M/S. RATAN CONDUCTORS,JAIPUR vs. ACIT, CIRCLE-4, JAIPUR

1. Disallowance of Interest of Rs. 17,73,769/- on account of Non TDS:- That on the facts and in the circumstances of the case Ld. CIT(A) has grossly erred in law and facts in confirming disallowance of interest of Rs.17,73,769/- paid to M/s Barelays Investment & Loan (india) Ltd. (Rs. 298826/-) and M/s Future Capital (Rs. 1474943/-) on account of non deduction of TDS thereon by invoking provisions of section 40(a)(ia) of the IT Act 1961. (a) The assessee firm paid, interest of Rs. 2,98,826/- to NBFC. M/s Barelays Investment & Loan (India) Ltd. and Rs.14,74,943/- to M/s Future Capital another NBFC. The assessee firm raised loan 2 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT from said NBFCs and paid loan with interest monthly. The interest was paid along with EMI which paid in full and therefore no tax was deducted. The Ld. AO on this failure to deduct tax invoked provisions of section 40(a)(ia) and disallowed whole of interest paid to both parties amounting to Rs.17,73,769/-.

Interest paid to NBFC has been computed in there ITR :- That on the facts and in the circumstances of the case Ld. CIT(A) has grossly erred in law and facts in not considering the plea that the interest paid by the assessee have already been included in the total income while computing taxable income by M/s Barelays Investment & Loan (India) Ltd. and Rs.14,74,943/- to M/s Future Capital another NBFC.

Brief facts of the case are that the assessee is a firm and engaged in the business of trading and manufacturing of copper wires. It filed its 3 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT return of income on 24/9/2012 declaring total income of Rs. 23,70,240/-. The A.O. completed the assessment U/s 143(3) of the Income tax Act, 1961 (in short, the Act) determining total income of Rs. 41,44,010/- by disallowing Rs. 17,73,769/- U/s 40(a)(ia) of the Act.

Based upon the aforesaid broad dictum, judges and jurists have been drawn distinction between procedural and substantive provisions, Substantive provisions deal with rights and the same are fundamental, while procedural law is concerned with the legal process involving actions and remedies, Amendments to substantive law are treated as prospective, while amendments to procedural law are treated as prospective, while amendments to procedural law are treated as retrospective. This distinction itself is not free from difficulties as right to appeal has been held to be a substantive law, but law of limitation is regarded as procedural. There is an interplay and interconnect between what can be regarded as substantive and procedural law [see CITv. Shrawan Kumar Swarup & Sons [1998] 232 ITR 123 (All.)] 17. There are decisions, which hold that process of litigation or enforcement of law is procedural. Similarly, machinery provision for collection of tax, rather than tax itself is procedural. Read in this 7 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT context, it can be strongly argued that Section 40 (a) (ia) at least to the extent of the amendment is procedural as by enacting Section 40 (a) (ia) the Legislature did not want to impose a new tax but wanted to ensure collection of TDS and the amendments made streamline and remedy the anomalies noticed in the said procedure by allowing deduction in the year when the for filing of the return. Remedial statues are normally not retrospective, on the ground that they may affect vested rights. But these statues are construed liberally when justified and rule against retrospectively may be applied with less resistance [See Bharat Singh v. Management of New Delhi Tuberculosis Centre [1986] 2 SCC 614 and Workmen Firestone Tyre & Rubber Co. of India (P.) Ltd. v. Management AIR 1973 SC 1227 18. It is interesting to note that earlier English decisions have held that an enactment fixing a penalty or maximum penalty for offence is merely procedural for the purpose of determining retrospectively [See DPP v. Lamb [1941] 2 KB 89) and R.V. Oliver [1944] 29 Cr. App.

This view, however, has been criticized in Reherd Athlumney, in re [1898] 2 QB 547 on the ground that higher or greater punishment impair existing rights or obligation. "No rule construction is more firmly established than this; that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation otherwise than as regards matters of procedure, unless that effect cannot be avoided without doing violence to the language of their enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only." The word "fairly" used in the aforesaid quotation is important and relevant, but for applicant of another rule of interpretation G.P. Singh in "Principles of Statutory Interpretation", 13th Edition, 2012 at Page 538 under the sub-heading "Recent statements of the rule against Retrospectively" has greatly emphasized the principle of fairness and observed that classification of statute either substantive or procedural does not necessarily determine whether the enactment or amendment has retrospective operation, e.g. law of limitation in procedural but it application to past cause of action may result or reviving or extinguishing a right and such operation cannot be said to be procedural. Similarly, when requisites of an action under the 8 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT new statute, draws from a time incident to its passing, rule against retrospectively may not be applicable.

