2013 (9) TMI 275 - HC - Income Tax

Amendments made to Section 40(a)(ia) by Finance Act, 2010 - Retrospective effect or Prospective effect - TDS on amount paid on before 28th February not paid before 31st March - But deposited before due date of filing of return - Held that - Question whether the amendment is retrospective or prospective is vexed and rigid rule can be applied universally. Various rules of interpretation have developed in order to determine whether or not, an amendment is retrospective or prospective. Fiscal statutes imposing liabilities are governed by normal presumption that they are not retrospective. The cardinal rule is that the law to be applied, is that which is in force on the first day of the assessment year, unless otherwise mandated expressly or provided by necessary implication. The aforesaid dictum is based upon the principle that a new provision creating a liability or an obligation, affecting or taking away vested rights or attaching new disability is presumed to be prospective. However, it is accepted that Legislatures have plenary power to make retrospective amendments, subject to Constitutional restrictions. Section 43B deals with statutory dues and stipulates that the year in which the payment is made the same would be allowed as a deduction even if the assessee is following the mercantile system of accountancy. The proviso, however, stipulates that deduction would be allowed where the statutory dues covered by Section 43B stand paid on or before the due date of filing of return of income. Section 40(a)(ia) is applicable to cases where an assessee is required to deduct tax at source and fails to deduct or does not make payment of the TDS before the due date, in such cases, notwithstanding Sections 30 to 38 of the Act, deduction is to be allowed as an expenditure in the year of payment unless a case is covered under the exceptions carved out. The amended proviso as inserted by Finance Act, 2010 states where an assessee has made payment of the TDS on or before the due date of filing of the return under Section 139(1), the sum shall be allowed as an expense in computing the income of the previous year. The two provisions are akin and the provisos to Sections 40(a)(ia) and 43B are to the same effect and for the same purpose. Principle of matching which is disturbed by Section 40(a)(ia) of the Act, may not materially be of consequence to the Revenue when the tax rates are stable and uniform or in cases of big assessees having substantial turnover and equally huge expenses as they have necessary cushion to absorb the effect. However, marginal and medium taxpayers, who work at low G.P. rate and when expenditure which becomes subject matter of an order under Section 40(a)(ia) is substantial, can suffer severe adverse consequences as is apparent from the case of Naresh Kumar. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Nevertheless the Section 40(a)(ia) has to be given full play keeping in mind the object and purpose behind the section. At the same time, the provision can be and should be interpreted liberally and equitable so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. Case of Naresh Kumar is not one of rare cases, but one of several cases as we find that Section 40(a)(ia) is invoked in large number of cases. It is apparent that the respondent assesse did not violate the unamended section 40(a)(ia) of the act - The amended provisions are clear and free from any ambiguity and doubt. They will help curtail litigation. The amended provision clearly support the expression said due date used in clause A of proviso to unamended section refers to time specified in Section 139(1) of the Act. The amended section 40(a)(ia) expands and further liberalises the statue when it stipulates that deductions made in the first eleven months of the previous year but paid before the due date of filing of the return, will constitute sufficient compliance. Following the decision in Rajinder Kumar 2013 (7) TMI 454 - DELHI HIGH COURT , Decided against Revenue.

Summary

Issues Involved:
1. Retrospective application of amendments to Section 40(a)(ia) of the Income Tax Act by Finance Act, 2010.
2. Interpretation of Section 40(a)(ia) regarding the due date for TDS deposit.
3. The impact of non-compliance with TDS provisions on the deductibility of expenses.

Detailed Analysis:

1. Retrospective Application of Amendments to Section 40(a)(ia):
The Revenue contended that the amendments made to Section 40(a)(ia) by the Finance Act, 2010 should not be given retrospective effect. They argued that these amendments were effective from April 1, 2010, and thus not applicable to the assessment year 2008-09. The court referred to the rationale behind the insertion and subsequent amendments to Section 40(a)(ia), emphasizing that the amendments aimed to streamline and correct anomalies, thus ensuring compliance with TDS provisions.

The court highlighted that the amendments by the Finance Act, 2010, were intended to remedy unintended consequences and supply an obvious omission. This remedial nature justified giving the amendments retrospective effect, aligning with the principle that amendments which clarify or correct existing provisions should be applied retrospectively to prevent undue hardship.

2. Interpretation of Section 40(a)(ia) Regarding the Due Date for TDS Deposit:
The court examined the interpretation of the due date for TDS deposit under Section 40(a)(ia). The unamended section required TDS deducted in the last month of the previous year to be deposited on or before the due date specified in Section 139(1). The amended section liberalized this requirement, allowing deductions made in the first eleven months of the previous year but paid before the due date of filing the return to constitute sufficient compliance.

The court referred to the case of Rajinder Kumar, where it was held that the expression "said due date" in the proviso to the unamended section referred to the due date for filing the return under Section 139(1), not the date by which TDS should have been deposited. This interpretation was necessary to avoid conflicts and ensure a logical and practical application of the provision.

3. Impact of Non-Compliance with TDS Provisions on Deductibility of Expenses:
The court analyzed the consequences of non-compliance with TDS provisions, noting that failure to deduct or pay TDS results in several consequences, including interest, penalties, and potential prosecution. However, Section 40(a)(ia) was not intended as a penal provision but aimed to ensure TDS compliance by shifting the year in which the expenditure could be claimed if TDS was not deposited on time.

The court emphasized that strict compliance with Section 40(a)(ia) should not result in disproportionate punishment or unintended hardships. The amendments made in 2010 were seen as a step to mitigate such hardships and ensure fairness. The court concluded that the provision should be interpreted liberally and equitably to avoid deleterious consequences beyond the legislative intent.

Conclusion:
The court dismissed the Revenue's appeals, holding that the amendments to Section 40(a)(ia) by the Finance Act, 2010, should be given retrospective effect. The interpretation of the due date for TDS deposit was clarified to align with the due date for filing the return under Section 139(1). The court stressed the need for a balanced approach to ensure compliance without causing undue hardship to taxpayers.