M/s Ravi Spice Processors Private Limited, Bangalore V. ACIT, Bangalore

ITA 426/BANG/2014

• Counselvise Citation: 42621114 RSA 2014
• Duration Of Justice: 1 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-10-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 29-09-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 25-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: V SRINIVASAN
• Keywords: Business income; Business expenditure; Retrospective amendment; Non-deduction of tax
• Section: 43B; 194C; 201(1); 28; 139

Judgement Text

ITA.426/BANG/2014 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T.A NO.426/BANG/2014 (ASSESSMENT YEAR : 2005-06) M/S. RAVI SPICE PROCESSORS P. LTD, P. B. NO.6919, NO.74/1M 3 RD MAIN ROAD, NEW THARAGUPET, BANGALORE 560 002 ..APPELLANT PAN : AAACR8178B V. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 12(4), BANGALORE ..RESPONDENT ASSESSEE BY : SHRI. V. SRINIVASAN, CA REVENUE BY : SHRI. T. N. PRAKASH, JCIT HEARD ON : 29.09.2015 PRONOUNCED ON : .10.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE IT HAS ALTOGE THER TAKEN FIVE GROUNDS OF WHICH GROUNDS 1 AND 5 ARE GENERAL, GROUND 4 CONSEQU ENTIAL IN NATURE, NEEDING NO SPECIFIC ADJUDICATION. 02. EFFECTIVE GROUNDS ARE GROUNDS 2 AND 3, WHICH AR E REPRODUCED HEREUNDER : ITA.426/BANG/2014 PAGE - 2 2. THE LEARNED CIT (A) IS NOT JUSTIFIED IN UPHOLDI NG THE DISALLOWANCE OF A SUM OF RS.10,23,138/- BEING FREIG HT ON PURCHASE U/S.40(A)(IA) WITHOUT APPRECIATING THAT THE PROVISI ONS OF SECTION 40(A)(IA) OF THE ACT HAVE NO APPLICATION AT ALL UND ER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 3. THE LEARNED CIT (A) IS NOT JUSTIFIED IN UPHOLDIN G THE DISALLOWANCE OF RS.36,16,957/- BEING FREIGHT FORWAR DING EXPENSES U/S.40(A)(IA) WITHOUT APPRECIATING THAT THE PROVISI ONS OF SECTION 40(A)(IA) OF THE ACT HAVE NO APPLICATION AT ALL UND ER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 03. FACTS APROPOS ARE THAT ASSESSEE, AN EXPORTER OF SPICES AND FOOD ITEMS HAD FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSM ENT YEAR DECLARING INCOME OF RS.1,25,16,914/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED BY THE AO THAT ASSESSEE HAD EFFECTED PAYMENTS FOR FREI GHT ON PURCHASES WITHOUT EFFECTING DEDUCTION OF TAX AT SOURCE. AS PER THE A O CBDT CIRCULAR NO.715 DT.08.08.1995, CLEARLY MANDATED DEDUCTION OF TAX AT SOURCE ON PAYMENTS TO TRANSPORTERS, CLEARING AND FORWARDING AGENTS FOR CA RRIAGE OF GOODS. AO ALSO NOTED THAT THE CIRCULAR STIPULATED SUCH DEDUCTIONS TO BE MADE ON GROSS AMOUNTS INCLUDING REIMBURSEMENTS. ASSESSEE HAD DURING THE RELEVANT PREVIOUS YEAR PAID A SUM OF RS.10,23,138/- AS FREIGHT ON PURCHASES. A SSESSEE HAD ALSO PAID A SUM OF RS.36,16,957/- TO CLEARING AND FORWARDING AGENTS DURING THE COURSE OF ITS EXPORT BUSINESS. WHEN ASSESSEE WAS PUT ON NOTICE T HAT IT HAD NOT DEDUCTED TAX AT SOURCE AS REQUIRED UNDER LAW, IT REPLIED THAT TH E LORRIES USED FOR TRANSPORTATION OF GOODS WERE ENGAGED BY THE SUPPLIERS WHO SUPPLIED THE COMMODITIES. AS PER THE ASSESSEE, AGENCIES LIKE M/S. KANAKADURGA LORRY SUPPLY OFFICE, ENGAGED SEVERAL PRIVATE VEHICLES AND PAYMENTS TO INDIVIDUAL LORRY DRIVERS DID NOT FALL WITHIN THE PURVIEW OF SECTION 194C OF THE ACT. AS PER THE ASSESSEE, IT WAS ITA.426/BANG/2014 PAGE - 3 UNDER NO OBLIGATION TO DEDUCT TAX AT SOURCE ON THE PAYMENTS EFFECTED TO THE LORRY DRIVERS. 04. VIS-A-VIS DISALLOWANCE OF FREIGHT FORWARDING EX PENSES, ARGUMENT OF THE ASSESSEE WAS THAT MAJOR PART OF THE PAYMENTS MADE T O CLEARING AGENTS WERE REIMBURSEMENTS. ASSESSEE ALSO TOOK A PLEA THAT HAR IHARAN LOGISTICS WHICH WAS A FORWARDING AND CLEARING AGENT HAD ALREADY DECLARE D THE WHOLE OF THE AMOUNTS RECEIVED FROM THE ASSESSEE IN ITS RETURN AS A PART OF ITS INCOME. THUS AS PER ASSESSEE, SECTION 40(A)(IA) COULD NOT BE APPLIED EI THER ON FREIGHT PAID FOR PURCHASES NOR ON FREIGHT AND FORWARDING CHARGES PAI D TO THE CLEARING AND FORWARDING AGENTS. HOWEVER, AO WAS NOT IMPRESSED B Y THE ABOVE ARGUMENTS. ACCORDING TO HIM, CIRCULAR NO.715 (SUPRA) APPLIED F OR BOTH THE ABOVE PAYMENTS. HE DISALLOWED FREIGHT ON PURCHASES OF RS.10,23,138/ - PAID BY THE ASSESSEE AND FREIGHT FORWARDING EXPENSES OF RS.36,16,957/-, PAID TO THE CLEARING AND FORWARDING AGENTS RELYING ON SECTION 40(A)(IA) OF T HE ACT. 05. AGGRIEVED ASSESSEE MOVED IN APPEAL BEFORE THE C IT (A). ARGUMENT OF THE ASSESSEE WAS THAT IT WAS PURCHASING GOODS FROM VARIOUS PERSONS OUTSIDE BANGALORE. AS PER THE ASSESSEE THE SELLERS WHO WER E ALSO THE CONSIGNERS OF THE GOODS CONSIGNED THE GOODS THROUGH SEVERAL LORRY OWN ERS FROM THEIR RESPECTIVE PLACES AND SUCH LORRY OWNERS WERE ENGAGED THROUGH T RANSPORT AGENCY OFFICES. THOUGH THE LORRY TRANSPORT RECEIPTS WERE ISSUED BY THE CONCERNED TRANSPORT AGENCIES, THEY WERE ACTING AS BROKERS ONLY. ASSES SEE ALSO PRODUCED A COPY OF LORRY RECEIPT ISSUED BY M/S. KANAKADURGA LORRY SUPP LY OFFICE AS A TYPICAL AND ITA.426/BANG/2014 PAGE - 4 ILLUSTRATIVE EXAMPLE. AS PER THE ASSESSEE, THEIR C ONTRACT WAS WITH CONSIGNERS OF THE GOODS AND IT WAS FOR THE CONSIGNERS TO FIND THE TRANSPORTERS AND SEND THE GOODS TO THE ASSESSEE. GOODS WERE TO BE DELIVERED AT BANGALORE. AS PER THE ASSESSEE IT HAD NEVER MADE ANY PAYMENT TO THE LORRY TRANSPORT OFFICE. PAYMENTS WERE EFFECTED TO THE VEHICLE DRIVERS WHO WERE DELIV ERING THE GOODS TO THE ASSESSEE. THERE WAS NO ENTRY MADE IN THE BOOKS REG ARDING PAYMENTS MADE BY THE ASSESSEE ON THE DATE OF PURCHASE WITH REGARD TO FREIGHT. IN OTHER WORDS AS PER THE ASSESSEE, FREIGHT PAID BY THE ASSESSEE WAS TOWARDS THE COST OF PURCHASE. THUS ACCORDING TO ASSESSEE, SECTION 194C OF THE ACT WAS NOT APPLICABLE. 