Sri. B.V. Nagesh, Bangalore V. ITO, Bangalore

ITA 568/BANG/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5323 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G KAMALADHAR
• Assessee Lawyers: V SRINIVASAN
• Keywords: Retrospective amendment; Non-deduction of tax
• Section: 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ITA NO. 568/BANG/2014 ASSESSMENT YEAR : 2010-11 SHRI B V NAGESH, FLAT NO. 101, 1 ST FLOOR, PRISTINE BOGHAN VILLA, OPP: KATRIGUPPE WATER TANK ROAD, VHBCS LAYOUT, GIRINAGAR 4 TH PHASE, BANASHANKARI 3 RD STAGE, BANGALORE 560 085. PAN: ABAPN 9044J VS. THE INCOME TAX OFFICER, WARD 10(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI V. SRINIVASAN, ADVOCATE RESPONDENT BY : SHRI G. KAMALADHAR, STANDING COUNSEL DATE OF HEARING : 26.04.2017 DATE OF PRONOUNCEMENT : 02.06.2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THE APPEAL OF THE ASSESSEE WAS EARLIER ADJUDICATED BY THIS TRIBUNAL VIDE ITS ORDER DATED 17.07.2015 HOWEVER SUBSEQUENTL Y THE SAID ORDER OF THE TRIBUNAL WAS RECALLED IN THE MP NO. 109/BANG/20 15 VIDE ORDER DATED 30.06.2016. HENCE THIS APPEAL OF THE ASSESSEE WAS AGAIN PLACED BEFORE ITA NO. 568/BANG/2014 PAGE 2 OF 9 THIS TRIBUNAL FOR ADJUDICATION ON THE ISSUE OF DISA LLOWANCE U/S. 40(A)(IA). THE ASSESSEE IS A TOUR AND TRAVEL OPERATOR AND PROV IDING VEHICLES ON HIRE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE PAID HIRE CHARGES EXCEEDING RS. 15,000/- I N VARIOUS CASES. SINCE THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE FROM TH ESE PAYMENTS THE AO PROPOSES TO DISALLOW THE HIRE CHARGES AMOUNTING TO RS. 1,03,59,106/- BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. THE ASSESSEE CONTENTED BEFORE THE AO THAT THESE PAYMENTS TO THE VEHICLE OWNERS DOES NOT COME UNDER THE PURVIEW OF SECTION 194C OF THE A CT AS IT WAS NOT FOR HIRING OF THE VEHICLE BUT IT WAS SHARING OF REVENUE WITH THE OTHER OWNERS OF THE VEHICLE. THE AO DID NOT ACCEPT THE CONTENTI ON AND EXPLANATION OF THE ASSESSEE AND MADE DISALLOWANCE OF THE SAID AMOU NT AS PER THE PROVISIONS OF SECTION 40(A)(IA). THE ASSESSEE CHAL LENGED THE ACTION OF THE AO BEFORE THE CIT(A) AND CONTENTED THAT THE ASSESSE E IS IN CAB SHARING ARRANGEMENT WITH THE CAB OWNERS AND THEREFORE THE P ROVISIONS OF SECTION 194C DO NOT APPLY ON THE PAYMENTS IN QUESTION WHICH IS SHARING OF REVENUE. THE CIT(A) DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THE ALLEGED CAB SHARING ARRANGEMENT HAS N OT BEEN PROVED BY THE ASSESSEE BY ANY EVIDENCE. ITA NO. 568/BANG/2014 PAGE 3 OF 9 2. BEFORE US THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THESE PAYMENTS WERE NOT IN THE NATURE OF HIRE CHARGES BUT IT IS A REVENUE