In the said text, reference has been made to formulation by Dixon, C.J. in Maxwell v. Murphy [1957] 96 CLR 261 holding :- "The general rule of the common law is that a statute changing the law ought not, unless the intention appears with reasonable certainty, to be understood as applying to facts or events that have already occurred in such a way as to confer or impose or otherwise affect the rights or liabilities which the law had defined be reference to the past events. But given the rights and liabilities fixed by reference to the past facts, matters or events, the law appointing or regulating the manner in which they are to be enforced or their enjoyment is to be secured by judicial remedy is not within the application of such a presumption".

Identically, in Secretary of State for Social Security v. Tunnicliffe [1991] 2 All ER 712 (CA), Stoughton, L.J. has expressed the said principle in the following words :- "The true principle is that Parliament is presumed not to have intended to alter the law applicable to past events and transactions in a manner which is unfair to those concerned in them unless a in a manner which is unfair to those concerned in them unless a contrary intention appears. It is not simply a question of classifying an enactment as retrospective or not retrospective. Rather it may well be a matter of degree - the greater the unfairness, the more it is to be expected that Parliament will make it clear if that is intended".

House of Lords in L' Office Cherifien des Phosphates v. Yamashita Shinnihon Steamship Co. Ltd. [1994] 1 All ER 20 has said the question of fairness has to be answered by taking into account various factors, viz., value of the rights which the statute affects; extent to which that value is diminished or extinguished by the suggested retrospective effect of the statute; unfairness of adversely affecting the rights; clarity of the language used by Parliament and the circumstances in which the legislation was created. These factors have to be weighed together to provide an answer whether the consequences of reading the statute with suggested degree of 9 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT retrospectively is unfair; that the words used by the Parliament could not have been intended to mean what they might appear to say. This principle was applied while interpreting a new provision in Arbitration Act in this case observing that the delay attributable to the claimant in pursuing a claim before enactment of the new provision, could be taken into consideration for dismissal.

Principle of matching which is disturbed by Section 40 (a) (ia) of the Act, may not materially be consequence to the Revenue when the tax rates are stable and uniform or in cases of big assesses having substantial turnover and equally huge expenses as they have necessary cushion to absorb the effect.

One important consideration in construing a machinery section is that is must be so construed so as to effectuate the liability imposed by the charging section and to make the machinery workable. However, when the machinery section results in unintended or harsh consequences which were not intended, the remedial or correction action taken is not to be disregarded but given due regard.

It is, in this context that we had in Rajender Kurnar's case (supra) observed as under : '22. Now, we refer to the amendments which have been made by the Finance Act, 2010 and the effect thereof. We have already quoted the decision of the Calcutta High Court in Virgin Creations (supra). The said decision refers to the earlier decision of the Supreme Court in the case of Allied Motors (P.) Ltd. (Supra) and commissioner of Income Tax v. Alom Extrusions Ltd, [2009] 319 ITR 306 (SC). In the case of Allied Motors (P.) Ltd. (supra), the Supreme Court was examining the first proviso to Section 43B and whether it was retrospective. Section 43B was inserted in the Act with effect from 1st April 1984 for curbing claims of taxpayers who did not discharge or pay statutory liabilities but claimed deductions on the ground that the statutory liability had accrued. Section 43B states that the statutory liability would be allowed as a deduction or as an expense in the year in which the payment was 11 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT made and would not be allowed, even in cases of mercantile system of accountancy, in the year of accrual. It was noticed that in some cases hardship would be caused to assesses, who paid the statutory dues within the prescribed period though the payments so made would not fall within the relevant previous year. Accordingly, a proviso was added by Finance Act, 1987 applicable with effect from 1st April, 1988. The proviso stipulated that when statutory dues covered by Section 43B were paid on or before the due date for furnishing of the return under Section 139 (1), the deduction / expenses, equal to the amount paid would be allowed. The Supreme Court notices the purpose behind the proviso and the remedial nature of the insertion made. Of course, the Supreme Court also referred to Explanation 2 which was inserted by Finance Act, 1989 which was made retrospective and was to take effect from 1st April, 1984. Highlighting the object behind Section 43B, it was observed that the proviso makes the provision makes the provision workable, gives it a reasonable interpretation it was elucidated. "12. In the case of Goodyear India Ltd. v. State of Haryana this Court said that the rule of reasonable construction must be applied while construing a statute. Literal construction should be avoided if it defeats the manifest object and purpose of the Act.