06. IN SO FAR AS THE PAYMENTS EFFECTED TO HARIHARIN LOGISTICS WAS CONCERNED, ARGUMENT OF THE ASSESSEE WAS THAT THEY HAD TO INCUR EXPENDITURE LIKE DOCUMENTATION CHARGES, CUSTOMS CHARGES, TRANSPORTA TION CHARGES, FUMIGATION CHARGES TAXI CHARGES ETC., THESE WERE REIMBURSED T O THE FORWARDING AGENTS. ACTUAL CHARGES LEVIED BY SUCH FORWARDING AGENTS WAS SPECIFICALLY MENTIONED IN THE BILLS RAISED. ONE COPY OF THE BILL OF HARIHARA N LOGISTICS WAS ALSO PLACED BEFORE THE CIT (A). AS PER THE ASSESSEE, PAYMENTS FOR SERVICES RENDERED BY SUCH FORWARDING AGENTS NEVER EXCEEDED A SUM OF RS.T WENTY THOUSAND AT A GIVEN INSTANCE. 07. HOWEVER, C IT (A) WAS NOT APPRECIATIVE OF THE A BOVE CONTENTIONS. ACCORDING TO HIM, SUPPLIER OF GOODS WAS ONLY A FACI LITATOR FOR TRANSPORTATION ARRANGEMENT. TRANSPORT AGENCY HAD ISSUED RECEIVED THE LORRY RECEIPTS AND THE CONCERNED SUPPLIER HAD ISSUED DEBIT NOTES FOR THE A BOVE PAID AS ADVANCE ON ITA.426/BANG/2014 PAGE - 5 BEHALF OF THE ASSESSEE TO THE CONCERNED TRANSPORT A GENCY. AS PER THE CIT (A) JUST BECAUSE THE PAYMENTS WERE EFFECTED TO THE TRUC K DRIVER AT THE END OF UNLOADING THERE WOULD BE NO CHANGE IN THE COMPLEXIO N OF THE TRANSACTION. CIT (A) WAS OF THE OPINION THAT ASSESSEE WAS MAKING CON TRADICTORY SUBMISSIONS. IN ONE PLACE IT WAS TELLING THAT THE FREIGHT CHARGES P AID FORMED A PART OF THE COST OF GOODS. HOWEVER IN A LATER SUBMISSION ASSESSEE STAT ED THAT THE SUPPLIER WAS IDENTIFYING THE TRANSPORT AGENCY AND WAS DELIVERING THE GOODS TO THEM. AS PER THE CIT (A), NO EVIDENCE WAS ADDUCED BY THE ASSESSE E TO SHOW THAT THE SUPPLIER OF THE GOODS HAD AGREED TO ARRANGE FOR THE TRANSPOR TATION OF THE GOODS AND TO DELIVER THE GOODS AT THE ASSESSEES PREMISES. THUS ACCORDING TO HIM ASSESSEE WAS BOUND TO DEDUCT TAX ON THE AMOUNT OF FREIGHT EX PENDITURE. 08. IN SO FAR AS NON-DEDUCTION OF TAX AT AOURCE ON FREIGHT AND FORWARDING EXPENDITURE WAS CONCERNED, CIT (A) NOTED THAT WHAT WAS CLAIMED BY THE ASSESSEE AS REIMBURSEMENTS WERE NOT ACTUALLY REIMBU RSEMENTS. FORWARDING AGENT WAS ONLY A SINGLE POINT FOR PROVIDING MULTIPL E SERVICE TO THE ASSESSEE AND IT WAS UNDER A CONTRACTUAL OBLIGATION TO DO SO. AS PER THE CIT (A) ASSESSEE SHOULD HAVE DEDUCTED TAX ON THE PAYMENTS MADE TO FO RWARDING AGENTS. HE THUS APPLIED SECTION 40(A)(IA) OF THE ACT TO BOTH THE PA YMENTS, NAMELY FREIGHT EXPENDITURE AND FREIGHT AND FORWARDING CHARGES PAID TO CARRYING AND FORWARDING AGENTS. 09. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE OR DER OF LOWER AUTHORITIES SUBMITTED THAT THE BILL RAISED BY KANAKADURGA LORRY OFFICE CLEARLY INDICATED THE ITA.426/BANG/2014 PAGE - 6 CONSIGNER AS SHREE GAJANAN INDUSTRIES WHO WAS THE S UPPLIER OF GOODS. AS PER THE LD. AR, ASSESSEE HAD NOT ENTERED INTO ANY CONTR ACT WITH KANAKADURGA LORRY OFFICE AT ANY POINT OF TIME. RELYING ON A BILL NO. 1049, DT.17.04.2004 OF KANAKADURGA LORRY OFFICE, LD. AR SUBMITTED THAT LOR RY OWNERS NAME WAS MENTIONED AS S. K. KHAJANAYAB RASUL P, AND LORRY DR IVERS NAME WAS B. PURNACHANDRA RAO. AS PER THE LD. AR, LORRY BY WHIC H THE GOODS WERE TO BE TRANSPORTED WAS DECIDED BY THE SELLER AND THE ASSES SEE HAD NO ROLE IN THIS. PLACING RELIANCE ON A LETTER DT.17.04.2004 OF SHREE GAJANAN INDUSTRIES, LD. AR SUBMITTED THAT GOODS WERE DESPATCHED BY THEM WITH A DIRECTION TO THE ASSESSEE TO PAY THE BALANCE OF THE LORRY RENT. THUS ACCORDI NG TO HIM THE CONTRACT WAS BETWEEN THE TRANSPORTER AND THE CONSIGNER AND NOT B ETWEEN THE ASSESSEE AND THE LORRY OWNER. ASSESSEE HAD NO CHOICE. IN ANY CASE, AS PER THE LD. AR, PAYMENT TO EACH OF THE DRIVER ENGAGED BY THE CONSIGNER WAS LESS THAN RS.20,000/- AND THEREFORE SECTION 194C OF THE ACT WAS NOT AT ALL AT TRACTED. 10. IN SO FAR AS THE SECOND ISSUE OF NON-DEDUCTION OF TAX AT SOURCE ON PAYMENTS EFFECTED TO FREIGHT AND FORWARDING AGENT W AS CONCERNED, LD. AR SUBMITTED THAT THE CONCERNED CLEARING AND FORWARDIN G AGENTS, NAMELY HARIHARAN LOGISTICS HAD ACCOUNTED THE WHOLE OF THE MONEY RECE IVED BY THEM FROM THE ASSESSEE AS A PART OF ITS INCOME AND PAID TAXES DUE THEREON. RELYING ON THE DECISION OF COORDINATE BENCH IN THE CASE OF DCIT V. ANANDA MARAKALA [ITA NO.1584/BANG/2012, DT.13.09.2013], LD. AR SUBMITTED THAT ONCE THE RECIPIENT ITA.426/BANG/2014 PAGE - 7 HAD ACCOUNTED THE INCOME, LIABILITY FOR NON-DEDUCTI ON OF TAX AT SOURCE ON THE PAYER COULD NOT BE FASTENED. 11. PER CONTRA, LD. DR STRONGLY SUPPORTED THE ORDER S OF LOWER AUTHORITIES. 12. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IN SO FAR AS THE FIRST ISSUE, VIA., PAYMENT FOR FREIGHT CHARGES ON GOODS RECEIVED BY THE ASSESSEE IS CONCERNED, NO DOUBT THE RECEIPT OF KANA KADURGA LORRY OFFICE STATED THE CONSIGNER AS GAJANANA INDUSTRIES WHO WAS THE S UPPLIER. LORRY OWNERS NAME AND LORRY DRIVERS NAME ARE ALSO MENTIONED THE REIN. IT IS CLEAR FROM THE BILL DT.17.04.2004 AVAILABLE ON RECORD THAT KANAKAD URGA LORRY OFFICE WAS NOT THE OWNER OF THE LORRY. FOR APPLICATION OF SECTION 194C OF THE ACT, IT IS ESSENTIAL THAT THERE IS A CONTRACT BETWEEN THE ASSESSEE AND T HE PERSON WHO IS TRANSPORTING THE GOODS. QUESTION BEFORE US IS WHETHER SHREE GAJ ANAN INDUSTRIES WHO WAS THE SUPPLIER TO GOODS THE ASSESSEE HAD ENGAGED THE LOR RY OWNER THROUGH KANAKADURGA LORRY OFFICE AT THE BEHEST OF THE ASSE SSEE OR ON ITS OWN. IF IT WAS ON THE DIRECTION OF THE ASSESSEE THAT THE LORRY WAS ENGAGED BY THE SUPPLIER, THEN WE CAN CONSTRUE THE CONTRACT AS ONE BETWEEN THE ASS ESSEE AND THE LORRY OFFICE. IT MIGHT BE TRUE THAT THE ASSESSEE PAID TO THE LORRY O WNER THE BALANCE OF THE AMOUNT DUE FOR THE TRANSPORTATION. HOWEVER, EXISTENCE OF AGREEMENT FOR TRANSPORTATION, WHETHER ORAL OR WRITTEN, IF ANY, BETWEEN THE ASSESS EE AND SHREE GAJANAN INDUSTRIES, AS TO HOW THE SUPPLIES WERE TO BE MADE, VIZ., WHETHER IT WAS THE RESPONSIBILITY OF THE SELLER TO FIND THE TRANSPORTE R AND TRANSPORT IT TO THE ASSESSEES PREMISES, OR IT WAS UNDER DIRECTION OF T HE LATTER THE FORMER WAS DOING ITA.426/BANG/2014 PAGE - 8 SO, WAS NEVER VERIFIED BY THE LOWER AUTHORITIES. W E ARE OF THE OPINION THAT THIS ISSUE REQUIRES A FRESH LOOK BY THE AO FOR VERIFYING ALL ASPECTS OF THE PAYMENT OF FREIGHT CHARGES. 