SHARING BETWEEN THE ASSESSEE AND OTHER SERVICE PROVIDERS. HE HAS R EFERRED TO THE PARA 4 OF THE CIT(A) AND SUBMITTED THAT THE ASSESSEE HAS CLEA RLY BROUGHT OUT THE FACTS BEFORE THE CIT(A) THAT DUE TO HIS ILL HEALTH HE WAS NOT IN A POSITION TO CARRY OUT THE BUSINESS OF PROVIDING / SUPPLYING VEHICLES TO COMPANIES FOR PICK UP AND DROP OF THEIR EMPLOYEES AND HAD INS TEAD, COMPLETELY TRANSFERRED HIS BUSINESS USING SUCH AN ARRANGEMENT OF SHARING OF REVENUE. HE HAS POINTED OUT THAT THE ASSESSEE MADE CAB SHARI NG ARRANGEMENT WITH SOME PARTIES. THE LD. AR HAS POINTED OUT THAT THE ASSESSEE FILED SEVEN AFFIDAVITS OF THE RECIPIENTS WHO HAVE CONFIRMED THA T THEY RECEIVED THE AMOUNT UNDER THE CAB SHARING ARRANGEMENT WHEREBY SP ECIFIC CAB TRIPS WERE SPECIFICALLY TRANSFERRED FOR EXECUTION AND ACC ORDINGLY THEY HAVE DELIVERED THE SERVICES TO THE RESPECTIVE CLIENTS AT THEIR OWN RISK AND SPENDING THEIR OWN EXPENSES. IN SUPPORT OF HIS CON TENTION HE HAS RELIED UPON THE DECISION OF HONBLE RAJASTHAN HIGH COURT I N CASE OF CIT VS KRISHI UPAJ MANDI SAMITI (390 ITR 59) AS WELL AS TH E DECISION OF COORDINATE BENCHS OF TRIBUNAL IN CASE OF MUNICIPAL CORPORATION VS ITO [2013] 37 TAXMANN.COM 258. THE LD. AR HAS RELIED U PON THE FOLLOWING DECISION. ITA NO. 568/BANG/2014 PAGE 4 OF 9 1.ITO VS M/S. KCEL-MEIL(JV) DATED 13.01.2014 IN ITA NOS. 323 TO 336/HYD/2014 2.DCIT VS SHRI ANANDA MARAKALA DATED 13.09.2013 IN ITA NO. 1584/BANG/2012 AND CO NO. 58/BANG/2013. THUS THE LD. AR HAS SUBMITTED THAT IT IS NOT AN EXP ENDITURE BUT SHARING OF THE REVENUE AT SOURCE ITSELF AND THEREFORE IT DOES NOT COME UNDER THE PURVIEW OF SECTION 194C. 3. THE SECOND FLAG OF THIS ARGUMENT IS THAT THE RECIPI ENTS OF THIS AMOUNTS HAS ALREADY TAKEN INTO ACCOUNT THE SAME FOR COMPUTING I NCOME IN THEIR RETURN OF INCOME AND PAID TAX DUE ON THE INCOME DECLARED B Y THEM. THEREFORE AS PER THE SECOND PROVISO IN SECTION 40(A)(IA) NO D ISALLOWANCE CAN BE MADE ON THIS ACCOUNT. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF CIT VS NARESH KUMAR (362 ITR 256) AS WELL AS IN CASE OF CIT VS ANSAL LAND MARK TOWNSHIP (P.) LTD. ( 377 ITR 635). THE LD. AR HAS SUBMITTED THAT THE HO NBLE HIGH COURT HAS HELD THAT THE SECOND PROVISO TO SECTION 4 0(A)(IA) IS IN THE NATURE OF CLARITY, DECLARATORY AND CURATIVE AND THEREFORE HAS RETROSPECTIVE EFFECT FROM 01.04.2005. HENCE THE LD. AR HAS SUBMITTED TH AT THE DISALLOWANCE MADE BY THE AO U/S. 40(A)(IA) IS NOT SUSTAINABLE AN D THE SAME MAY BE DELETED. ITA NO. 568/BANG/2014 PAGE 5 OF 9 4. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT TH E SECOND PROVISO TO SECTION 40(A)(IA) HAS BEEN INSERTED IN THE STATUTE VIDE FINANCE ACT 2012 WITH EFFECT FROM 01.04.2013. WHEN THE LEGISLATURE HAS MADE IT CLEAR THAT THE SAID PROVISO IS APPLICABLE ONLY W.E.F. 01.04.20 13 THEN IT CANNOT BE APPLIED RETROSPECTIVELY. THE LD. DR HAS FURTHER CO NTENTED THAT ON MERITS THE PAYMENTS ARE CLEARLY IN THE NATURE OF HIRE CHAR GES AS HELD BY THE AO AS WELL AS CIT(A). THEREFORE IN THE ABSENCE OF ANY EVIDENCE TO SHOW OTHERWISE IT CANNOT BE TREATED AS SHARING OF REVENU E. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED I T IS A DIRECT EXPENDITURE AND NOT SHARING OF REVENUE. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. WE FIND MERITS IN THE CONTENTION OF THE AS SESSEE REGARDING THE APPLICABILITY OF SECOND PROVISO TO SECTION 40(A)(IA ) OF THE IT ACT AND IN CASE THE RECIPIENTS HAVE ALREADY CONSIDERED THE AMO UNTS IN QUESTION FOR COMPUTATION OF THEIR INCOME OFFERED FOR TAX IN THE RETURN OF INCOME THEN NO DISALLOWANCE CAN BE MADE U/S. 40(A)(IA). THE ON LY QUESTION ARISES IS WHETHER THE SECOND PROVISO IS PROSPECTIVE OR RETROS PECTIVE IN NATURE. AT THE OUTSET WE NOTE THAT THE HONBLE DELHI HIGH COUR T WHILE DEALING WITH THIS QUESTION IN CASE OF CIT VS NARESH KUMAR (SUPRA ) HELD THAT THE SAID PROVISO IS EXPLANATORY AND REMEDIAL IN NATURE AND T HEREFORE HAS TO BE APPLIED RETROSPECTIVELY. BY FOLLOWING THE SAID DEC ISION THE HONBLE DELHI ITA NO. 568/BANG/2014 PAGE 6 OF 9 HIGH COURT AGAIN IN CASE OF CIT VS ANSAL LAND MARK TOWNSHIP (P.) LTD. (SUPRA) HAS HELD IN PARA 13 AND 14 AS UNDER. 13. TURNING TO THE DECISION OF THE AGRA BENCH OF ITAT IN RAJIV KUMAR AGARWAL'S CASE (SUPRA ), THE COURT FINDS THAT IT HAS UNDERTAKEN A THOROUGH ANALYSIS OF THE SECOND PROVIS O TO SECTION 40(A)(IA) OF THE ACT AND ALSO SOUGHT TO EXPLAIN THE RATIONALE BEHIND ITS INSERTION. IN PARTICULAR, THE COURT WOUL D LIKE TO REFER TO PARA 9 OF THE SAID ORDER WHICH READS AS UNDER: 'ON A CONCEPTUAL NOTE, PRIMARY JUSTIFICATION FOR SU CH A DISALLOWANCE IS THAT SUCH A DENIAL OF DEDUCTION IS TO COMPENSATE FOR THE LOSS OF REVENUE BY CORRESPONDING INCOME NOT BEING TAKEN INTO ACCOUNT IN COMPUTATION OF TAXABLE INCOME IN TH E HANDS OF THE RECIPIENTS OF THE PAYMENTS. SUCH A POLICY MOTIVATED DEDUCTION RESTRICTIONS SHOULD, THEREFORE, NOT COME INTO PLAY WHEN AN ASSESSEE IS ABLE TO ESTABLISH THAT THERE IS NO ACTU AL LOSS OF REVENUE. THIS DISALLOWANCE DOES DEINCENTIVIZE NOT D EDUCTING 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 SOUR CE LAPSES. THERE ARE SEPARATE PENAL PROVISIONS TO THAT EFFECT. DEINCENTIVIZING A LAPSE AND PUNISHING A LAPSE ARE T WO DIFFERENT THINGS AND HAVE DISTINCTLY DIFFERENT, AND SOMETIMES MUTUALLY EXCLUSIVE, CONNOTATIONS. WHEN WE APPRECIATE THE OBJ ECT OF SCHEME OF SECTION 40(A)(IA), AS ON THE STATUTE, AND