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TMI Blog2014 (10) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... even when the corresponding income is duly brought to tax - That will be going much beyond the obvious intention of the section - the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 – thus, the matter is required to be remitted back to the AO for fresh adjudication – Decided in favour of assessee. Cash payment for purchase of land u/s 40A(3) disallowed – Held that:- Following the decision in Mr. Jamir Mondal Versus Assistant Commissioner of Income-tax [2014 (6) TMI 245 - ITAT KOLKATA] - Rule 6DD of the Rules clearly lays down the conditions or exceptions under which the rigor of the provisions of section 40A(3) of the Act may be relaxed and there is no discretion on either of the parties to extend the condition or relax the condition at will - Even the existence, demand or necessity or business expediency does not fall under the provisions of Rule 6DD of the Rules - it cannot be said that the assessee has immunity from the provisions of section 40A(3) of the act - the lower authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready included the income embedded in these payments in their tax returns filed under section 139, disallowance under section 40(a)(ia) could not be invoked in this case. It was also contended that even though this proviso is stated to be effective 1st April 2013, since the amendment in declaratory and curative in nature, and, therefore, it should be given retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 . None of these submissions, however, impressed the learned CIT(A). Relying upon a Special Bench decision in the case of Bharati Shipyard Ltd Vs. DCIT (141 TTJ 129), herejected this plea and concluded that insertion of second proviso to Section 40(a)(ia) cannot be held to have retrospective effect. The disallowance was thus confirmed by the learned CIT(A). The assessee is aggrieved and is in appeal before us. 3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 4. Let us first take a look at the legislative amendment of section 40(a)(ia), vide Finance Act 2012, and try to ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issuance of a certificate, in the prescribed format, evidencing compliance of these conditions by the recipients of income, but that is essentially a procedural aspect of the matter. The legislative amendment so brought about by the Finance Act, 2012, so far as the scheme of disallowance under section 40(a)(ia) is concerned, substantially mitigates the rigour of, what otherwise seemed to be, a rather harsh disallowance provision. 5. As for the question as to whether this amendment can be treated as retrospective in nature, even in the case of Bharti Shipyard (supra) a special bench decision vehemently relied upon in support of revenue s case,the special bench, on principles, summed up the settled legal position to the effect that any amendment of the substantive provision which is aimed at (inter alia) removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively . It was held that if the consequences sought to be remedied by the subsequent amendments were to be treated as intended consequences , the amendment could not be treated as retrospective in effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption underlying its approach, i.e. on the issue of the object of Section 40(a)(ia), was rejected too. In any event, even going by Bharti Shipyard decision (supra), what we have to really examine is whether 2012 amendment, inserting second proviso to Section 40(a)(ia), deals with an intended consequence or with an unintended consequence . 7. When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after insertion of second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non deduction of tax at source by the assessee. In other words, deductibility of expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for expenditure is not allowed to the assessees, in cases where assessees had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient.That is the clearly discernable bigger picture, and, unmist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a fair, just and equitable interpretation of law- as is the guidance from Hon ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an intended consequence to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer shall give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law and by way of a speaking order. We order so. 5. We see no reasons to take any other view of the matter than the view so taken by us in the case of Rajeev Kumar Agarwal (supra). Respectfully following the same, we uphold the grievance of the assessee in principle, and upon necessary verifications, consider deletion of impugned disallowance of ₹ 7,26,585. The assessee gets the relief accordingly, if admissible. 6. Ground No. 1 is thus allowed for statistical purposes in the terms indicated above. 7. In ground no.2 the assessee has raised the following grievances:- 2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of ₹ 1,15,275/- (i.e. 20% of 5,76,370/-) on account of cash payment for purchase of land u/s 40A(3) of Income Tax Act, 1961. 7. So far as this grievance of the assessee is concerned, the material facts are like this. During the course of scrutiny assessment proceedings, it was noticed by the A.O. that the assessee has m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business was trading in land. During the year under consideration the assessee purchased land to the tune of ₹ 67,49,3151/- from different parties. The assessee made payments partly by cheque and partly in cash exceeding ₹ 20,000/- from the six parties in total amounting to ₹ 9,25,000/- (details of these parties are narrated in the assessment order). Ld. counsel for the assessee Shri M. Bhattacharjee relied on the decision in the case of S.A. Builders Ltd. Vs. CIT (2007) 288 ITR 1 (SC). Wherein the expression commercial expediency is explained that it is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. He stated that once there is a business expediency the expenditure should have been allowed. Further, Ld. counsel for the assessee stated that there is exception provided u/s.40A(3) of the Act and as per Rule 6DD of the Rules it takes cares only banking facility and no specific rules remains on statute book after deletion of Rule 6DDJ of the Rules so as to take care of business expediency and other relevant factors. He stated that the decision of Hon'ble Supreme Court in the case of S. A. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinguishable. Since the assessee was engaged in the business of building construction and property development, the land so purchased essentially constituted its stock in trade. Even though the assessee had not shown the transaction of purchase and closing stock in trade in its profit and loss account, but once such asset is brought to the balance sheet as stock in trade, as a natural corollary, such transaction can only come out of trading account. Therefore, no purpose will be served in deferring disallowance of such expenditure, which is made in cash during the year under consideration. As per our considered view, giving such direction for deferring the disallowance to subsequent years will frustrate the purpose of Section 40A(3), which is meant for discarding cash payment made during the year in respect of trading goods. Furthermore, there will always be uncertainty as to the year in which the assessee come forward and claim such expenditure in its profit and loss account. In the instant case before us, even today, the assessee has not come forward to offer such expenditure in the profit and loss account, when more than 6 years have been passed. For the time being, even if it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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