13. IN SO FAR AS THE PAYMENTS EFFECTED TO HARIHARAN LOGISTICS FOR FREIGHT AND FORWARDING OF GOODS EXPORTED BY THE ASSESSEE ARE CO NCERNED, CLAIM OF THE ASSESSEE IS THAT HARIHARAN LOGISTICS HAD ACCOUNTED THE WHOLE OF THE PAYMENTS RECEIVED BY THE ASSESSEE AS ITS INCOME AND PAID DUE TAXES THEREON. COORDINATE BENCH IN THE CASE OF ADANDA MARAKALA (SUPRA), HAD H ELD AS UNDER AT PARA 14 TO 26 OF ITS ORDER DT.13.09.2013 : 14. IN ORDER TO FIND ANSWER TO THIS QUESTION, IT WOULD BE RELEVANT TO NOTE DOWN THE LEGISLATIVE HISTORY OF THE PROVISION. SECT ION 40 HAS CERTAIN CLAUSES PROVIDING FOR THE AMOUNTS WHICH ARE NOT DED UCTIBLE. SUB-CLAUSE (IA) OF CLAUSE (A) OF SECTION 40 WAS INSERTED BY TH E FINANCE (NO.2) ACT, 2004 WITH EFFECT FROM 1 ST APRIL, 2005 READING AS UNDER:- 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SE CTIONS 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMP UTED THE INCOME CHARGEABLE UNDER THE HEAD `PROFITS AND GAINS OF BUS INESS OR PROFESSION. .. (IA) ANY INTEREST, COMMISSION OR BROKERAGE, FEES FO R PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR F OR CARRYING OUT ANY WORK), ON OR, AFTER DEDUCTION, HAS NOT BEEN PAI D DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCT ED IN THE PREVIOUS YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPI RY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200, SU CH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF T HE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. ITA.426/BANG/2014 PAGE - 9 EXPLANATION. FOR THE PURPOSES OF THIS SUB-CLAUSE, - (I) COMMISSION OR BROKERAGE SHALL HAVE THE SAME MEANING AS IN CLAUSE (I) OF THE EXPLANATION TO SECTION 194H; (II) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9; (III) PROFESSIONAL SERVICES SHALL HAVE THE S AME MEANING AS IN CLAUSE (A) OF THE EXPLANATION TO SECTION 194J; (IV) WORK SHALL HAVE THE SAME MEANING AS IN EXPLANATION III TO SECTION 194C; THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FIN ANCE BILL EXPLAINED THE RATIONALE OF THE INSERTION OF THE NEW PROVISION IN FOLLOWING WORDS :- WITH A VIEW TO AUGMENT COMPLIANCE OF TDS PROVISIONS, IT IS PROPOSED TO EXTEND THE PROVISIONS OF SECTION 40(A)( I) TO PAYMENTS OF INTEREST, COMMISSION OR BROKERAGE, FEES FOR PROFESS IONAL SERVICES OR FEES FOR TECHNICAL SERVICES TO RESIDENTS, AND PAYME NTS TO A RESIDENT CONTRACTOR OR SUB-CONTRACTOR FOR CARRYING OUT ANY W ORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK), ON WHI CH TAX HAS NOT BEEN DEDUCTED OR AFTER DEDUCTION, HAS NOT BEEN PAID BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SEC TION 200 AND IN ACCORDANCE WITH THE OTHER PROVISIONS OF CHAPTER XVI I-B. IT IS ALSO PROPOSED TO PROVIDE THAT WHERE IN RESPECT OF PAYMEN T OF ANY SUM, TAX HAS BEEN DEDUCTED UNDER CHAPTER XVII-B OR PAID IN A NY SUBSEQUENT YEAR, THE SUM OF PAYMENT SHALL BE ALLOWED IN COMPUT ING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAI D. THE PROPOSED AMENDMENT WILL TAKE EFFECT FROM 1ST DA Y OF APRIL, 2005 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASS ESSMENT YEAR 2005- 2006 AND SUBSEQUENT YEARS. [CLAUSE 11] THEREAFTER THE FINANCE ACT, 2008 MADE AMENDMENT TO CLAUSE (A) IN SUB- CLAUSE (IA) IN SECTION 40 WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL, 2005. THE SECTION AS AMENDED BY THE FINANCE ACT, 2008 READ AS UNDER:- (IA) ANY INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICE S PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB -CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPP LY 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,- ITA.426/BANG/2014 PAGE - 10 (A) IN A CASE WHERE THE TAX WAS DEDUCTIBLE AND WAS SO DEDUCTED DURING THE LAST MONTH OF THE PREVIOUS YEAR, ON OR B EFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 ; OR (B) IN ANY OTHER CASE, ON OR BEFORE THE LAST DA Y OF THE PREVIOUS YEAR. PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCT ED- (A) DURING THE LAST MONTH OF THE PREVIOUS YEAR BUT PAID AFTER THE SAID DUE DATE ; OR (B) DURING ANY OTHER MONTH OF THE PREVIOUS YEAR BUT PAID AFTER THE END OF THE SAID PREVIOUS YEAR, SUCH SUM SHALL BE AL LOWED AS A DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS Y EAR IN WHICH SUCH TAX HAS BEEN PAID. ; 15. THE FINANCE ACT, 2008 BROUGHT OUT AMENDMENT TO SECT ION 40(A)(IA) W.R.E.F. 1.4.2005 BY RELAXING EARLIER POSITION TO S OME EXTENT. IT MADE TWO CATEGORIES OF DEFAULTS CAUSING DISALLOWANCE ON THE BASIS OF THE PERIOD OF THE PREVIOUS YEAR IN WHICH TAX WAS DEDUCTIBLE. THE FIRST CATEGORY OF DISALLOWANCES INCLUDED THE CASES IN WHICH TAX WAS D EDUCTIBLE AND WAS SO DEDUCTED DURING THE LAST MONTH OF THE PREVIOUS YEAR BUT THERE WAS FAILURE TO PAY SUCH TAX ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 OF THE ACT. IN OTHER WORDS, IF ANY AMOU NT ON WHICH TAX WAS DEDUCTIBLE DURING LAST MONTH OF THE PREVIOUS YEAR, THAT IS MARCH 2005, BUT WAS PAID BEFORE 31 ST OCTOBER, 2005, BEING THE DUE DATE U/S 139(1), THE DEDUCTIBILITY OF THE AMOUNT WAS KEPT INTACT. THE SE COND CATEGORY INCLUDED CASES OTHER THAN THOSE GIVEN IN CATEGORY FIRST. TO PUT IT SIMPLY, IF TAX WAS DEDUCTIBLE AND WAS SO DEDUCTED DURING THE FIRST ELE VEN MONTHS OF THE PREVIOUS YEAR, THAT IS, UP TO FEBRUARY, 2005, THE D ISALLOWANCE WAS TO BE MADE IF THE ASSESSEE FAILED TO PAY IT BEFORE 31 ST MARCH, 2005. 