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Income Tax Appellate Tribunal, KOLKATA BENCH ‘D’, KOLKATA
Before: Shri P.M. Jagtap, AM & Shri S.S. Viswanethra Ravi, JM
order
: April 04 , 2018 ORDER
Per S.S. Viswanethra Ravi, JM
This appeal is preferred by the assessee against the order dated 28.03.2013 passed by the Ld. CIT(Appeals) – XIV, Kolkata for Assessment Year 2006-07.
The learned AR submits that the A.O. made addition of Rs. 63,16,063/- for non deduction of TDS by invoking the provisions of Section 40(a)(ia) of the Act. The CIT(A) deleted the addition to an extent of Rs. 43,77,000/- holding that the provisions of Section 40(a)(ia) is not applicable as the said payment paid on account of rent to M/s. Kolkata Port Trust in view of the certificate issued u/s 197(1) of the Act by the Income Tax Department and confirmed the balance sheet of Rs. 19,39,066/-. The learned AR relied on the decision of Hon’ble High Court of Delhi in the case of Ansal Land Mark Township
Assessment Year: 2006-07 Ran Vijay Singh Pvt. Ltd. reported in 377 ITR 635 (Delhi) and argued to restore the matter to the file of the A.O. in respect of confirmation of addition to an extent of Rs. 19,39,066/- made by the CIT(A) to make necessary enquiries with the payee i.e. Tea Trading Corporation Ltd. to whom the assessee paid rent whether it is considered the payments received from the assessee to an extent of Rs. 19,39,066/- in their accounts. The learned DR relied on the order of A.O. and prays to dismiss the grounds of appeal raised by the assessee.
Heard rival submissions and perused the relevant material on record. As relied by the Ld.AR on the decision of the Hon’ble High Court of Delhi supra, while dealing with the case on hand, held and agreed with the reasoning and conclusion to the insertion of second proviso to section 40(a)(ia) of the Act by the Agra Bench of Tribunal. The relevant portion from paras 11 to 14 are reproduced here in below:
The first proviso to Section 201 (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 fulfilment 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.
Relevant to the case in hand, what is common to both the provisos to Section 40 (a) (ia) and Section 201 (1) of the Act is that the as long as the payee/resident (which in this case is APIL) has filed its return of income disclosing the payment received by and in which the income earned by it is Assessment Year: 2006-07 Ran Vijay Singh 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. ACIT (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 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) as they existed prior to insertion of second proviso thereto, went much beyond of 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 Assessment Year: 2006-07 Ran Vijay Singh 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 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.
The Court is of the view that the above reasoning of the Agra Bench of ITAT 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 mandatory requirement u/s 194I 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. The Kolkata Tribunal followed the same principle in the case of M/s. Tirupati Construction which was upheld by the Hon’ble High Court of Calcutta.
Since the Ld. AR did not dispute the applicability of provision u/s 194I of the Act before us, we are restraining from making any Assessment Year: 2006-07 Ran Vijay Singh finding whether the said payment on account of rent made to Tea Trading Corporation Ltd whether attracted u/s 194I of the Act. The contention of the Ld. AR before us was that the assessee shall produce all the details before A.O. showing that the payee offered the said receipt in its return of income and pleaded to restore the issue to the file of A.O. The Hon’ble High Court of Calcutta in the case of supra observed that the 2nd proviso to Section 40(a)(ia) of the Act is curative in nature and has retrospective effect. Respectfully following the decisions of the Hon’ble High Court of Calcutta and Delhi in the cases supra, we remand the matter to the file of the recipient and the assessee shall provide all the details concerning the payment of said recipient and A.O. shall examine whether the said recipient has included in its accounts and to pass order in accordance with law. The assessee is directed to cooperate in completing the assessment for early disposal and is at liberty to file evidences, if any. Ground Nos. 1 & 2 raised by the assessee in this regard are allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purpose.
Order Pronounced in the Open Court on 4th April, 2018.