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Income Tax Appellate Tribunal, : ‘A’ BENCH, KOLKATA
Before: Shri J. Sudhakar Reddy & Shri S.S.Viswanethra Ravi
This appeal by the assessee is against the order dated 20-01- 2016 of the CIT-(A)-7, Kolkata for the A.Y 2007-08, wherein he confirmed the disallowance of Rs.36,00,000/- made by the AO u/s. 40(a)(ia) of the Act.
Therefore, the only issue is to be decided as to whether the CIT-A was justified in confirming the impugned addition made u/s. 40(a)(ia) of the Act in the facts and circumstances of the case.
The ld.AR submits that the AO disallowed an amount of Rs.36,00,000/- under the head ‘rental expenses’ for non deduction of TDS required u/s. 194I r.w.s 40(a)(ia) of the Act and added the same to the total income of the assessee. The CIT-A confirmed the said addition made by the AO.
Before us, the ld.AR submits that the issue in hand is covered by the decision of the Hon’ble High Court of Calcutta in the case of Pr. CIT Vs. M/s. Tirupati Construction, ITAT No. 287 of 2016 in G.A No. 2146 of 2016. The Hon’ble High Court of Calcutta in the case of supra dismissed the revenue’s appeal by following the decision of Hon’ble High Court of Delhi in the case of CIT-1 vs. Ansal Land Mark Township(P) Ltd reported in 377 ITR 635 (Del), confirmed the finding of the Kolkata Tribunal in restoring the impugned issue u/s. 40(a)(ia) of the Act to the file of AO in the light of applicability of second proviso to section 40(a)(ia) of the Act. The ld.AR further submits that the issue of applicability of second proviso was argued before the CIT-A by placing reliance on the decision of the Hon’ble High Court of Delhi in the case of Ansal Land Mark Township(P) Ltd supra. But, however, the CIT-A preferred to follow the decision of the Hon’ble High Court of Kerala in the case of Thomas George Moothoot reported in 63 Taxmann.com 99 and held that the amendment to Finance Act 2012 in respect of section 40(a)(ia) is effective from 01-04-2013, but not from retrospective effect. The ld.AR argued by placing reliance on the decision of Hon’ble High Court of Calcutta in the case of Pr. CIT Vs. M/s. Tirupati Construction to restore the matter to the file of AO to make necessary enquiries with the payee to whom the assessee paid the execution charges, i.e impugned amount whether the same included in its accounts as income.
The ld.DR, on the other hand, submits that the AO made addition on account of violation of non-deduction of TDS u/s. 194 I of the Act r.w.s 40(a)(ia) of the Act. But, however, the assessee made another set of arguments before the CIT-A that the addition cannot be made u/s. 194I of the Act and it should be under section 194C of the Act. Further, the assessee before the CIT-A submitted that under the head on which the impugned addition was made under the nature of rent paid. But, it is a payment in the nature of contract. To this effect, the ld.AR replied that the assessee being an individual is not liable to deduct TDS u/s. 194C of the Act as there was no application of law during the A.Y under consideration. The ld. DR relied on the order of AO and prayed 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, had an occasion to read down the decision of Agra Bench of Tribunal in ITA 337/Agra/2013 as it was relied on, 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 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.
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 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 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 supra found that there is a mandatory requirement u/s.194 I 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.
8. 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 finding whether the said payment made to M/s. B.K Leather Industries is whether attracted u/s. 194I or 194C of the Act. The assessee agitated before the CIT-A that the payee, M/s. B.K Leather Industries holding PAN No. AAEFB9655L as confirmed the inclusion of payment received from the assessee as its income and pleaded to restore the issue to the file of AO. 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 Judgment of the Hon’ble High Court of Calcutta and Delhi in the cases supra, we remand the matter to the file of AO for examination and verification of the required details of the recipient and the assessee shall provide all the details of said recipient and AO shall examine whether the said recipient has included payments received from the assessee in its accounts and to pass order in accordance with law. The assessee is directed to cooperate in completing the assessment for early disposal. Grounds 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 13-12-2017