16. THEN CAME THE AMENDMENT TO SECTION 40(A)(IA) BY TH E FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL, 2010. THE PROVISION SO AMENDED, NOW READS AS UNDER :- (IA) ANY INTEREST, COMMISSION OR BROKERAGE, RENT , ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICE S PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB -CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPP LY OF LABOUR FOR CARRYING OUT ANY WORK), ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED O R; AFTER DEDUCTION, HAS NOT BEEN PAID ON OR BEFORE THE DUE D ATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 ITA.426/BANG/2014 PAGE - 11 PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCT ED DURING THE PREVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139, SUCH SUM SHALL BE ALLOWED AS A DEDU CTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. 17. FROM THE ABOVE PROVISION AS AMENDED BY THE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL, 2010 IT CAN BE SEEN THAT THE ONLY DIFFERENCE WHICH THIS AMENDMENT HAS MADE IS DISPENS ING WITH THE EARLIER TWO CATEGORIES OF DEFAULTS AS PER THE FINANCE ACT, 2008, AS DISCUSSED IN THE EARLIER PARA, CAUSING DISALLOWANCE ON THE BASIS OF THE PERIOD OF THE PREVIOUS YEAR DURING WHICH TAX WAS DEDUCTIBLE. THE FIRST CATEGORY OF DISALLOWANCES INCLUDED THE CASES IN WHICH TAX WAS D EDUCTIBLE AND WAS SO DEDUCTED DURING THE LAST MONTH OF THE PREVIOUS YEAR BUT THERE WAS FAILURE TO PAY SUCH TAX ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139. THE FINANCE ACT, 2010 HAS NOT TINKERED WITH THIS POSITION. THE SECOND CATEGORY OF THE FINANCE ACT, 2008 WHICH REQUIRED THE DEPOSIT OF TAX BEFORE THE CLOSE OF THE PREVIOUS YEAR IN CAS E OF DEDUCTION DURING THE FIRST ELEVEN MONTHS, AS A PRE-CONDITION FOR THE GRANT OF DEDUCTION IN THE YEAR OF INCURRING EXPENDITURE, HAS BEEN ALTERED . THE HITHERTO REQUIREMENT OF THE ASSESSEE DEDUCTING TAX AT SOURCE DURING THE FIRST ELEVEN MONTHS OF THE PREVIOUS YEAR AND PAYING IT BEFORE TH E CLOSE OF THE PREVIOUS YEAR UP TO 3 1 ST MARCH OF THE PREVIOUS YEAR AS A REQUIREMENT FOR GRA NT OF DEDUCTION IN THE YEAR OF INCURRING SUCH EXPENDITURE , HAS BEEN EASED TO EXTEND SUCH TIME FOR PAYMENT OF TAX UP TO DUE DATE U/S 139(1) OF THE ACT. AS PER THE NEW AMENDMENT, THE DISALLOWANCE WILL BE MADE IF AFTER DEDUCTING TAX AT SOURCE, THE ASSESSEE FAILS TO PAY THE AMOUNT OF TAX ON OR BEFORE THE DUE DATE SPECIFIED IN SUBSECTION (1) OF SECTION 139 OF THE ACT. THE EFFECT OF THIS AMENDMENT IS THAT NOW THE ASSESS EE DEDUCTING TAX EITHER IN THE LAST MONTH OF THE PREVIOUS YEAR OR FIRST ELE VEN MONTHS OF THE PREVIOUS YEAR SHALL BE ENTITLED TO DEDUCTION OF THE EXPENDITURE IN THE YEAR OF INCURRING IT, IF THE TAX SO DEDUCTED AT SOURCE I S PAID ON OR BEFORE THE DUE DATE U/S 139(1). THIS IS THE ONLY DIFFERENCE WHICH HAS BEEN MADE BY THE FINANCE ACT, 2010. 18. THE QUESTION AS TO WHETHER THE AMENDMENT BY THE FI NANCE ACT, 2010 AS AFORESAID IS PROSPECTIVE OR RETROSPECTIVE FROM 1.4. 2005 CAME UP FOR CONSIDERATION BEFORE THE MUMBAI SPECIAL BENCH ITAT IN THE CASE OF BHARATI SHIPYARD LTD . BEFORE THE SPECIAL BENCH, IT WAS ARGUED THAT THE AMENDMENT WAS MADE WITH A VIEW TO REMOVE THE UNNECE SSARY HARDSHIP CAUSED TO THE ASSESSEE BY THE EARLIER PROVISION. TH E SPECIAL BENCH BY ITS ORDER DATED 9.9.2011, HOWEVER, HELD THAT THE AMENDMENT CARRIED OUT BY THE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FRO M ASSESSMENT YEAR ITA.426/BANG/2014 PAGE - 12 2010-2011 CANNOT BE HELD TO BE RETROSPECTIVE FROM A SSESSMENT YEAR 2005- 2006. THE SPECIAL BENCH HELD THAT THE AMENDMENT B ROUGHT OUT BY THE FINANCE ACT, 2010 TO SECTION 40(A)(IA) W.E.F. 01.04 .2010, IS NOT REMEDIAL AND CURATIVE IN NATURE. 19. PRIOR TO THE DECISION OF THE SPECIAL BENCH, ID ENTICAL ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE ITAT KOLKATA B ENCH IN THE CASE OF VIRGIN CREATIONS VS. ITO, WARD 32(4), KOLKATA ITA N O. 267/KOL/2009 FOR AY 05-06 . THE ISSUE THAT AROSE FOR CONSIDERATION WAS DISAL LOWANCE OF EXPENSES U/S.40(A)(IA)CLAIMED AS DEDUCTION WHILE CO MPUTING INCOME FROM BUSINESS BEING EMBROIDERY CHARGES, DYEING CHARGES, INTEREST ON LOAN AND FREIGHT CHARGES WITHOUT DEDUCTING TAX AT SOURCE. T HE EMBROIDERY CHARGES WERE PAID BETWEEN 22 ND MAY, 2004 TO 30.11.2004. TAX HAD BEEN DEDUCTED AT SOURCE BUT WERE PAID TO THE GOVERNMENT ONLY ON 2 8.10.2005 AND NOT WITHIN THE TIME CONTEMPLATED BY SECTION 200(1) OF T HE ACT. THE DYEING CHARGES WERE PAID BETWEEN 5.4.2004 TO 20.8.2004. T AX WAS DEDUCTED AT SOURCE BUT WAS PAID TO THE GOVERNMENT ONLY ON 28.10 .2005. FRIEGHT OUTWARD CHARGES WERE PAID WITHOUT DEDUCTION OF TAX AT SOURCE. INTEREST ON LOANS WERE CREDITED TO THE CREDITORS ACCOUNT ON 31. 