M/S KANADE AQUA FARMS PVT LTD,MUMBAI vs. ITO 6 (3)(3), MUMBAI

During the course of assessment proceedings, it was observed by the A.O that though the assessee had made a substantial investment of Rs. 8,52,57,900/- in equity shares of M/s Kanade Anand Udyog Pvt. Ltd., however, it had not offered for disallowance any part of the expenditure incurred for earning of the exempt dividend income u/s 14A of the Act. Backed by his aforesaid observation, the A.O worked out the disallowance u/s 14A as per the methodology provided in Rule 8D at an amount of Rs. 56,68,365/-, as under:-

Aggrieved, the assessee carried the matter in appeal before the CIT(A). In so far the disallowance u/s 40(a)(ia) of Rs. 1,13,218/- was concerned, the CIT(A) concurred with the view taken by the A.O and upheld the said disallowance. Also, the CIT(A) confirmed the disallowance made by the A.O under Sec. 14A of the Act.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. At the very outset, it was submitted by the Ld. Authorized Representative (for short 'AR') for the assessee that as the assessee had not earned any exempt income during the year under consideration, therefore, no disallowance u/s 14A could have been made in its hands. In so far the disallowance made by the AO u/s 40(a)(ia) of Rs. 1,13,218/- was concerned, it was submitted by the Ld. AR that pursuant to the amendment made available on the statute vide the Finance Act, 2014 w.e.f. 01.04.2015, the disallowance under the aforesaid statutory provision was liable to be restricted only to the extent of 30% of the amount as regards which the assessee had defaulted qua deduction of tax at source under Chapter XVII-B of the Act. It was submitted by the Ld. AR that as the aforesaid amendment was declaratory and curative in nature, therefore, it was applicable to the case of the assessee for the year under consideration i.e. A.Y 2014-15. In support of her aforesaid contention the Ld. A.R had relied on the order of the ITAT, Mumbai in the case of Neena Kaul Vs. ACIT 24(3), Mumbai, dated 21.05.2019 and that of ITAT, Delhi in the case of Muradul Haque Vs. ITO, ITA No. 114(Delhi) of 2019, dated 18.06.2020.

Per contra, the Ld. Departmental Representative (for short 'DR') admitted that the assessee company during the year under consideration had not earned any exempt income. However, the Ld. D.R supported the orders of the lower authorities qua the disallowance that was made/sustained by them u/s 14A r.w Rule 8D. As regards, the disallowance made by the A.O u/s 40(a)(ia) of the Act, it was submitted by the Ld. D.R that as the amendment qua the quantum of disallowance under the said statutory provision was made available on the statute vide Finance (No.2) Act, 2014 w.e.f. 01.04.2015, therefore, the same was applicable only w.e.f. AY 2015-16 and thus would not take within its realm the case of the assessee for the year under consideration i.e A.Y 2014-15.

We have heard the Ld. Authorized Representative for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. A.R to drive home her aforesaid contentions. In so far, the claim of the Ld. A.R that as the assessee had not earned any exempt income during the year under consideration, therefore, no disallowance could have been made u/s 14A of the Act is concerned, we find substantial force in the same. As stated by the Ld. A.R, and rightly so, in the absence of any exempt income having been earned by the assessee during the year under consideration no disallowance u/s 14A could have been made in its hands. Our aforesaid view that the disallowance u/s 14A cannot exceed the amount of the exempt income received by the assessee during the year is fortified by the following judicial pronouncements:

Therefore, the assesses were, after the said amendment in 2008, classified in two categories namely: one, those who have deducted that tax during the last month of the previous year and two, those who have deducted the tax in the remaining eleven months of the previous year. It was provided that in the case of assessees falling under the first category, no disallowance under section 40(a)(ia) of the Income-tax Act shall be made if the tax deducted by them during the last month of the previous year has been paid on or before the last day of filing of return in accordance with the provisions of section 139(1) of the Income-tax Act for the said previous year. In case, 9 M/s Kanade Aqua Farms Pvt. Ltd. Vs. ITO 6(3)(3) the assessees are falling under the second category, no disallowance under section 40(a)(ia) of Income-tax Act where the tax was deducted before the last month of the previous year and the same was credited to the Government before the expiry of the previous year. The net effect is that the assessee could not claim deduction for the TDS amount in the previous year in which the tax was deducted and the benefit of such deductions can be claimed in the next year only.

