M/S. CALCUTTA EXPORT CO.,KOLKATA vs. JCIT, R-34, KOLKATA, KOLKATA

ORDER Shri S.S.Viswanethra Ravi, JM:

This appeal by the assessee is against the order dt. 7th April, 2016 passed by the Commissioner of Income Tax (Appeals)-10, Kolkata for the A.Y 2012-13.

On the other hand, the ld. DR submits that the insertion of 2nd 4. proviso to section 40(a)(ia) was considered by the CIT-A, but, for not giving any details in respect of the recipients before him, he dismissed the ground of appeal. In view of this, he prayed to dismiss the grounds of appeal of the assessee by confirming the order of the CIT-A.

5. Heard rival submissions and perused the record. We find that the AO disallowed an amount of Rs.8,77,089/- for non deduction of TDS at source u/s. 194C of the Act from the 5 parties. According to AO, the assessee has not offered any reply and explanation to the objections raised by the AO in his order. Thereby, he added the impugned amount and added the same to the total income of the assessee. Before the CIT-A, we find that the effect of 2nd proviso to section 40(a)(ia) r.w.s 194C of the Act was raised. But, however, the assessee has not produced any document or evidence to that effect. Thus, the CIT-A dismissed the grounds appeal of the assessee. In this regard, we may refer to the followings :- “8. Heard rival submissions and perused the relevant material on record. As relied by the Ld.AR on the case law of the Hon’ble High Court of Delhi supra, while dealing with the case on hand, had an occasion to read down the decision of Agra Bench of Tribunal in ITA 337/Agra/2013 as it was relied on, and held and agreed with the reasoning and conclusion to the insertion of second proviso to section 40(a)(ia) of the Act by the legislature. The relevant portion from paras 11 to 14 are reproduced here in below: 11. 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 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. 2 ITA No. 1355/Kol/2016

"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 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 assessee agitated that the resident in terms of 2nd proviso also 6. paid tax on receipt of income and pleaded to restore the issue to the file of AO. The Tribunal observed that the 2nd proviso to Section 40(a)(ia) of the is curative and takes care of unintended consequence and restored the file to the AO. We are of the view that the facts therein are similar to 3 ITA No. 1355/Kol/2016 the facts of the case on hand. Respectfully following the Judgment of the Hon’ble High Court of Delhi supra and order of Coordinate Bench of Kolkata Tribunal, we remand the matter to the file of AO for examination and for verification of the required details of the respective recipients and direct the assessee to cooperate in completing the assessment. Preliminary ground raised by the assessee is allowed for statistical purposes.