3.2005 TO THE EXTENT THEY WERE PAID AFTER THE DUE DATE FOR FILING RETURN OF I NCOME U/S.139(1) OF THE ACT, THE DISALLOWANCE WAS MADE U/S.40(A)(IA) OF THE ACT. BEFORE THE TRIBUNAL, THE ASSESSEE CONTENTED THAT THE AMENDMENT BY THE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL, 2010 WHEREBY AMOUNT OF TAX DEDUCTED AT THE TIME OF MAKING PAYMENT IN RESPECT O F EXPENDITURE REFERRED TO IN SEC.40(A)(IA) OF THE ACT, IF PAID TO THE GOVE RNMENT ON OR BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME DUE DATE U /S 139(1) OF THE ACT SHOULD BE ALLOWED AS A DEDUCTION. IN OTHER WORDS IT WAS ARGUED THAT THE AMENDMENT BY THE FINANCE ACT, 2010 TO THE PROVISION S OF SEC.40(A)(IA) HAS TO BE HELD TO BE RETROSPECTIVE W.E.F. 1-4-2005. TH E ITAT KOLKATA BENCH BY ITS ORDER DATED 15.12.2010 , HELD AS FOLLOWS: 8. AFTER HEARING THE RIVAL SUBMISSIONS AND ON CAR EFUL PERUSAL OF THE MATERIALS AVAILABLE ON RECORD, KEEPING IN VIEW OF T HE FACT THAT THOUGH THE LD.D.R. SUBMITTED THAT THE DECISIONS OF THE COO RDINATE BENCHES ARE NOT BINDING AND THE KOLKATA BENCHES MAY TAKE A DIFFERENT VIEW, SINCE MUMBAI BENCH AFTER ANALYZING THE PROVISIONS O F SEC.40(A)9IA) SINCE ITS INCEPTION AND VARIOUS AMENDMENTS MADE TO THE SAME INCLUDING THE SUGGESTION MADE BY THE INDUSTRY IN TH E FORM OF REPRESENTATION IN THEIR PRE-BUDGET MEMORANDUM TO TH E HONBLE FINANCE MINISTER AND BY APPLYING THE DECISION OF TH E HONBLE APEX COURT IN THE CASE OF ALOM EXTRUSIONS LTD., HAS OBSE RVED THAT THE PROVISIONS OF SECTION 40(A)(IA) AS STOOD PRIOR TO T HE AMENDMENTS MADE BY THE FINANCE ACT 2010 THUS WERE RESULTING IN TO UNINTENDED CONSEQUENCES AND CAUSING GRAVE AND GENUINE HARDSHIP S TO THE ASSESSES WHO HAD SUBSTANTIALLY COMPLIED WITH THE RE LEVANT TDS ITA.426/BANG/2014 PAGE - 13 PROVISIONS BY DEDUCTING THE TAX AT SOURCE AND BY PA YING THE SAME TO THE CREDIT OF THE GOVERNMENT BEFORE THE DUE DATE OF FILING OF THEIR RETURNS U/S.139(1). IN ORDER TO REMEDY THIS POSITI ON AND TO REMOVE THE HARDSHIPS WHICH WAS BEING CAUSED TO THE ASSESSEE BE LONGING TO SUCH CATEGORY, AMENDMENTS HAVE BEEN MADE IN THE PROVISIO NS OF SECTION 40(A)(IA) BY THE FINANCE ACT, 2010. THE SAID AMEND MENTS, IN OUR OPINION, THUS ARE CLEARLY REMEDIAL/CURATIVE IN NATU RE AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF ALLIED MOTORS PVT. LTD. (SUPRA) AND MOM EXTRUSIONS LTD. (SUPRA) AND THE SAME THEREF ORE WOULD APPLY RETROSPECTIVELY W.E.F. 1 ST APRIL, 2005. IN THE CASE OF R.B.JODHA MAL KUTHIALA 82 ITR 570, IT WAS HELD BY THE HONBLE SUP REME COURT THAT A PROVISO WHICH IS INSERTED TO REMEDY UNINTENDED CO NSEQUENCES AND TO MAKE THE PROVISION WORKABLE, REQUIRES TO BE TREA TED AS RETROSPECTIVE IN OPERATION SO THAT A REASONABLE INTERPRETATION CA N BE GIVEN TO THE SECTION AS A WHOLE. IN THE PRESENT CASE, THE AMOUN T OF TAX DEDUCTED AT SOURCE FROM THE FREIGHT CHARGES DURING THE PERIOD 0 1/04/2005 TO 28/02/2006 WAS PAID BY THE ASSESSEE IN THE MONTH O F JULY AND AUGUST 2006 I.E., WELL BEFORE THE DUE DATE OF FILIN G OF ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION. THIS BEIN G THE UNDISPUTED POSITION, WE HOLD THAT THE DISALLOWANCE MADE BY THE A.O. AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF FREIG HT CHARGES BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) IS NOT SUSTAINABLE AS PER THE AMENDMENTS MADE IN THE SAID PROVISIONS BY THE F INANCE ACT, 2010 WHICH, BEING REMEDIAL/CURATIVE IN NATURE, HAVE RETR OSPECTIVE APPLICATION, WE FIND NO REASON TO DEVIATE FROM THE DECISIONS OF THE ITATS MUMBAI BENCH AND AHMEDABAD BENCH, IN THE ABS ENCE OF A CONTRARY VIEW, EXCEPT THE OTHER BENCHES DECISIONS O R ANY OTHER HIGH COURT. THEREFORE, RESPECTFULLY FOLLOWING THE DECIS ION OF THE COORDINATE BENCHES (SUPRA), WE ALLOW THE GROUND NOS . I TO 3 OF THE ASSESSEES APPEAL. 20. AS AGAINST THE AFORESAID DECISION, THE REVENUE PREF ERRED APPEAL BEFORE THE HONBLE CALCUTTA HIGH COURT. THE HONBLE CALCU TTA HIGH COURT IN ITA NO. 302 OF 2011, GA 3200/2011 DECIDED ON 23.1 1.2011 , HELD AS FOLLOWS: WE HAVE HEARD MR. NIZAMUDDIN AND GONE THROUGH THE IMPUGNED JUDGMENT AND ORDER. WE HAVE ALSO EXAMINED THE POINT FORMULATED FOR WHICH THE PRESENT APPEAL IS SOUGHT TO BE ADMITTED. IT IS ARGUED BY MR. NIZAMUDDIN THAT THIS COURT NEEDS TO TAKE DECISION A S TO WHETHER SECTION 40(A)(IA) IS HAVING RETROSPECTIVE OPERATION OR NOT. THE LEARNED TRIBUNAL ON FACT FOUND THAT THE ASSESSE E HAD DEDUCTED TAX AT SOURCE FROM THE PAID CHARGES BETWEEN THE PERIOD APRIL 1, 2005 AND ITA.426/BANG/2014 PAGE - 14 APRIL 28, 2006 AND THE SAME WERE PAID BY THE ASSESS EE IN JULY AND AUGUST 2006, I.E. WELL BEFORE THE DUE DATE OF FILIN G OF THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION. THIS FACTU AL POSITION WAS UNDISPUTED. MOREOVER, THE SUPREME COURT, AS HAS BEE N RECORDED BY THE LEARNED TRIBUNAL, IN THE CASE OF ALLIED MOTORS PVT. LTD. AND ALSO IN THE CASE OF ALOM EXTRUSIONS LTD., HAS ALREADY DECID ED THAT THE AFORESAID PROVISION HAS RETROSPECTIVE APPLICATION. AGAIN, IN THE CASE REPORTED IN 82 ITR 570, THE SUPREME COURT HELD THAT THE PROVISION, WHICH HAS INSERTED THE REMEDY TO MAKE THE PROVISION WORKABLE, REQUIRES TO BE TREATED WITH RETROSPECTIVE OPERATION SO THAT REASONABLE DEDUCTION CAN BE GIVEN TO THE SECTION AS WELL. IN V IEW OF THE AUTHORITATIVE PRONOUNCEMENT OF THE SUPREME COURT, T HIS COURT CANNOT DECIDE OTHERWISE. HENCE WE DISMISS THE APPEAL WITHO UT ANY ORDER AS TO COSTS. 