2016 (8) TMI 99 - HC - Income Tax

Applicability of provision of Section 40(a)(ia) - whether, a sum paid by the assessee to a contractor, during the previous year ended on 31st March, 2005 is deductible ? - Held that - Admittedly, the Finance Act, 2004 got presidential assent on 10th September, 2004. The assessee could not have foreseen prior to 10th September, 2004 that any amount paid to a contractor without deducting tax at source was likely to become not deductible under Section 40. It is difficult to assume that the legislature was not aware or did not foresee the aforesaid predicament. The legislature therefore provided that the act shall become operative on 1st April, 2005. Any other interpretation shall amount to punishing the assessee for no fault of his following the judgment in the case of Hindusthan Elector Graphites Ltd. 2000 (3) TMI 2 - SUPREME Court . On the top of that, Section 4 relied upon by Mr.Agarwal merely provides for an enactment as regards rate of tax to be charged in any particular assessment year which has no application to the case before us. Section 11 of the Finance Act by which Clause (ia) was added to Section 40 of the Income Tax Act does not provide that the same was to become effective from the assessment year 2005-06. It merely says it shall become effective on 1st April, 2005 which for reasons already discussed should mean to refer to the financial year. There is, as such, no scope for any ambiguity nor is there any scope for confusion. Tribunal erred in applying provision of section 40(a)(ia) in disallowing payment to a contractor without deducting TDS during the financial year 2004-05, corresponding to assessment year 2005-06. - Decided in favour of the assessee.

Summary

Issues:
Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 for the assessment year 2005-06.

Analysis:
The judgment in question dealt with the interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 for the assessment year 2005-06. The primary issue revolved around whether a sum of ?4,30,386 paid by the assessee to a contractor during the previous year ended on 31st March, 2005 was deductible. The learned Tribunal had initially ruled against the deduction, prompting the appeal by the assessee. The crux of the matter lay in the applicability of the law, specifically Clause (ia) added to Section 40 by Section 11 of the Finance Act of 2004. The appellant argued that any omission to deduct tax became subject to penal consequences under Section 40 only from 1st April, 2005, as per the provisions of the Finance Act, 2004. This argument was supported by a precedent where the Supreme Court emphasized not punishing the assessee for legislative changes beyond their control.

The appellant's counsel contended that the law, including Clause (ia) of Section 40, should be deemed effective from 1st April, 2005, as per the Finance Act, 2004. On the other hand, the revenue's representative argued that the law applicable is that on the date of filing the return, which, in this case, had already come into force. However, the revenue failed to explain how the assessee could have foreseen the implications of the legislative change before the Finance Act, 2004 received presidential assent on 10th September, 2004. The Court highlighted that the legislature's intention was crucial, and any ambiguity should be resolved in favor of the taxpayer, as per established legal principles.

The Court further scrutinized Section 4 of the Income Tax Act, emphasizing that it pertains to the rate of tax to be charged in a specific assessment year, which was not directly relevant to the issue at hand. By examining precedents and legal principles, the Court concluded that the Tribunal erred in disallowing the deduction of the sum paid to the contractor without deducting TDS during the financial year 2004-05, corresponding to the assessment year 2005-06. Consequently, the question posed was answered in the affirmative, in favor of the assessee, leading to the allowance of the appeal.