TO EXAMINE WHETHER OR NOT, ON A 'FAIR, JUST AND EQUITABLE' INT ERPRETATION OF LAW AS IS THE GUIDANCE FROM HON'BLE DELHI HIGH COU RT ON INTERPRETATION OF THIS LEGAL PROVISION, IN OUR HUMB LE UNDERSTANDING, IT COULD NOT BE AN 'INTENDED CONSEQU ENCE' TO DISALLOW THE EXPENDITURE, DUE TO NON-DEDUCTION OF T AX AT SOURCE, EVEN IN A SITUATION IN WHICH CORRESPONDING INCOME I S BROUGHT TO TAX IN THE HANDS OF THE RECIPIENT. THE SCHEME OF SE CTION 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 EXP ENDITURE HAS REMAINED UNTAXED DUE TO TAX WITHHOLDING LAPSES BY T HE ASSESSEE. IT IS NOT, IN OUR CONSIDERED VIEW, A PENA LTY FOR TAX WITHHOLDING LAPSE BUT IT IS A SORT OF COMPENSATORY DEDUCTION RESTRICTION FOR AN INCOME GOING UNTAXED DUE TO TAX WITHHOLDING LAPSE. THE PENALTY FOR TAX WITHHOLDING LAPSE PER SE IS SEPARATELY PROVIDED FOR IN SECTION 271C, AND, SECTION 40(A)(IA ) DOES NOT ADD TO THE SAME. THE PROVISIONS OF SECTION 40(A)(IA), A S THEY EXISTED PRIOR TO INSERTION OF SECOND PROVISO THERETO, WENT MUCH BEYOND THE OBVIOUS INTENTIONS OF THE LAWMAKERS AND CREATED UNDUE HARDSHIPS EVEN IN CASES IN WHICH THE ASSESSEE'S TAX WITHHOLDING LAPSES DID NOT RESULT IN ANY LOSS TO THE EXCHEQUER. NOW THAT THE LEGISLATURE HAS BEEN COMPASSIONATE ENOUGH TO CURE T HESE SHORTCOMINGS OF PROVISION, AND THUS OBVIATE THE UNI NTENDED ITA NO. 568/BANG/2014 PAGE 7 OF 9 HARDSHIPS, SUCH AN AMENDMENT IN LAW, IN VIEW OF THE WELL SETTLED LEGAL POSITION TO THE EFFECT THAT A CURATIVE AMENDM ENT TO AVOID UNINTENDED CONSEQUENCES IS TO BE TREATED AS RETROSP ECTIVE IN NATURE EVEN THOUGH IT MAY NOT STATE SO SPECIFICALLY , THE INSERTION OF SECOND PROVISO MUST BE GIVEN RETROSPECTIVE EFFEC T FROM THE POINT OF TIME WHEN THE RELATED LEGAL PROVISION WAS INTRODUCED. IN VIEW OF THESE DISCUSSIONS, AS ALSO FOR THE DETAILED REASONS SET OUT EARLIER, WE CANNOT SUBSCRIBE TO THE VIEW THAT I T COULD HAVE BEEN AN 'INTENDED CONSEQUENCE' TO PUNISH THE ASSESS EES FOR NON-DEDUCTION OF TAX AT SOURCE BY DECLINING THE DED UCTION IN RESPECT OF RELATED PAYMENTS, EVEN WHEN THE CORRESPO NDING INCOME IS DULY BROUGHT TO TAX. THAT WILL BE GOING M UCH BEYOND THE OBVIOUS INTENTION OF THE SECTION. ACCORDINGLY, WE HOLD THAT 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.' 14. THE COURT IS OF THE VIEW THAT THE ABOVE REASONING OF THE AGRA BENCH OF ITAT AS REGARDS THE RATIONALE BEHIND THE I NSERTION OF THE SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT AND ITS CONCLUSION THAT THE SAID PROVISO IS DECLARATORY AND CURATIVE AND HAS RETROSPECTIVE EFFECT FROM 1ST APRIL 2005, MERIT S ACCEPTANCE. 