21. FURTHER LIBERALIZATION OF PROVISIONS OF SECTION 40( A)(IA) WAS MADE THROUGH AMENDMENT BROUGHT BY THE FINANCE ACT 2012. WITH A VIEW TO LIBERALIZE PROVISIONS OF SECTION 40(A)(IA) OF THE A CT FINANCE ACT 2012 BROUGHT AMENDMENT W.E.F 01.04.2013 AS UNDER. THE FOLLOWING SECOND PROVISO SHALL BE INSERTED IN SUB-CLAUSE ( IA) OF CLAUSE ( A ) OF SECTION 40 BY THE FINANCE ACT, 2012, W.E.F. 1-4-2013 : PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN A SSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO SUB-SECTION (1) OF SECTION 201, THEN, FOR THE PURPOSE OF THIS SUB-CLAUSE, IT SHALL BE DEE MED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DA TE OF FURNISHING OF RETURN OF INCOME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO. 22. SINCE PROVISIONS OF SECTION 40(A)(IA) AS AMENDED BY FINANCE ACT, 2012 IS LINKED TO SECTION 201 OF THE ACT, IN WHICH A PROVISO WAS INSERTED, IT IS NECESSARY TO LOOK INTO THOSE PROVISIONS WHICH READ THUS: SEC.201: (1) WHERE ANY PERSON, INCLUDING THE PRINC IPAL OFFICER OF A COMPANY (A) WHO IS REQUIRED TO DEDUCT ANY SUM IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT; OR (B) REFERRED TO IN SUB-SECTION (1A) OF SECTION 192, BEING AN EMPLOYER, DOES NOT DEDUCT, OR DOES NOT PAY, OR AFTE R SO DEDUCTING FAILS TO PAY, THE WHOLE OR ANY PART OF THE TAX , AS REQUIRED BY OR UNDER THIS ACT, THEN, SUCH PERSON, SHALL, WITHOUT PREJUDICE TO ANY OTHER ITA.426/BANG/2014 PAGE - 15 CONSEQUENCES WHICH HE MAY INCUR, BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX: PROVIDED THAT ANY PERSON, INCLUDING THE PRINCIPAL OFFICER OF A COMPANY, WHO FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF THIS CHAPTER ON T HE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT O F SUCH TAX IF SUCH RESIDENT (I) HAS FURNISHED HIS RETURN OF INCOME UNDER SE CTION 139; (II) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPUTIN G INCOME IN SUCH RETURN OF INCOME; AND ( III) HAS PAID THE TAX DUE ON THE INCOME DECLARED BY HIM IN SUCH RETURN OF INCOME, AND THE PERSON FURNISHES A CERTIF ICATE TO THIS EFFECT FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PRESCRIBE D: 23. MEMORANDUM EXPLAINING THE PROVISIONS WHILE INTR ODUCING FINANCE BILL, 2012 PROVIDES THE JUSTIFICATION OF THE AMENDM ENT TO SECTION 40(A)(IA) IN THE FOLLOWING WORDS:- IN ORDER TO RATIONALISE THE PROVISIONS OF DISALLOW ANCE ON ACCOUNT OF NON-DEDUCTION OF TAX FROM THE PAYMENTS MADE TO A RE SIDENT PAYEE, IT IS PROPOSED TO AMEND SECTION 40(A)(IA) TO PROVIDE T HAT WHERE AN ASSESSEE MAKES PAYMENT OF THE NATURE SPECIFIED IN T HE SAID SECTION TO A RESIDENT PAYEE WITHOUT DEDUCTION OF TAX AND IS NO T DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER SECTION 201(1) ON ACCOUNT OF PAYMENT OF TAXES BY THE PAYEE, THEN, FOR THE PURPOSE OF ALLOWI NG DEDUCTION OF SUCH SUM, IT SHALL BE DEEMED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RE TURN OF INCOME BY THE RESIDENT PAYEE. 24. THE PROVISIONS OF SEC.40(A)(IA) OF THE ACT ARE MEANT TO ENSURE THAT THE ASSESSEES PERFORM THEIR OBLIGATION TO DEDUCT T AX AT SOURCE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. SUCH CO MPLIANCE WILL ENSURE REVENUE COLLECTION WITHOUT MUCH HASSLE. WHEN THE O BJECT SOUGHT TO BE ACHIEVED BY THOSE PROVISIONS ARE FOUND TO BE ACHIEV ED, IT WOULD BE UNJUST TO DISALLOWANCE LEGITIMATE BUSINESS EXPENSES OF AN ASSESSEE. DESPITE DUE COLLECTION OF TAXES DUE, IF DISALLOWANCE OF GENUINE BUSINESS EXPENSES ARE MADE THAN THAT WOULD BE UNJUST ENRICHMENT ON THE PART OF THE GOVERNMENT AS THE PAYEE WOULD HAVE ALSO PAID THE TA XES ON SUCH INCOME. IN ORDER TO REMOVE THIS ANOMALY, THIS AMENDMENT HAS BEEN INTRODUCED. IN CASE OF PAYMENT TO NON RESIDENT, THE GOVERNMENT DOE S NOT HAVE ANY OTHER ITA.426/BANG/2014 PAGE - 16 MECHANISM TO RECOVER THE DUE TAXES. HENCE, NO AMEND MENT WAS MADE IN SECTION 40(A)(I). THE LEGISLATURE HAS NOT GIVEN BL ANKET DEDUCTION UNDER SECTION 40(A)(IA). THE DEDUCTION AS PER AMENDED SEC TION WILL BE ALLOWED ONLY IF THE - (I) PAYEE HAS FURNISHED HIS RETURN OF INCOME UNDER SECTION 139; (II) PAYEE HAS TAKEN INTO ACCOUNT SUCH SUM FOR COM PUTING INCOME IN SUCH RETURN OF INCOME; AND (III) PAYEE HAS PAID THE TAX DUE ON THE INCOME DEC LARED BY HIM IN SUCH RETURN OF INCOME, AND THE PAYER FURNISHES A CERTIFICATE TO THIS EFFEC T FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PRESCRIBED. 25. THE QUESTION IS AS TO WHETHER THE AMENDMENT MAD E AS ABOVE IS PROSPECTIVE OR RETROSPECTIVE W.E.F. 1.4.2005 WHEN T HE PROVISIONS OF SEC.40(A)(IA) WERE INTRODUCED. KEEPING IN VIEW THE PURPOSE BEHIND THE PROVISO INSERTED BY THE FINANCE ACT, 2012 IN SECTIO N 40(A)(IA) OF THE ACT, IT CAN BE SAID TO BE DECLARATORY AND CURATIVE IN NATUR E AND THEREFORE, 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. IN CIT VS. ALOM EXTRUSIONS LTD. 319 ITR 306 (SC) , THE HONBLE SUPREME COURT HAD TO DEAL WITH THE QUESTION, WHETHE R OMISSION (DELETION) OF THE SECOND PROVISO TO S. 43B OF THE IT ACT, 1961 , BY THE FINANCE ACT, 2003, OPERATED W.E.F. 1ST APRIL, 2004, OR WHETHER I T OPERATED RETROSPECTIVELY W.E.F. 1ST APRIL, 1988? PRIOR TO FI NANCE ACT, 2003, THE SECOND PROVISO TO S. 43B OF THE IT ACT, 1961 (FOR S HORT, 'THE ACT') RESTRICTED THE DEDUCTION IN RESPECT OF ANY SUM PAYA BLE BY AN EMPLOYER BY WAY OF CONTRIBUTION TO PROVIDENT FUND/SUPERANNUATIO N FUND OR ANY OTHER FUND FOR THE WELFARE OF EMPLOYEES, UNLESS IT STOOD PAID WITHIN THE SPECIFIED DUE DATE. ACCORDING TO THE SECOND PROVISO, THE PAYM ENT MADE BY THE EMPLOYER TOWARDS CONTRIBUTION TO PROVIDENT FUND OR ANY OTHER WELFARE FUND WAS ALLOWABLE AS DEDUCTION, IF PAID BEFORE THE DATE FOR FILING THE RETURN OF INCOME AND NECESSARY EVIDENCE OF SUCH PAYMENT WAS E NCLOSED WITH THE RETURN OF INCOME. IN OTHER WORDS, IF CONTRIBUTION S TOOD PAID AFTER THE DATE FOR FILING OF THE RETURN, IT STOOD DISALLOWED. THIS RESULTED IN GREAT HARDSHIP TO THE EMPLOYERS. THEY REPRESENTED TO THE GOVERNMEN T ABOUT THEIR HARDSHIP AND, CONSEQUENTLY, PURSUANT TO THE REPORT OF THE KE LKAR COMMITTEE, THE GOVERNMENT INTRODUCED FINANCE ACT, 2003, BY WHICH T HE SECOND PROVISO STOOD DELETED W.E.F. 1ST APRIL, 2004, AND CERTAIN C HANGES WERE ALSO MADE IN THE FIRST PROVISO BY WHICH UNIFORMITY WAS BROUGHT A BOUT BETWEEN PAYMENT