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2014 (12) TMI 613 - AT - Income TaxDeletion made u/s 40(a)(ia) Failure to deduct TDS u/s 194C(2) Effect of amendment to section 40(a)(ia) w.e.f. 1.4.2005 Retrospective or prospective Whether the Amendment by the Finance Act, 2010 as aforesaid is prospective or retrospective from 1.4.2005 - Held that -Income from business stood enhanced by the amount disallowed by the AO and confirmed by the CIT(A) - the word amounts credited or paid with the word payable in the final enactment - only outstanding amounts are the provisions for expenses liable for TDS under Chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under Chapter XVII-B of the Act - While interpreting the word payable in section 40(a)(ia), the meaning of the word statute must be understood in its natural, ordinary or popular sense and constitute according to the grammatical meaning. The word payable used in Section 40(a)(ia) of the Act is to be assigned strict interpretation in view of the object of legislation which is intended from the replacement of the words in the proposed and enacted provision from the word amount credited or paid to payable thus, the CIT(A) rightly relied upon Merilyn Shipping Transport v. Addl. CIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM and held that the provisions of Section 40(a)(ia) of the Act are applicable only to the amount of expenditure which are payable as on 31st March, of every year and it cannot be invoked to disallow which had been actually paid during the previous year without deduction of TDS. In Bharati Shipyard Ltd. v. Dy. CIT 2011 (9) TMI 258 - ITAT MUMBAI it has been held that the amendment carried out by the Finance Act, 2010 with retrospective effect from assessment year 2010-2011 cannot be held to be retrospective from AY 2005-2006 - the amendment brought out by the Finance Act, 2010 to section 40(a)(ia) w.e.f. 01.04.2010, is not remedial and curative in nature - the hardship in such an event would be taxing an Assessee on a higher income in one year and taxing him on lower income in a subsequent year - To the extent the Assessee is made to pay tax on a higher income in one year, there would still be hardship. The use of word Payable , in Section 40(a)(ia) of the Act has created controversy as to whether payable includes amounts paid during the year - there are two views on the issue, one in favour of the assessee expressed by the Hon ble Allahabad High Court and the other against the assessee expressed by the Hon ble Gujarat & Calcutta High Courts - there is no decision rendered by the jurisdictional High Court on this issue thus, following the decision of the Commissioner of Income-Tax, West Bengal I Versus Vegetable Products Limited 1973 (1) TMI 1 - SUPREME Court decided against revenue.
Issues Involved:
1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961. 2. Interpretation of the term "payable" in Section 40(a)(ia). 3. Retrospective application of the Finance Act, 2012 amendment to Section 40(a)(ia). 4. Impact of non-deduction of TDS on amounts paid versus amounts payable. 5. Judicial precedents and conflicting High Court decisions on Section 40(a)(ia). Issue-wise Detailed Analysis: 1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961: The core issue was whether the assessee was liable to deduct tax at source under Section 194C(2) on payments made to sub-contractors. The Assessing Officer (AO) disallowed the deduction of Rs. 1,32,33,452 under Section 40(a)(ia) for non-deduction of TDS. The CIT(A) initially confirmed the AO's order, but on further appeal, the ITAT remanded the matter. The AO reaffirmed the applicability of Section 194C(2), leading to the present appeal. 2. Interpretation of the term "payable" in Section 40(a)(ia): The CIT(A) relied on the Special Bench decision in Merilyn Shipping Transport v. Addl. CIT, interpreting "payable" to mean amounts outstanding as on 31st March and not amounts already paid during the year. The CIT(A) directed the AO to disallow only the amounts payable as on 31st March. 3. Retrospective application of the Finance Act, 2012 amendment to Section 40(a)(ia): The assessee argued that the second proviso to Section 40(a)(ia) introduced by the Finance Act, 2012, effective from 1.4.2013, should apply retrospectively from 1.4.2005. This proviso states that if the payee has paid taxes on the income, the payer should not face disallowance under Section 40(a)(ia). The assessee cited Supreme Court decisions in Allied Motors (P.) Ltd. v. CIT and CIT v. Alom Extrusions Ltd., which held that amendments intended to remove hardship should apply retrospectively. The Tribunal agreed, stating that the amendment was curative and should apply from 1.4.2005. 4. Impact of non-deduction of TDS on amounts paid versus amounts payable: The Tribunal noted conflicting decisions on whether Section 40(a)(ia) applies to amounts paid during the year. The Gujarat and Calcutta High Courts held that the section covers all amounts payable during the year, while the Allahabad High Court in CIT v. Vector Shipping Services (P.) Ltd. upheld the Special Bench's view that it only applies to amounts payable as of 31st March. The Tribunal followed the Allahabad High Court's view, favoring the assessee. 5. Judicial precedents and conflicting High Court decisions on Section 40(a)(ia): The Tribunal acknowledged conflicting High Court decisions on the interpretation of Section 40(a)(ia). The Gujarat and Calcutta High Courts disagreed with the Special Bench's interpretation, while the Allahabad High Court supported it. In the absence of a jurisdictional High Court decision, the Tribunal followed the Supreme Court's principle in CIT v. Vegetable Products Ltd., favoring the interpretation beneficial to the assessee. Conclusion: The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, holding that the Finance Act, 2012 amendment to Section 40(a)(ia) applies retrospectively from 1.4.2005. It also upheld the interpretation that Section 40(a)(ia) applies only to amounts payable as of 31st March and not to amounts paid during the year, following the Allahabad High Court's decision in Vector Shipping Services (P.) Ltd.
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