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Income Tax Appellate Tribunal, KOLKATA BENCH “B”, KOLKATA
Before: SH.P.M.JAGTAP & SH. S.S.VISWANETHRA RAVI
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER This appeal filed by the assessee against the order dated 04.11.2011 passed by Ld. CIT(A)-XXX, Kolkata for AY 2007-08.
The assessee raised three grounds of appeal amongst which the sole ground emanates in respect of additions made by invoking the provisions of section 40(a)(ia) of the Income Tax Act, 1961 (in short “Act”).
Ld.AR submits that, the AO on perusal of the trading and P&L A/c found that the assessee debited Labour charges to the extent of Rs.12,19,989/-, Rs. 2,70,062/- on account of payment of commission and an amount of Rs.35,400/- paid on account of interests to Samiran Sarkar (HUF). For non-deduction of TDS on all the above three transactions, AO disallowed an amount totalling to Rs.15,26,061/- vide his order dated 29.12.2009 passed u/s 143(3) of the Act. Further, Ld.AR submits that the issue may be remanded to the file of the AO for
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verification whether the said recipients disclosed the said amounts in their
accounts for taxation or not and placed reliance in the case of M/s Tirupati
Construction Pvt.Ltd. of Hon’ble High Court of Calcutta and in the case of CIT-1 vs
Ansal Land Mark Township (P.) Ltd. Reported in 377 ITR 635 (Del.) of Hon’ble High
Court of Delhi. Ld.AR further submits that regarding the applicability of second
proviso to section 40(a)(ia) of the Act, the Hon’ble High Court of Delhi held that the
assessee cannot be viewed as a person in default and further, insertion of second
proviso was intended to benefit the assessee. Ld.CIT DR did not controvert the
same.
We have heard the rival submissions and perused the material available on
record. As relied by Ld. AR on the decision of Hon’ble High Court Calcutta in the
case of Tirupati Construction P.Ltd. (supra) upheld the finding of Kolkata Tribunal in
restoring the impugned issue therein u/s 40(a)(ia) of the Act to the file of the AO
agreeing with the view taken by the Hon’ble High Court of Delhi in the case of
Ansal Land Mark Township (P.) Ltd. (supra) regarding the applicability of second
proviso of section 40(a)(ia) of the Act. The relevant portion of the decision of
Hon’ble High Court of Delhi is reproduced hereunder below:-
The first proviso to Section 210 (1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfillment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a) (ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies. 12. Relevant to the case in hand, what is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has filed its return of income Page | 2
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disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax.
Turning to the decision of the Agra Bench of ITA T in Rajiv Kumar Agarwal v. A CIT (supra ) , the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under:
"On a conceptual note, primary justification for such 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 the 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 actual loss of revenue. This disallowance does deincentivize not deducting 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 source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in .a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 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 expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty 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 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40 a)(ia1 as 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 these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time
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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 it could have been an "intended consequence" to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much 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 IT AT as regards the rationale behind the insertion 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, merits acceptance.
The Hon’ble High Court of Delhi supra found that there is a mandatory
requirement u/s. 201 to deduct at source, but, however, opined, the assessee cannot
be viewed as a person in default in view of the first proviso to section 201(1) of the Act
and further that the insertion of second proviso to section 40(a)(ia) of the Act was
intended to benefit the assessee and it shall be viewed as in the same manner as that
of first proviso to section 201(1) of the Act.
Keeping in view of the principle enunciated by the Hon’ble High Court of Delhi
supra, we are of the view that the assessee cannot be treated as a defaulter in view of
the first proviso to section 201(1) r/w second proviso to section 40(a)(ia) of the Act if the
concerned payee has taken into account the relevant sum for computing income in his
return of income furnished u/s. 139 and has paid tax due on the income declared in
such return. We, therefore, set aside the impugned order of CIT(A) confirming the
disallowance made by the AO u/s. 40(a)(ia) of the Act made on account of labour
charges, commission payment and interest payment to Samiran Sarkar (HUF) and
restore the matter to the file of the AO for deciding the same afresh in the light of first
proviso to section 201(1) r/w second proviso to section 40(a)(ia) of the Act. We direct
the assessee to provide the complete details of said three recipients regarding the issue
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on hand to the AO and has liberty to file evidences, if any, in support of its contentions. Ground nos. 1 to 3 raised by the assessee are allowed for the statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court 11.07.2018.
Sd/- Sd/- (P.M.JAGTAP) (S.S.VISWANETHRA RAVI) ACCOUNTANT MEMBER JUDICIAL MEMBER
Date:-11.07.2018 *Amit Kumar*