OF FEES, TAXES, CESS, ETC., ON ONE HAND AND CONTRIB UTION MADE TO EMPLOYEES' PROVIDENT FUND, ETC., ON THE OTHER. ACCORDING TO THE DEPARTMENT, THE OMISSION OF THE SECOND PROVISO GIVING RELIEF TO THE ASSESSEE(S) ITA.426/BANG/2014 PAGE - 17 [EMPLOYER(S)] OPERATED ONLY W.E.F. 1ST APRIL, 2004, WHEREAS, ACCORDING TO THE ASSESSEE(S)-EMPLOYER(S), THE SAID FINANCE ACT, 2003, TO THE EXTENT INDICATED ABOVE, OPERATED W.E.F. 1ST APRIL, 1988 (R ETROSPECTIVELY). THE HONBLE SUPREME COURT HELD THAT THE DELETION OF THE SECOND PROVISO WAS RETROSPECTIVE W.E.F.1.4.2004. THE COURT CONSIDERED THE SCHEME OF THE ACT AND THE HISTORICAL BACKGROUND AND THE OBJECT OF INT RODUCTION OF THE PROVISIONS OF S. 43B. THE COURT ALSO REFERRED TO TH E EARLIER AMENDMENTS MADE IN 1988 WITH INTRODUCTION OF THE FIRST AND SEC OND PROVISOS. THE COURT ALSO NOTED FURTHER AMENDMENT MADE IN 1989 IN THE SE COND PROVISO DEALING WITH THE ITEMS COVERED IN S. 43B(B) ( I.E., CONTRIBUTION TO EMPLOYEES WELFARE FUNDS). AFTER CONSIDERING THE SAME, THE COU RT WAS OF THE VIEW THAT IT WAS CLEAR THAT PRIOR TO THE AMENDMENT OF 2003, T HE EMPLOYER WAS ENTITLED TO DEDUCTION ONLY IF THE CONTRIBUTION STANDS CREDIT ED ON OR BEFORE THE DUE DATE GIVEN IN THE PROVIDENT FUND ACT ON ACCOUNT OF SECOND PROVISO TO S. 43B. THE SITUATION CREATED FURTHER DIFFICULTIES AND AS A RESULT OF REPRESENTATIONS MADE BY THE INDUSTRY, THE AMENDMENT OF 2003 WAS CARRIED OUT WHICH DELETED THE SECOND PROVISO AND ALSO MADE FIRST PROVISO APPLICABLE TO CONTRIBUTION TO EMPLOYEES WELFARE FUN DS REFERRED TO IN S. 43B(B). 15. WE FIND NO MERIT IN THESE CIVIL APPEALS FILED BY TH E DEPARTMENT FOR THE FOLLOWING REASONS : FIRSTLY, AS STATED ABOVE, S . 43B (MAIN SECTION), WHICH STOOD INSERTED BY FINANCE ACT, 1983, W.E.F. 1 ST APRIL, 1984, EXPRESSLY COMMENCES WITH A NON OBSTANTE CLAUSE, THE UNDERLYING OBJECT BEING TO DISALLOW DEDUCTIONS CLAIMED MERELY BY MAKI NG A BOOK ENTRY BASED ON MERCANTILE SYSTEM OF ACCOUNTING. AT THE SA ME TIME, S. 43B (MAIN SECTION) MADE IT MANDATORY FOR THE DEPARTMENT TO GRANT DEDUCTION IN COMPUTING THE INCOME UNDER S. 28 IN THE YEAR IN WHICH TAX, DUTY, CESS, ETC., IS ACTUALLY PAID. HOWEVER, PARLIAMENT TOOK CO GNIZANCE OF THE FACT THAT ACCOUNTING YEAR OF A COMPANY DID NOT ALWAYS TA LLY WITH THE DUE DATES UNDER THE PROVIDENT FUND ACT, MUNICIPAL CORPORATION ACT (OCTROI) AND OTHER TAX LAWS. THEREFORE, BY WAY OF FIRST PROVISO, AN INCENTIVE/RELAXATION WAS SOUGHT TO BE GIVEN IN RESPECT OF TAX, DUTY, CES S OR FEE BY EXPLICITLY STATING THAT IF SUCH TAX, DUTY, CESS OR FEE IS PAID BEFORE THE DATE OF FILING OF THE RETURN UNDER THE IT ACT (DUE DATE), THE ASSESSE E(S) THEN WOULD BE ENTITLED TO DEDUCTION. HOWEVER, THIS RELAXATION/INC ENTIVE WAS RESTRICTED ONLY TO TAX, DUTY, CESS AND FEE. IT DID NOT APPLY T O CONTRIBUTIONS TO LABOUR WELFARE FUNDS. THE REASON APPEARS TO BE THAT THE EM PLOYER(S) SHOULD NOT SIT ON THE COLLECTED CONTRIBUTIONS AND DEPRIVE THE WORKMEN OF THE RIGHTFUL BENEFITS UNDER SOCIAL WELFARE LEGISLATIONS BY DELAY ING PAYMENT OF CONTRIBUTIONS TO THE WELFARE FUNDS. HOWEVER, AS STA TED ABOVE, THE SECOND PROVISO RESULTED IN IMPLEMENTATION PROBLEMS, WHICH HAVE BEEN MENTIONED HEREINABOVE, AND WHICH RESULTED IN THE ENACTMENT OF FINANCE ACT, 2003, DELETING THE SECOND PROVISO AND BRINGING ABOUT UNIF ORMITY IN THE FIRST PROVISO BY EQUATING TAX, DUTY, CESS AND FEE WITH CO NTRIBUTIONS TO WELFARE ITA.426/BANG/2014 PAGE - 18 FUNDS. ONCE THIS UNIFORMITY IS BROUGHT ABOUT IN THE FIRST PROVISO, THEN, IN OUR VIEW, THE FINANCE ACT, 2003, WHICH IS MADE APPL ICABLE BY THE PARLIAMENT ONLY W.E.F. 1ST APRIL, 2004, WOULD BECOM E CURATIVE IN NATURE, HENCE, IT WOULD APPLY RETROSPECTIVELY W.E.F. 1ST AP RIL, 1988. SECONDLY, IT MAY BE NOTED THAT, IN THE CASE OF ALLIED MOTORS (P) LTD. ETC. VS. CIT (1997) 139 CTR (SC) 364 : (1997) 224 ITR 677 (SC), THE SCHEME OF S. 43B OF THE ACT CAME TO BE EXAMINED. IN THAT CASE, T HE QUESTION WHICH AROSE FOR DETERMINATION WAS, WHETHER SALES-TAX COLL ECTED BY THE ASSESSEE AND PAID AFTER THE END OF THE RELEVANT PREVIOUS YEA R BUT WITHIN THE TIME ALLOWED UNDER THE RELEVANT SALES-TAX LAW SHOULD BE DISALLOWED UNDER S. 43B OF THE ACT WHILE COMPUTING THE BUSINESS INCOME OF THE PREVIOUS YEAR ? THAT WAS A CASE WHICH RELATED TO ASST. YR. 1984-8 5. THE RELEVANT ACCOUNTING PERIOD ENDED ON 30TH JUNE, 1983. THE ITO DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE WHICH WAS ON ACCO UNT OF SALES-TAX COLLECTED BY THE ASSESSEE FOR THE LAST QUARTER OF T HE RELEVANT ACCOUNTING YEAR. THE DEDUCTION WAS DISALLOWED UNDER S. 43B WHI CH, AS STATED ABOVE, WAS INSERTED W.E.F. 1ST APRIL, 1984. IT IS ALSO REL EVANT TO NOTE THAT THE FIRST PROVISO WHICH CAME INTO FORCE W.E.F. 1ST APRIL, 198 8 WAS NOT ON THE STATUTE BOOK WHEN THE ASSESSMENTS WERE MADE IN THE CASE OF ALLIED MOTORS (P) LTD. ETC. (SUPRA). HOWEVER, THE ASSESSEE CONTENDED THAT EVEN THOUGH THE FIRST PROVISO CAME TO BE INSERTED W.E.F. 1ST APRIL, 1988, IT WAS ENTITLED TO THE BENEFIT OF THAT PROVISO BECAUSE IT OPERATED RETROSPECTIVELY FROM 1ST APRIL, 1984, WHEN S. 43B STOOD INSERTED. T HIS IS HOW THE QUESTION OF RETROSPECTIVITY AROSE IN ALLIED MOTORS (P) LTD. ETC. (SUPRA). THIS COURT, IN ALLIED MOTORS (P) LTD. ETC. (SUPRA) HELD THAT WHEN A PROVISO IS INSERTED TO REMEDY UNINTENDED CONSEQUENC ES AND TO MAKE THE SECTION WORKABLE, A PROVISO WHICH SUPPLIES AN OBVIO US OMISSION IN THE SECTION AND WHICH PROVISO IS REQUIRED TO BE READ IN TO THE SECTION TO GIVE THE SECTION A REASONABLE INTERPRETATION, IT COULD B E READ RETROSPECTIVE IN OPERATION, PARTICULARLY TO GIVE EFFECT TO