The amendment though has addressed the concerns of the assesses falling in the first category but with regard to the case falling in the second category, it was still resulting into unintended consequences and causing grave and genuine hardships to the assesses who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns under section 139(1) of the Income-tax Act. 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 assessment year.

In order to remedy this position and to remove hardships which were being caused to the assessees belonging to such second category, amendments have been made in the provisions of section 40(a) (ia) by the Finance Act, 2010. *** *** *** 24. Thus, the Finance Act, 2010 further relaxed the rigors of section 40(a)(ia) of the Income-tax Act to 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. However, the Memorandum Explaining the Provisions of the Finance Bill, 2010 expressly mentioned as follows: "This amendment is proposed to take effect retrospectively from April 1, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years."

The controversy surrounding the above amendment was 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) or to be applicable from the date of enforcement. *** *** *** 27. 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 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 the 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 out 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 is required to be given retrospective operation, i.e., from the date of insertion of the said provision." 19.5. A bare look at the extraction aforesaid makes it clear that what this Court has held as regards "retrospective operation" is that the amendment of the year 2010, being curative in nature, would be applicable from the date of insertion of the provision in question i.e., sub-clause (ia) of Section 40(a) of the Act. This being the position, it is difficult to find any substance in the argument that the principles adopted by this Court in the case of Calcutta Export Company (supra) dealing with curative amendment, relating more to the procedural aspects concerning deposit of the deducted TDS, be applied to the amendment of the substantive provision by the Finance (No.2) Act, 2014. 19.6. We may in the passing observe that the assessee-appellant was either labouring under the mistaken impression that he was not required to deduct TDS or under the mistaken belief that the methodology of splitting a single payment into parts below Rs. 20,000/- would provide him escape from the rigour of the provisions of the Act providing for disallowance. In either event, the appellant had not been a bonafide assessee who had made the deduction and deposited it subsequently. Obviously, the appellant could not have derived the benefits that were otherwise available by the curative amendments of 2008 and 2010. Having defaulted at every stage, the attempt on the part of assessee-appellant to seek some succor in the amendment of Section 40(a)(ia) of the Act by the Finance (No.2) Act, 2014 could only be rejected as entirely baseless, rather preposterous. 19.7. Hence, Question No.3 is also answered in the negative, i.e., against the assessee-appellant and in favour of the revenue. Question No. 4 20. Before finally answering the root question in the matter as to whether the payments in question have rightly been disallowed from deduction, we may usefully summarise the answers to Question Nos. 1 to 3 that the provisions of Section 194C were indeed applicable and the assessee-appellant was under obligation to deduct the tax at source in relation to the payments made by it for hiring the vehicles for the purpose of its business of transportation of goods; that disallowance under Section 40(a)(ia) of the Act is not limited only to the amount outstanding and this provision equally applies in relation to the expenses that had already been incurred 11 M/s Kanade Aqua Farms Pvt. Ltd. Vs. ITO 6(3)(3) and paid by the assessee; that disallowance under Section 40(a)(ia) of the Act of 1961 as introduced by the Finance (No.2) Act, 2004 with effect from 01.04.2005 is applicable to the case at hand relating to the assessment year 2005-2006; and that the benefit of amendment made in the year 2014 to the provision in question is not available to the appellant in the present case. These answers practically conclude the matter but we have formulated Question No. 4 essentially to deal with the last limb of submissions regarding the prejudice likely to be suffered by the appellant.” Accordingly, in light of the aforesaid judgment of the Hon‟ble Apex Court, we herein reject the claim of the ld. A.R that the amendment to Sec. 40(a)(ia) of the Act that was made available on the statute vide the Finance (No.2) Act, 2014, w.e.f 01.04.2015 being retrospective would thus be applicable to the case of the assessee before us for A.Y 2014-15. In so far the orders of the coordinate benches of the Tribunal that have been relied upon by the ld. A.R are concerned, we find that the same were passed prior to the aforesaid binding judgment of the Hon‟ble Apex Court. Be that as it may, in light of the judgment of the Hon‟ble Supreme Court in the aforesaid case we herein reject the claim of the ld. A.R that the amendment to Sec. 40(a)(ia) that was made available on the statute vide the Finance (No.2) Act, 2014, w.e.f 01.04.2015 being retrospective would thus be applicable to the case of the present assessee i.e for A.Y 2014-15. Accordingly, the Ground of appeal No. 1 is dismissed.

Resultantly, the appeal filed by the assessee is partly allowed in terms of our aforesaid observations.