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TMI Blog2013 (9) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, not applicable to the assessment year in question i.e. 2008-09. 3. Section 40(a)(ia) was inserted with effect from 1st April, 2005 by Finance (No.2), 2004 Bill and after retrospective amendment by Finance Act, 2008, w.e.f. 1st April, 2005, read as under:- "40. Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "profit and gains of business or profession"... (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contactor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been paid,- (A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or (B) in any other case, on or before the last day of the previous year; Provided that where in respect of any such sum, tax has been deducted in any subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id in any subsequent year, the sum of payment shall be allowed in computing the income of the previous year in which such tax has been paid. The proposed amendment will take effect from the 1st day of April, 2005 and will, accordingly, apply in relation to the assessment year 2005-06 and subsequent years. (clause 11)." (emphasis supplied) 6. The rationale behind the amendment 40(a)(ia) by Finance Act, 2010 in the Memorandum explaining the amendments was also reproduced and reads : "Notes on Clauses: Clause 12 of the Bill seeks to amend section 40 of the Income-tax Act relating to amounts not deductible. Under the existing provisions contained in sub-clause (ia) of clause (a) of the aforesaid section, non-deduction of tax or non-payment of tax after deduction on payment of any sum by way of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or sub-contractor, being resident, results in the disallowance of the said sum, in the computation of income of the payer, on which tax is required to be deducted under Chapter XVII-B. It is proposed to amend sub-clause (ia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and acknowledges the said position and, therefore, clause (A) states that where tax "was" deductible and was so deducted during the last month of the previous year but stands paid before the due date specified under sub-section (1) to Section 139, deduction shall be allowed in the said year. 19. Proviso applies when tax was deducted in a subsequent year; when TDS has been deducted during any month of the previous year but paid after the end of the previous year; or TDS was deducted during the last month of the previous year but paid after the said due date. When proviso applies deduction is to be allowed in the year in which the payment is made. Clause A of the proviso has to be read with clause A of the main Section and not in isolation. Clause A of the main Section and clause A of the proviso will apply in different factual matrix or situations. Clause A of the main Section applies when the tax was deductable and was so deducted during the last month of the assessment year and was paid on or before the due date for filing of the return under Section 139(1). The proviso applies when tax has been deducted in any subsequent year or has been deducted as per clause A thereto during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rel that addition of this amount is justified and should be made under Section 40(a)(ia). The dispute pertains to other amount i.e. Rs.66,29,926/-. The assessment order and the appellate order do not mention the date on which deduction of tax was made or should have been made, but in the assessment order, it is indicated that tax deducted at source prior to February, 2008 was required to be deposited by March, 2008 and TDS deducted in the month of March, 2008 had to be deposited before filing of the return. If we accept the plea of the Revenue that in terms of Section 40(a)(ia) of the Act, the respondent assessee i.e. Talbros (P) Ltd. would not be entitled to expenditure actually incurred and paid to the extent of Rs.66,29,926/-, then the said expenditure would be disallowed and added back in the profit and loss account. The assessee did not succeed in the first appeal but has succeeded before the Appellate Tribunal. Before the CIT (Appeal), the assessee has placed on record document to show that entire TDS amount was paid on or before 4th August, 2004, i.e. much before the date on which return of income under Section 139(1) had to be filed. 10. Naresh Kumar is an individual and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductee do not suffer and are not deprived of credit of deduction made from their income. Section 40(a)(ia) is a provision incorporated with the said objective and purpose in mind. It is not basically a penal provision as when the TDS is deposited, the amount on which deduction was made is allowed as an expenditure incurred in previous year in which the payment of TDS is made. Thus, it results in shifting of the year in which the expenditure can be claimed, even if payment has been made to the recipient and is to be allowed as expenditure in another year. Principle of matching i.e. matching of receipts with expenditure to the extent indicated in Section 40(a)(ia), therefore, gets affected. The provision can work harshly and may be very stringent in some cases as is apparent from these facts stated in the case of Naresh Kumar. Strict compliance of Section 40(1)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature should not be allowed to be converted into an iron rod provision which metes out stern punishment and results in malevolent results, disproportionate to the offending act and aim of the legislation. