accordingly deducted TDS and the same was deposited within the due date from the date of said deduction in April, 2007. Prior to that, the assessee had deducted TDS on professional charges in February, 2007. TDS on the said amount which was deducted in the month of February was deposited on 7th March, 2007, within the due date - It is an accepted position that in case tax was deductible in March, 2007 the due date of payment was in April, 2007 and before due date payment TDS was paid - it is logical that there would be some time gap between date of deduction of tax at source and when payment is deposited - Therefore provision of Section 40(a)(ia) could not be invoked - Decided against Revenue. Increase in rate of interest - Held that - Even prior to the amendment made by Finance Bill, 2010, Section 40(a)(ia) had stipulated that in case where the tax was deductable and so deducted during the last month of the previous year but was paid on or before the due date specified in Section 139(1) of the Act, deduction/expenditure will be allowed in the previous year notwithstanding the main Section - The object of introduction of Section 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries. It is not to penalise an assessee when payment has been made within the time stated. Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable. The provision should be interpreted in a fair, just and equitable manner. It should not be interpreted in a manner which results in injustice and creates tax liabilities when TDS has been deposited/paid and the respondent who is following cash system of accountancy has made actual payment to the third party for services rendered - Decided against Revenue.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in deleting the addition of Rs.78,51,800/- under Section 40(a)(ia) of the Income Tax Act, 1961?

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) to Cash System of Accounting:
The respondent-assessee, an architect by profession, follows a cash system of accounting. The Assessing Officer (AO) noticed that an amount of Rs.8,52,034/- had not been paid by 31st March 2007 and proposed disallowance under Section 40(a)(ia) as amended by Finance Act, 2008 with retrospective effect from 1st April 2005. The assessee argued that since they follow a cash system, they did not claim expenses on an accrual basis. The AO, however, did not address this submission and observed a violation of Section 40(a)(ia) because TDS should have been paid before 31st March 2007.

2. Interpretation of Section 194J and Memorandum Accounts:
The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that Section 194J required TDS deduction either at the time of payment or credit to the payee's account, regardless of the accounting system. The assessee maintained a memorandum for better control, which did not reflect in the annual accounts as sundry creditors or liabilities.

3. ITAT's Reliance on Calcutta High Court Decision:
The Income Tax Appellate Tribunal (ITAT) deleted the addition, relying on the Calcutta High Court's decision in Commissioner of Income Tax versus Virgin Creations, which held that the proviso to Section 40(a)(ia) amended by Finance Act, 2010 has retrospective effect.

4. Arguments by Revenue and Assessee:
The Revenue argued against applying the Virgin Creations decision, citing that the amendments by Finance Act, 2010 are not retrospective. They referred to the Full Bench decision in Bharati Shipyard Limited and the Bombay High Court decision in Commissioner of Income Tax versus Shyam Narayan and Brothers. The assessee, on the other hand, supported their stance with the Virgin Creations decision and Supreme Court rulings in Allied Motors (P) Limited and Commissioner of Income Tax versus Podar Cement Private Limited.

5. Analysis of Relevant Case Law and Statutory Provisions:
The court noted that the Bombay High Court decision in Shyam Narayan and Brothers did not address the legal question raised in this case. The Calcutta High Court in Virgin Creations ruled that the amended proviso to Section 40(a)(ia) by Finance Act, 2010, has retrospective effect, supported by Supreme Court decisions in Allied Motors (P) Limited and Alom Extrusions Ltd.

6. Legislative Intent and Retrospective Application:
The court examined the legislative intent behind Section 40(a)(ia) and its amendments. Initially introduced to ensure compliance with TDS provisions, the section was amended by Finance Acts of 2008 and 2010 to address practical difficulties and ensure fair implementation. The amendments were intended to be retrospective to provide clarity and prevent undue hardship to taxpayers.

7. Practical Application to the Assessee's Case:
The court observed that the assessee, following a cash system, deducted TDS in March 2007 and deposited it in April 2007, within the due date for filing the return under Section 139(1). The court emphasized a pragmatic approach, noting the time gap between TDS deduction and its deposit. The proviso to Section 40(a)(ia), as amended, acknowledges this gap and allows deductions if TDS is paid before the due date for filing the return.

8. Conclusion and Judgment:
The court concluded that the assessee did not violate Section 40(a)(ia) as the TDS was deducted and paid within the stipulated time. The amendments by Finance Act, 2010, support this interpretation, ensuring fair and just implementation. The court rejected the Revenue's interpretation and upheld the ITAT's decision, answering the question of law in favor of the assessee and against the Revenue. The appeal was disposed of without costs.

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