This view has been accepted by a number of High Courts. In the case of CIT v. Chandulal Venichand, the Gujarat High Court has held that the first proviso to Section 43-B is retrospective and sales tax for the last 12 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT quarter paid before the filing of the return for the assessment year is deductible. This decision deals with Assessment Year 1985-85. The Calcultta High Court in the case of CIT v. Sri Jagannath Steel Corpn. Has taken a similar view holding that the statutory liability for sales tax actually discharged after the expiry of the accounting year in compliance with the relevant statute is entitled to deduction under Section 43-B. The High Court has held the amendment to be certificatory and therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. Union of India. The special leave petition from this decision of the Patna High Court was dismissed. The view of the Delhi High Court, therefore, that the first proviso to Section 43-B will be available only prospectively does not appear to be correct. As observed by G.P. Singh in his Principles of Statutory Interpretation, 4th Edn. At p. 291: "It is well-settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended." In fact the amendment would not serve its object in such a situation unless it is construed as retrospective. The view, therefore, taken by the Delhi High Court cannot be sustained."

Section 43B deals with statutory dues and stipulates that the year in which the payment is made the same would be allowed as a deduction even if the assessee is following the mercantile system of accountancy. The proviso, however, stipulates that deduction would be allowed where the statutory dues covered by Section 43-B stand paid on or before the due date of filing of return of income. Section 40 (a) (ia) is applicable to cases where an assessee is required to deduct tax at source and fails to deduct or does not make payment of the TDS before the due date, in such cases, notwithstanding Sections 30 to 38 of the Act, deduction is to be allowed as an expenditure in the year of payment unless a case is covered under the exceptions carved out.

In Podar Cement (P.) Ltd. (Supra), the Supreme Court considered whether term "owner" would include unregistered owners who had paid sale consideration and were covered by Section 53A of the Transfer of Property Act. The contention of the assesses was that the amendments made to the definition of term "owner" by Finance Bill, 1987 should be given retrospective effect. It was held that the amendments were retrospective in nature as they rationalize and clear the existing ambiguities and doubts. Reference was made to Crawfore: "Statutory Construction" and "the principle of Declaratory Statutes", Francis Bennion: "Statutory Interpretation "Justice G.P. Singh's "Principles of Statutory Interpretation", it was observed that sometimes amendments are made to supply and obvious omission or to clear up doubts as to the meaning of the previous provision. The issue was accordingly decided holding that in such cases the amendments were retrospective though it was notices that as per Transfer of Property Act Registration Act, etc. a legal owner must have a registered document.

In view of the aforesaid discussion in paras 18, 19 and 20, it is apparent that the respondent assessee did not violate the unlamented section 49 (a) (ia) of the act. We have noted the ambiguity and referred their contention of Revenue and rejected the interpretation placed by them. The amended provisions are clear and free from any ambiguity and doubt. They will help curtail litigation. The amended provisions clearly support view taken in paragraphs 17 - 20 that the expression "said due date" used in clause A of proviso to unamended section refers to time specified in Section 139(1) of the Act. The amended Section 40 (a) (ia) expands and further liberalises the statute when it stipulates that deductions made in the first eleven months of the previous year but paid before the due date of filing of the return, will constitute sufficient compliance.

On the other hand, the ld DR has vehemently supported the orders of the authorities below.