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect between what can be regarded as substantive and procedural law [see Commissioner of Income Tax versus Shrawan Kumar Swarup & Sons, (1998) 232 ITR 123(SC)]. 17. There are decisions, which hold that process of litigation or enforcement of law is procedural. Similarly, machinery provision for collection of tax, rather than tax itself is procedural. Read in this context, it can be strongly argued that Section 40(a)(ia) at least to the extent of the amendment is procedural as by enacting Section 40(a)(ia)the Legislature did not want to impose a new tax but wanted to ensure collection of TDS and the amendments made streamline and remedy the anomalies noticed in the said procedure by allowing deduction in the year when the expenditure is incurred provided TDS is paid before the due date for filing of the return. Remedial statutes are normally not retrospective, on the ground that they may affect vested rights. But these statutes are construed liberally when justified and rule against retrospectivity may be applied with less resistance [See Bharat Singh versus Management of New Delhi Tuberculosis Centre, (1986) 2 SCC 614 and Workmen of Messrs Firestone Tyre & Rubber Company of India ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vents, the law appointing or regulating the manner in which they are to be enforced or their enjoyment is to be secured by judicial remedy is not within the application of such a presumption". 21. Identically, in Secretary of State for Social Security versus Tunnicliffe, (1991) 2 All ER 712, Staughton, L.J. has expressed the said principle in the following words:- "The true principle is that Parliament is presumed not to have intended to alter the law applicable to past events and transactions in a manner which is unfair to those concerned in them unless a contrary intention appears. It is not simply a question of classifying an enactment as retrospective or not retrospective. Rather it may well be a matter of degree- the greater the unfairness, the more it is to be expected that Parliament will make it clear if that is intended". 22. House of Lords in L' office Cherifien des Phosphates versus Yamashita Shinnihon Steamship Co. Ltd., (1994) 1 All ER 20 has said the question of fairness has to be answered by taking into account various factors, viz., value of the rights which the statute affects; extent to which that value is diminished or extinguished by the suggested retrospecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial 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. 27. One important consideration in construing a machinery section is that it must be so construed so as to effectuate the liability imposed by the charging section and to make the machinery workable. However, when the mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le construing a statute. Literal construction should be avoided if it defeats the manifest object and purpose of the Act. 13. Therefore, in the well-known words of Judge Learned Hand, one cannot make a fortress out of the dictionary; and should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of R.B. Judha Mal Kuthiala v. CIT, this Court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. 14. This view has been accepted by a number of High Courts. In the case of CIT v. Chandulal Venichand, the Gujarat High Court has held that the first proviso to Section 43-B is retrospective and sales tax for the last quarter paid before the filing of the return for the assessment year is deductible. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are akin and the provisos to Sections 40(a)(ia) and 43B are to the same effect and for the same purpose. 24. In Podar Cement Private Limited (supra), the Supreme Court considered whether term 'owner‟ would include unregistered owners who had paid sale consideration and were covered by Section 53A of the Transfer of Property Act. The contention of the assessees was that the amendments made to the definition of term 'owner‟ by Finance Bill, 1987 should be given retrospective effect. It was held that the amendments were retrospective in nature as they rationalise and clear the existing ambiguities and doubts. Reference was made to Crawford: 'Statutory Construction‟ and 'the principle of Declaratory Statutes‟, Francis Bennion: 'Statutory Interpretation‟, Justice G.P. Singh‟s 'Principles of Statutory Interpretation‟, it was observed that sometimes amendments are made to supply an obvious omission or to clear up doubts as to the meaning of the previous provision. The issue was accordingly decided holding that in such cases the amendments were retrospective though it was noticed that as per Transfer of Property Act, Registration Act, etc. a l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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