DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE vs. M/S JANANI TOURS & RESORTS PVT LTD , BANGALORE

This appeal by the revenue is against the order dated 28.12.2016 of the CIT(Appeals)-4, Bangalore relating to assessment year 2005-06.

The issue that arises for consideration in this appeal is as to, whether the CIT(Appeals) was justified in deleting the addition made by the AO of a sum of Rs.6,78,28,697 by invoking the provisions of section 40(a)(ia) of the Income-Tax Act, 1961 [“the Act”].

The assessee is a tourist taxi operator. The Hon’ble High Court of Karnataka in by order dated 19.01.2016 had remitted the question of disallowance u/s. 40(a)(ia) of the Act for fresh consideration, after verifying the date of payment of TDS by the assessee. On such remand, the AO sustained the addition originally made to the extent of Rs.6,00,93,026 for the following reasons:-

The legislative history of the provisions of Sec.40(a)(ia) of the Act is as follows: Section 40 has certain clauses providing for the amounts which are not deductible. Sub-clause (ia) of clause (a) of section 40 was inserted by the Finance (No.2) Act, 2004 with effect from 1st April, 2005 reading as under:-

Thereafter the Finance Act, 2008 made amendment to clause (a) in sub-clause (ia) in section 40 with retrospective effect from 1st April, 2005. The section as amended by the Finance Act, 2008 read as under:-

The Finance Act, 2008 brought out amendment to section 40(a)(ia) w.e.f. 1.4.2005 by relaxing earlier position to some 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 deductible 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 amount on which tax was deductible during last month of the previous year, that is March 2005, but was paid before 31st October, 2005, being the due date u/s 139(1), the deductibility of the amount was kept intact. The second 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 eleven months of the previous year, that is, up to February, 2005, the disallowance was to be made if the assessee failed to pay it before 31st March, 2005.

The AO allowed deduction of the sum of Rs.77,35,670 which was expenditure incurred in the month of March, 2005 because the tax deducted was paid on or before 30.10.05, the last date for filing return of income u/s.139(1) of the Act for AY 2005-06 as it fell in the first category referred to in earlier paragraph. In respect of the remaining sum of Rs.6,00,93026, the expenditure was incurred in the first eleven months of the previous year i.e., from 1.4.2004 upto 28.2.2005 and therefore the AO disallowed the claim for deduction even though the TDS in respect of these expenditure was paid or before 30.10.2005 because the case fell within the second category referred to in earlier paragraph.

Then came the amendment to section 40(a)(ia) by the Finance Act, 2010 with retrospective effect from 1st 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 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 for carrying out any work), on which tax is deductible at source under Chapter

From the above provision as amended by the Finance Act, 2010 with retrospective effect from 1st April, 2010, it can be seen that the only difference which this amendment has made is dispensing 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 deductible 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 case 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 the close of the previous year up to 3 1st March of the previous year as a requirement for grant 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 sub-section (1) of section 139 of the Act. The effect of this amendment is that now the assessee deducting tax either in the last month of the previous year or first eleven 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 is 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.

The question as to whether the amendment to the provisions of Sec.40(a)(ia) of the Act by the Finance Act, 2010 whereby it was laid down that if the tax deducted at source is paid on or before the due date for filing the return of income u/s.139(1) of the Act, then no disallowance can be made u/s.40(a)(ia) of the Act, is retrospective in operation and operates from 1.4.2005 though it is said to be retrospective only from 1.4.2010.

Before the CIT(Appeals), the assessee submitted that if the TDS has been remitted on or before the due date of filing of return of income, then no disallowance u/s. 40(a)(ia) can be made and therefore the entire addition of Rs.6,78,28,696 made by the AO should be deleted. The assessee relied on the decision of the Hon’ble High Court of Karnataka in CIT v. Sri Santosh Kumar Shetty in order dated July, 2014. The Hon’ble High Court took the view that amendment to provisions of section 40(a)(ia) by the Finance Act, 2010 w.e.f. 1.4.2010 was retrospective in its operation and was applicable from 1.4.2005.

The CIT(Appeals) accepted the contention of the assessee and found that the entire TDS had been paid on or before the due date of filing of return of income and therefore the entire disallowance u/s. 40(a)(ia) of the Act should be deleted. In doing so, the CIT(Appeals) followed the order of Hon’ble High Court of Karnataka in the case of Sri Santosh Kumar Shetty (supra).

Aggrieved by the order of CIT(Appeals), the revenue has preferred the present appeal before the Tribunal. The main grievance of the revenue is projected in the following revised grounds of appeal before the Tribunal:-

We have heard the rival submissions. It is clear from the grounds of appeal raised by the department that the decision of Hon’ble High Court of Karnataka in the case of Sri Santosh Kumar Shetty (supra) is in favour of the assessee and in the light of the law laid down therein, disallowance u/s. 40(a)(ia) of the Act cannot be sustained. The grievance of the revenue is that the decision of the Hon’ble High Court of Karnataka has not become final and a SLP has been filed by the department before the Hon’ble Supreme Court. In our view, merely because an appeal has been preferred against the judgment of the High Court, it cannot be the basis not to follow the binding decision of the Hon’ble High Court. In the given facts and circumstances, we find no merit in this appeal by the revenue. Consequently, the appeal by the revenue is dismissed.

In the result appeal by the Revenue is dismissed.