We have considered the rival contentions and carefully perused the material placed on record. As per facts of the present case, the assessment was completed U/s 143(3) of the Act at Rs. 41,44,010/- by making disallowance of Rs. 17,73,769/- U/s 40(a)(ia) of the Act on the ground that the assessee had not deducted TDS on the payment of interest amount of Rs. 17,73,769/- paid to Barclays Investment & Loan (India) Ltd. and Future Capital. The total interest paid by the assessee to the said NBFC is Rs. 2,98,826/- to Barclays Investment & Loan (India)

We have also gone through the second proviso to Section 40(a)(ia) of the Act which was inserted w.e.f. 01/04/2013, however, the Coordinate Benches of ITAT Bangalore Bench in the case of Shri G. Shankar Vs ACIT in order dated 10/10/2014, DCIT Vs Ananda Marakala (2014) 150 ITD 323, Agra Bench of the Tribunal in the case of Rajeev Kumar Agarwal Vs ACIT (2010) 34 ITR (Trib) 479 and Delhi 18 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT Benches in the case of ITO Vs Dr. Jaideep Kumar Sharma (2014) 34 ITR (Trib) 565 has held that the amendment was made to remove the undue hardship and it was held that the said second proviso to Section 40(a)(ia) of the Act has retrospective effect. Therefore, keeping in view the settled legal proposition, we are also of the view that second proviso to Section 40(a)(ia) of the Act has retrospective effect.

In the present case, the disallowance U/s 40(a)(ia) of the Act was made on account of the fact that the assessee could not place on record any documentary evidence in order to demonstrate that the interest paid by the assessee has been shown by the NBFCs as income in the return of income, therefore, the claim was of the assessee was rejected. During the pendency of present appeal, in order to support his contention, the assessee has moved an application under Rule 29 of the ITAT Rules, 1963 for placing on record the documents by way of additional evidences vide application dated 01/4/2021 and the same is reproduced below:

That during the year under consideration above said firm repaid the same loan to above NBFC's in EMI with Interest without deducting tax as follows; (A) Barclays Investment & loan (India) Ltd. 2,98,826.12 (b) Future Capital (later known as Capital First Ltd. 14,74,943.63

The Ld. AO disallowed the aforementioned payment of Interest under section 40(a) (ia) of Income Tax Act, 1961 through their Assessment order dated 27.02.2015 by rejecting the submission of the assesse regarding NBFC must have been declared such interest income in their Income Tax Return along with the deposit of Tax.

That after the passing of the Assessment order the appellant obtained a Certificate from the Chartered Accountant dated 08/09/2015 in respect of Capital First Limited (one of Payees) to the effect that such interest as paid by the assesse to the above NBFC relating to the AY 2012-13 have already been included as income in his total taxable income followed by the Income tax return as submitted under section 139 after depositing due Income Tax, such Certificate is being enclosed (Page NO. 1-8).”

On the other hand, the ld DR contested the present application on the ground that the said application is not maintainable.

Since, we have allowed the application of assessee by admitting the documents as additional evidences, therefore, in these circumstances, it has become although necessary to restore the present appeal to the file of the A.O. to verify the certificate placed on record by the assessee of the C.A. dated 08/09/2015 in respect of Capital First Limited (one of payee) to demonstrate that such interest as paid by the assessee to the 21 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT above NBFC relating to the year under consideration have already been included as income in his total taxable income followed by the income tax return as submitted U/s 139 of the Act after depositing due income tax. However, the assessee has not placed on record the required certificates of the other payee i.e. Barclays Investment & Loan (India) Ltd.. Considering the totality of the facts and circumstances of the case, though we have restored the matter back to the file of the A.O. for reconsideration. Hence, we further direct the assessee to submit required documents in respect of both the NBFCs i.e. Barclays Investment & Loan (India) Ltd. and Future Capital relating to the year under consideration and further the A.O. is also directed that being the adjudicator as well as investigator, the A.O. should invoke necessary provisions of the Income Tax Act for calling the records from the concerned NBFCs i.e. i.e. Barclays Investment & Loan (India) Ltd. and Future Capital to ascertain that the amount paid by the assessee has been included as income in their total taxable income and if from the documents, the A.O. is satisfied regarding inclusion of the said amount paid by the assesse as income in the records of respected payees i.e. i.e. Barclays Investment & Loan (India) Ltd. and Future Capital then in that eventuality, the A.O. is directed to delete the additions. It is further clarified that since the present assessment year pertains to A.Y. 2012-13 and is quite old, therefore, the A.O. is further 22 ITA 1259/JP/2019_ Ratan Conductors Vs ACIT directed to decide this issue within a reasonable time frame by providing appropriate opportunity of hearing to the assessee. 10. In the result, this appeal of the assessee is allowed for statistical purposes only. Order pronounced in the open court on 02nd September, 2021.