By TIOL News Service

NEW DELHI, MAY 02, 2018: THE issue is - Whether the legislative intent behind the provisions of Sec 40(a)(ia) is to ensure tax compliance and not to punish taxpayer. YES is the answer.

The assessee firm, involved in manufacturing and exporting casting materials, had returned income for the relevant AY. During the scrutiny assessment, the AO noted that the assessee had paid export commission charges to M/s. Steel Crackers Pvt. Ltd. It was also noted that the assessee had deposited TDS on the said commission charges on 01.08.2005. However, the AO stated that in order to avail the benefit provided u/s 40(a)(ia), the assessee was required to deposit the TDS on such commission on 07.07.2004, 07.09.2004 and 07.10.2004 before the end of the previous year i.e. 31.03.2005. Accordingly, the AO held that the assessee could not claim the deduction of the commission amount from its total income and hence, disallowed the said export commission charges. Further, the AO revised the assessee's total income and directed to pay the additional tax amount. On assessee's appeal, the FAA held that the said commission charges were eligible for deduction under the said AY.

On further proceedings, both Tribunal as well as the High Court dismissed the Revenue's appeal.

On appeal, the Apex Court held that,

++ the amended provision of Sec. 40(a)(ia) came with a purpose to ensure tax compliance. The fact that the intention of the legislature was not to punish the assessee is further reflected from a bare reading of the provisions of Sec. 40(a)(ia). It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the TDS was duly deposited with the government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government;

++ however, it has caused some genuine and apparent hardship to the assesses especially in respect of tax deducted at source in the last month of the previous year, the due date for payment of which as per the time specified in Sec. 200(1) was only on 7th of April in the next year. The assessee in such case, thus, had a period of only seven days to pay the TDS from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure u/s 40(a)(ia). With a view to mitigate this hardship, Sec. 40(a)(ia) was amended by the Finance Act, 2008 which provided that no disallowance u/s 40(a)(ia) shall be made in respect of the expenditure incurred in the month of March if the TDS on such expenditure has been paid before the due date of filing of the return. It is important to mention here that the amendment was given retrospective operation from the date of 01.04.2005 i.e., from the very date of substitution of the provision;

++ the amendment though has addressed the concerns of the assesses who have deducted TDS during the last month of the previous year but with regard to the taxpayers who have deducted TDS in the remaining eleven months of the previous year, was still resulting into unintended consequences and causing grave and genuine hardships to the assessees who had substantially complied with the relevant TDS provisions by deducting the TDS and by paying the same to the credit of the Government before the due date of filing of their returns u/s 139(1). The disability to claim deductions on account of such lately credited sum of TDS in assessment of the previous year in which it was deducted, was detrimental to the small traders who may not be in a position to bear the burden of such disallowance in the present AY;

++ in order to remedy this position and to remove hardships which were being caused to the assessees who have deducted TDS in the remaining eleven months of the previous year, amendments have been made in the provisions of Sec. 40(a)(ia) by the Finance Act, 2010. The amendment provide that all TDS made during the previous year can be deposited with the Government by the due date of filing the return of income. The idea was to allow additional time to the deductors to deposit the TDS so made;

++ TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of Sec. 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, 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;

++ legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced but the magnitude of punishment must not be disproportionate by what is required and necessary. The consequences and the injury caused, if disproportionate do and can result in amendments which have the effect of streamlining and correcting anomalies;

++ 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, is required to be read into the Section to give the Section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the Section as a whole. The purpose of the amendment made by the Finance Act, 2010 is to solve the anomalies that the insertion of Sec. 40(a)(ia) was causing to the bona fide tax payer. The amendment, even if not given operation retrospectively, 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 and necessary cushion to absorb the effect;

++ however, marginal and medium taxpayers, who work at low gross product rate and when expenditure which becomes subject matter of an order u/s 40(a)(ia) is substantial, can suffer severe adverse consequences if the amendment made in 2010 is not given retrospective operation i.e., from the date of substitution of the provision. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Such could not be the intention of the legislature. Hence, the amendment made by the Finance Act, 2010 being curative in nature required to be given retrospective operation i.e., from the date of insertion of the said provision;

++ in the case of Allied Motors (P) Limited, this Court has held that the new proviso to Sec. 43B should be given retrospective effect from the inception on the ground that the proviso was added to remedy unintended consequences and supply an obvious omission. The proviso ensured reasonable interpretation and retrospective effect would serve the object behind the enactment. The said view has consistently been followed by this Court in the various cases. Hence, we are of the view that the amended provision of Sec. 40(a)(ia) should be interpreted liberally and equitable and applies retrospectively from the date when Sec. 40(a)(ia) was inserted i.e., w.e.f. AY 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates;

++ as the developments with regard to the Section recorded shows that the amendment was curative in nature, it should be given retrospective operation as if the amended provision existed even at the time of its insertion. Since the assessee has filed its returns on 01.08.2005 i.e., in accordance with the due date under the provisions of Section 139 hence, is allowed to claim the benefit of the amendment made by Finance Act, 2010 to the provisions of Sec. 40(a)(ia). We are of the view that judgment of the High Court does not call for any interference and, hence, the appeals are accordingly dismissed. Parties to bear cost on their own.

(See 2018-TIOL-172-SC-IT)