6. ACCORDINGLY, IN VIEW OF THE DECISION OF HONBLE DEL HI HIGH COURT THE SECOND PROVISO TO SECTION 40(A)(IA) HAS RETROSPECTI VE EFFECT FROM 01.04.2005 AND IN CASE THE RECIPIENTS OF THE AMOUNT HAVE TAKEN INTO ACCOUNT FOR COMPUTATION OF THEIR INCOME OFFERED TO TAX IN THE RETURN OF INCOME THEN NO DISALLOWANCE CAN BE MADE U/S. 40(A)( IA). HENCE IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE SET ASIDE TH IS ISSUE TO THE RECORD OF THE AO FOR LIMITED PURPOSE OF VERIFICATION OF THE F ACTS WHETHER THE RECIPIENTS HAVE CONSIDERED THE AMOUNT IN QUESTION F OR COMPUTATION OF THEIR INCOME OFFERED TO TAX. ITA NO. 568/BANG/2014 PAGE 8 OF 9 7. AS REGARDS THE CONTENTION OF MERITS REGARDING NATUR E OF THE PAYMENT THE ASSESSEE HAS BEEN CONTENDING RIGHT FROM THE BEGINNI NG THAT THIS PAYMENT IS NOT IN THE NATURE OF HIRE CHARGES BUT IT WAS SHA RING OF REVENUE UNDER THE CAB SHARING ARRANGEMENT BY THE ASSESSEE WITH OTHER CAB OWNERS. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THIS PAYMEN T IS SHARING OF THE REVENUE AT SOURCE AND THEREFORE THE PROVISIONS OF S ECTION 194C ARE NOT APPLICABLE. IN SUPPORT OF THE CONTENTION THE ASSES SEE HAS RELIED UPON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN CASE OF CIT VS KRISHI UPAJ MANDI SAMITI (SUPRA) AS WELL AS VARIOUS DECISIONS O F THIS TRIBUNAL AS CITED IN THE FOREGOING PARAGRAPHS. IT IS PERTINENT TO NO TE THAT THIS IS MORE OF A QUESTION OF FACT THAN LAW AS TO WHETHER THE PAYMENT IN QUESTION ARE SHARING OF REVENUE OR ARE IN THE NATURE OF HIRE CHA RGES. WE FIND THAT THOUGH THE ASSESSEE FILED THE AFFIDAVITS OF THE REC IPIENTS IN SUPPORT OF THE CLAIM HOWEVER NEITHER THE AO NOR THE CIT(A) HAVE CO NDUCTED A PROPER ENQUIRY TO VERIFY THIS FACT RATHER THE EVIDENCE PRO DUCED BY THE ASSESSEE WAS REJECTED AT THRESHOLD. EVEN THE DECISIONS RELI ED UPON BY THE ASSESSEE BEFORE US WERE ALSO NOT CONSIDERED BY THE AUTHORITI ES BELOW. THEREFORE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE INTEREST OF JUSTICE WHEN WE HAVE ALREADY SET ASIDE THE ISSUE OF NON-APPLICAB LE OF PROVISIONS OF SECTION 40(A)(IA) BY VIRTUE OF SECOND PROVISO TO SA ID SECTION WE DEEM FIT AND PROPER THAT THIS ISSUE OF NATURE OF PAYMENT ALS O REQUIRES A PROPER VERIFICATION AND EXAMINATION AT THE LEVEL OF THE AO . ACCORDINGLY, WE SET ITA NO. 568/BANG/2014 PAGE 9 OF 9 ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFF ICER FOR PROPER EXAMINATION OF THE FACTS BY CONDUCTING A DUE ENQUIR Y AND THEN DECIDING THE SAME IN THE LIGHT OF VARIOUS DECISIONS RELIED U PON BY THE ASSESSEE. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 02 ND DAY OF JUNE, 2017. SD/- SD/- (S. JAYARAMAN) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 02 ND JUNE, 2017. / MS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.