THE SECTI ON AS A WHOLE. ACCORDINGLY, THIS COURT, IN ALLIED MOTORS (P) LTD. ETC. (SUPRA), HELD THAT THE FIRST PROVISO WAS CURATIVE IN NATURE, HENCE, RE TROSPECTIVE IN OPERATION W.E.F. 1ST APRIL, 1988. IT IS IMPORTANT TO NOTE ONC E AGAIN THAT, BY FINANCE ACT, 2003, NOT ONLY THE SECOND PROVISO IS DELETED B UT EVEN THE FIRST PROVISO IS SOUGHT TO BE AMENDED BY BRINGING ABOUT A N UNIFORMITY IN TAX, DUTY, CESS AND FEE ON THE ONE HAND VIS-A-VIS CONTRI BUTIONS TO WELFARE FUNDS OF EMPLOYEE(S) ON THE OTHER. THIS IS ONE MORE REASON WHY WE HOLD THAT THE FINANCE ACT, 2003, IS RETROSPECTIVE IN OPE RATION. MOREOVER, THE JUDGMENT IN ALLIED MOTORS (P) LTD. ETC. (SUPRA) IS DELIVERED BY A BENCH OF THREE LEARNED JUDGES, WHICH IS BINDING ON US. AC CORDINGLY, WE HOLD THAT FINANCE ACT, 2003, WILL OPERATE RETROSPECTIVEL Y W.E.F. 1ST APRIL, 1988 (WHEN THE FIRST PROVISO STOOD INSERTED). LASTLY, WE MAY POINT OUT THE HARDSHIP AND THE INVIDIOUS DISCRIMINATION WHICH WOU LD BE CAUSED TO THE ASSESSEE(S) IF THE CONTENTION OF THE DEPARTMENT IS TO BE ACCEPTED THAT FINANCE ACT, 2003, TO THE ABOVE EXTENT, OPERATED PR OSPECTIVELY. TAKE AN ITA.426/BANG/2014 PAGE - 19 EXAMPLEIN THE PRESENT CASE, THE RESPONDENTS HAVE D EPOSITED THE CONTRIBUTIONS WITH THE R.P.F.C. AFTER 31ST MARCH (E ND OF ACCOUNTING YEAR) BUT BEFORE FILING OF THE RETURNS UNDER THE IT ACT A ND THE DATE OF PAYMENT FALLS AFTER THE DUE DATE UNDER THE EMPLOYEES' PROVI DENT FUND ACT, THEY WILL BE DENIED DEDUCTION FOR ALL TIMES. IN VIEW OF THE SECOND PROVISO, WHICH STOOD ON THE STATUTE BOOK AT THE RELEVANT TIM E, EACH OF SUCH ASSESSEE(S) WOULD NOT BE ENTITLED TO DEDUCTION UNDE R S. 43B OF THE ACT FOR ALL TIMES. THEY WOULD LOSE THE BENEFIT OF DEDUCTION EVEN IN THE YEAR OF ACCOUNT IN WHICH THEY PAY THE CONTRIBUTIONS TO THE WELFARE FUNDS, WHEREAS A DEFAULTER, WHO FAILS TO PAY THE CONTRIBUTION TO T HE WELFARE FUND RIGHT UPTO 1ST APRIL, 2004, AND WHO PAYS THE CONTRIBUTION AFTER 1ST APRIL, 2004, WOULD GET THE BENEFIT OF DEDUCTION UNDER S. 43B OF THE ACT. IN OUR VIEW, THEREFORE, FINANCE ACT, 2003, TO THE EXTENT INDICAT ED ABOVE, SHOULD BE READ AS RETROSPECTIVE. IT WOULD, THEREFORE, OPERATE FROM 1ST APRIL, 1988, WHEN THE FIRST PROVISO WAS INTRODUCED. IT IS TRUE T HAT THE PARLIAMENT HAS EXPLICITLY STATED THAT FINANCE ACT, 2003, WILL OPER ATE W.E.F. 1ST APRIL, 2004. HOWEVER, THE MATTER BEFORE US INVOLVES THE PR INCIPLE OF CONSTRUCTION TO BE PLACED ON THE PROVISIONS OF FINA NCE ACT, 2003. 16. BEFORE CONCLUDING, WE EXTRACT HEREINBELOW THE RELEV ANT OBSERVATIONS OF THIS COURT IN THE CASE OF CIT VS. J .H. GOTLA (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC), WHICH READS AS UNDER : 'WE SHOULD FIND OUT THE INTENTION FROM THE LANGUAGE USED BY THE LEGISLATURE AND IF STRICT LITERAL CONSTRUCTI ON LEADS TO AN ABSURD RESULT, I.E., A RESULT NOT INTENDED TO BE SU BSERVED BY THE OBJECT OF THE LEGISLATION FOUND IN THE MANNER I NDICATED BEFORE, THEN IF ANOTHER CONSTRUCTION IS POSSIBLE AP ART FROM STRICT LITERAL CONSTRUCTION, THEN THAT CONSTRUCTION SHOULD BE PREFERRED TO THE STRICT LITERAL CONSTRUCTION. THOUG H EQUITY AND TAXATION ARE OFTEN STRANGERS, ATTEMPTS SHOULD B E MADE THAT THESE DO NOT REMAIN ALWAYS SO AND IF A CONSTRU CTION RESULTS IN EQUITY RATHER THAN IN INJUSTICE, THEN SU CH CONSTRUCTION SHOULD BE PREFERRED TO THE LITERAL CON STRUCTION.' 17. FOR THE AFORESTATED REASONS, WE HOLD THAT FINANCE A CT, 2003, TO THE EXTENT INDICATED ABOVE, IS CURATIVE IN NATURE, HENCE, IT IS RETROSPECTIVE AND IT WOULD OPERATE W.E.F. 1ST APRIL , 1988 (WHEN THE FIRST PROVISO CAME TO BE INSERTED). FOR THE ABOVE R EASONS, WE FIND NO MERIT IN THIS BATCH OF CIVIL APPEALS FILED BY THE D EPARTMENT WHICH ARE HEREBY DISMISSED WITH NO ORDER AS TO COSTS. 26. WE ARE OF THE VIEW THAT THE REASONING OF THE HO NBLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS LTD(SUPRA) WIL L EQUALLY TO THE AMENDMENT TO SEC.40(A)(IA) OF THE ACT WHEREBY A SEC OND PROVISO WAS INSERTED IN SUB-CLAUSE (IA) OF CLAUSE (A) OF SECTIO N 40 BY THE FINANCE ACT, ITA.426/BANG/2014 PAGE - 20 2012, W.E.F. 1-4-2013. THE PROVISIONS ARE INTENDED TO REMOVE HARDSHIP. IT WAS ARGUED ON BEHALF OF THE REVENUE THAT THE EXISTI NG PROVISIONS ALLOW DEDUCTION IN THE YEAR OF PAYMENT AND TO THAT EXTENT THERE IS NO HARDSHIP. WE ARE OF THE VIEW THAT THE HARDSHIP IN SUCH AN EVE NT WOULD BE TAXING AN ASSESSEE ON A HIGHER INCOME IN ONE YEAR AND TAXING HIM ON LOWER INCOME IN A SUBSEQUENT YEAR. TO THE EXTENT THE ASSESSEE I S MADE TO PAY TAX ON A HIGHER INCOME IN ONE YEAR, THERE WOULD STILL BE HAR DSHIP. 14. IN VIEW OF THE DECISION OF THE COORDINATE BENCH , ASSESSEE CAN ALWAYS PLEAD THAT RECIPIENT OF THE AMOUNTS HAD ACCOUNTED T HE INCOME AND FILED RETURNS AND HENCE THE RIGORS OF SECTION 40(A)(IA) OF THE AC T COULD NOT BE APPLIED TO IT. HOWEVER, QUESTION WHETHER THE RECIPIENTS OF PAYMENT S HAD INDEED ACCOUNTED THE AMOUNTS AND RETURNED THE INCOME THEREFROM IN THEIR RETURN OF INCOME REQUIRES TO BE VERIFIED. WE ARE OF THE OPINION THEREFORE THAT THIS ISSUE ALSO REQUIRES A FRESH LOOK BY THE AO. 15. IN THE RESULT, WE SET ASIDE THE ORDERS OF LOWER AUTHORITIES AND REMIT BOTH THE ISSUES UNDER SECTION 40(A)(IA) OF THE ACT, BACK TO THE AO FOR VERIFICATION AFRESH IN ACCORDANCE WITH LAW. 16. APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTIC AL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST DAY OF OCTOBER, 2015. SD/- SD/- (N. V. VASUDEVAN) (ABRAHAM P GEO RGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN ITA.426/BANG/2014 PAGE - 21 COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR