Amendment to section 40(a)(ia) by Finance Act, 2010 being curative in nature are retrospective-SC

Amendment to section 40(a)(ia) by Finance Act, 2010 being curative in nature are retrospective i.e., from the date of insertion of the section itself-Supreme Court

The instant appeal(s) were filed by the Income Tax Department (Revenue/appellant) against the judgment passed by the High Court whereby the Division Bench of the High Court dismissed the appeal filed by the appellant against the order passed by the Income Tax Appellate Tribunal (ITAT) which held that the amendment made by the Finance Act, 2010 to section 40(a)(ia) of the Income Tax Act, 1961 (the Act) being curative in nature applied retrospective i.e., from the date of insertion of the said provision.

ABCAUS Case Law Citation:
ABCAUS 2319 (2018) (05) SC

Important Case Laws Cited/relied upon by the parties:
Bharati Shipyard Ltd. vs. Deputy CIT (ITA No. 404/Mumb/2009)
CIT v. Ansal Land Mark Township Pvt Ltd. in ITA No. 160/2015
Allied Motors (P.) Ltd etc. vs. CIT, Delhi – (1997) 224 ITR 677(SC).

Amendment to section 40(a)(ia) by Finance Act 2010 is retrospective 

Amendment to section 40(a)(ia) by Finance Act 2010 is retrospective

The Respondent was a partnership firm engaged in manufacturing and export of casting materials. The return of income the respondent for the relevant Assessment Year was selected for scrutiny and the assessment under Section 143(3) of the Income Tax Act, 1961 (‘Act’) was completed by the Assessing Officer (AO) by disallowing the export commission charges paid. The reason stated for the disallowance was that the tax deducted at source (TDS) on such commission was not deposited by the respondent before the end of the previous year in terms of the provisions of Section 40(a)(ia) of the Act as it stood then.

The CIT (Appeals) allowed the appeal of the respondent holding that the commission amount was eligible for deduction under the said Assessment Year. The Tribunal dismissed the appeal filed by the Revenue and the further appeal of the Revenue to High Court was also dismissed.

The question before the Hon’ble Supreme Court was as to whether the amendment made by the Finance Act, 2010 in Section 40(a)(ia) of the Act is retrospective in nature? Whether the amendment being curative in nature should be applied retrospectively i.e., from the date of insertion of the provisions of Section 40(a)(ia) itself or to be applicable from the date of enforcement as provided in the Finance Act, 2010?

The Hon’ble Supreme Court noted that the purpose of the introduction of the section 40(a)(ia) which was highlighted in the memorandum explaining the provision was “to ensure tax compliance” and not to punish the assessee which gets further reflected from a bare reading of the provisions of Section 40(a)(ia) of the Act. It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the tax deducted at source 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.

The Hon’ble High Court further observed that the said section caused some genuine and apparent hardship to the assesses especially in respect of TDS in the last month of the previous year as the due time for TDS deposit as specified in Section 200 (1) of Act 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 tax deducted at source from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure under Section 40(a)(ia) of Act. With a view to mitigate this hardship, Section 40(a)(ia) was amended by the Finance Act, 2008 to provide that no disallowance u/s 40 (a)(ia) of the Act shall be made in respect of the expenditure incurred in the month of March if the tax deducted at source on such expenditure has been paid before the due date of filing of the return. The amendment was given retrospective operation from the date of 01.04.2005 i.e., from the very date of substitution of the provision.

It was also observed that the section 40(a)(ia) was again amended by Finance Act, 2010, with effect from 01.04.2010 to relaxed the rigors of Section 40(a)(ia) of the Act to provide that all TDS made during the previous year (not only match) 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. However, the Memorandum explaining the provisions of the Finance Bill, 2010 expressly mentioned that the amendment shall take effect retrospectively from 1st April, 2010.

The Hon’ble Supreme Court opined in view of the legislative object and purpose behind the provision it 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. The Court opined that the amendments made in 2008 and 2010 were steps in the said direction only and the Legislative purpose and the object of the said amendments were to ensure payment and deposit of TDS with the Government.

The Hon’ble Supreme Court opined that 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 Hon’ble Supreme Court observed that the purpose of the amendment made by the Finance Act, 2010 was to solve the anomalies that the insertion of section 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 under Section 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

It was held that since the respondent assessee had filed its return within the due date u/s 139 he was entitled to claim benefit of the amendment made by Finance Act, 2010 to the provisions of Section 40(a)(ia) of the Act.

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