E COMMERCE MAGNUM SOLUTIONS LTD,MUMBAI vs. DCIT CEN CIR 5(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order of the CIT(A)-53,Mumbai,dated 29.01.2016,the assessee has filed the present appeal. The assessee-company engaged in the business of software development,filed its return of income on 30.09.2012,declaring loss of Rs.7.35 lakhs. The AO completed the assessment u/s.143(3) of the Act on 26.03.2015 determining the income of the assessee at Rs.NIL. 2.The first ground of appeal is about disallowing of interest expenses of Rs.10,39,94,746/- u/s. 40(a) (ia)of the Act.At the time of assessment, it was observed that in the return filed u/s. 139 (1)of the Act, the assessee had claimed interest expenses of Rs.10,82,30,717/-which included interest of Rs.10,39,94,746/- payable to M/s.Hubtown Ltd.(HL),that it had not discharged its TDS liability on the said interest accrued which worked out to Rs.1, 03, 99, 475/-.Since the assessee had not paid the TDS on the aforesaid interest on or before the due date specified in section 139(1),the AO asked it to explain as to why the said interest of Rs.10,39,94,746/- should not be disallowed u/s.40(a)(ia) of the Act. It was submitted on behalf of the assessee that "Akruti Group" was passing through a severe liquidity crunch and so it could not make payment of the TDS within the due date of filing return u/s.139 of the Act.Relying upon the CBDT Instruction No.275/201/95-IT(B) dated 29.01.1997 and decision of Hon'ble Supreme Court in the case of Hindustan Coca- Cola Beverages Pvt. Ltd.(293 ITR 226),the assessee argued that the payer/deductor was not

3179/Mum/2016(12-13(E.Commerce) liable to pay the amount of short/non-deduction of tax u/s.201(1) in cases where the payee/deductee had already included the relevant income in his total income and paid tax thereon,that it had made payment of interest u/s.201(1) up to the date of return filed by the deductee,that there was no loss of revenue,that there ought to be no disallowance u/s.40(a) (ia)in its case.In this context,the AO held that the issue before the Hon'ble Supreme Court in the case of Hindustan Coca-Cola Beverages Pvt.Ltd.(supra)was not regarding the disallowance u/s.40(a)(ia) but it was regarding Section 201(1A),that Section 40(a)(ia) had been amended by the Finance Act, 2012 in as much as second proviso has been brought in the statute book w.e.f. 01.04.2013 i.e. A.Y. 2013-14,that the act of the assessee in claiming deduction of aforesaid interest in the return was not in consonance either with the Hon'ble Supreme Court ruling or with the statutory provisions,that the assessee had capitalised the amount of Rs.10,39, 94,746/- in the balance sheet under the head "inventories". As a result, the inventory shown by the assessee was reduced to Rs.61,25,84,025/- as against Rs.71,65, 78,771/-declared by the assessee and the claim made by the assessee was disallowed u/s.40(a)(ia)of the Act.

3.In the course of appellate proceedings,before the First Appellate Authority (FAA),the assessee submitted that it had accrued/paid interest of Rs.10,39,94,746/- to HL which was also its Holding Company,that the TDS liability on the interest accrued was Rs.1,03, 99, 475/-,that the assessee was passing through a very bad phase of liquidity crunch,that it could not make the payment of TDS within the due date of filing of return u/s.139 of the Act,that based on judicial pronouncements and the newly introduced provisions of the Act it reversed the TDS liability,while filing return of income u/s.139 of the Act on 30.09.2012,that reversal was made about the capitalised interest on the premise that HL to whom interest was paid had filed its return u/s.139 of the Act and had no tax liability,that HL had filed its revised return on 01.02. 2013 and had reversed its claim for credit of TDS that was receivable from the assessee,that the scheme of Section 40(a)(ia) of the Act was aimed at ensuring that expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure had remained untaxed due to tax withholding lapses by the assessee,that section 40(a)(ia)of the Act could not be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure, particularly when the recipient has taken into account income embedded in those payments and had paid due 2

3179/Mum/2016(12-13(E.Commerce) taxes thereon.It was further argued that the nature of the amendment was of a curative nature and accordingly the insertion of the second proviso must be given retrospect - tive effect from the point of time when the related legal provision was introduced (i.e.01.04.2005).The assessee has invited attention to CBDT Instruction No.275/201/95- IT(B),dated 29.01.1997,under which it is stated that the demand for non/short deduction of tax should not be enforced against the payer/deductor if he satisfies the Income-tax Authorities that such taxes have been paid by the payee/deductee. The assessee referred to the judicial decisions of Allied Motors (P.) Ltd (91 Taxman 205), Alom Extrusions Ltd.(185 Taxman 416),Ansal Landmark Tonshir Pvt. Ltd. (ITA Nos. 160 & 161of 2015), JH.Gotla (23 Taxmann 14). 3.1After considering the submissions and the assessment order,the FAA held that the assessee had borrowed funds from HL for the purpose of its ongoing project that during the year under consideration it had accrued/paid interest of Rs1039,94746/- to HI which was capitalised to the WIP account in the return of income filed by the assessee,that he was unable to accept the assessee's plea that since HL had filed its return and paid tax on the amount of interest received/accrued no disallowance would be called for,that the the provisions of Sections 40(a)(ia) and 201 of the Act would operate in two different fields,that the assessee had to deduct tax as required under the provisions of the Act,that the reliance of the assessee in this regard on the judicial decisions in the cases of Hindustan Coca Cola Beverage (P) Ltd.was of no use,that the assessee had relied heavily on the amendments made by the Finance Act, 2012 in Sections 201 and 40(a) (ia),that the amendment was not curative.Finally,he upheld the order of the AO.

4.Before us,the Authorised Representative(AR)argued that amendment to the provisio to section 40(a)(ia)was retrospective and curative,that the deductee had disclosed the entire amount in its revised return of income,that it had not claimed credit for TDS, that the assessee had also filed revised return based on the judgment of Hindustan Coca Cola Beverage (P) Ltd.,that the FAA was not justified in upholding the order of the AO.The Departmental Representative(DR)supported the order of the FAA and contended that the amendment was not retrospective,that the assessee itself had made a disallowance with regard to non deduction of tax in the original return.

3179/Mum/2016(12-13(E.Commerce)

5.We have heard the rival submissions and perused the material before us.We find that the assessee had, while finding its original return of income,had made a disallowance of Rs. 1.03 Crores,that it had not deducted tax at source as per the provisions of chapter XVII of the Act, that later on it withdrew the disallowance made under section 40(a)(ia) in the revised return, that it relied upon the case of Hindustan Coca-Cola Beverages Private Ltd.(293 ITR 226), that the AO and the FAA held that facts of Hindustan Coca-Cola Beverages Private Ltd.were distinguishable,that the provisions of section 40(a)(ia) were amended by the Finance act, 2012, that second proviso had been brought in statute book with effect from 01/04/2013, that the act of the assessee of deleting the addition under section 40(a)(ia) in the revised return for the assessment year 2012-13 was not in consonance with the judgment of the Hon’ble of Apex Court or the Act, that the assessee had claimed the reversal of TDS amount of Rs. 10,39,94,746/- in the balance sheet under the head inventories,that the assessee claimed that proviso to the section was applicable retrospectively. In our opinion, the core issue to be decided is as to whether the proviso is applicable from 1.4.2005 or from 01/04/2013.We find that the Hon’ble Delhi High Court has, in the case of Ansal Landmark Township Private Ltd. (377 ITR 635)dealt the issue at length and has held as under: “Section 40(a)(ia) of the Income-tax Act,1961,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 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 insertion of the second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from April 1, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. 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 . What is common to both provisos to sections 40(a)(ia) and 201(1) of the Act is that as long as the payee or resident 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.”

3179/Mum/2016(12-13(E.Commerce)

Considering the facts of the case and the above judgment,we hold that the proviso to the section is applicable from 01.04.2005,that the deductee had paid the taxes on the income that was subject of TDS provisions,that no action could be taken against the assessee making the payment to HL.The basic aim of chapter XVII is to ensure that no portion of income remains untaxed.To ensure it,TDS provisions were introduced-the person making payment was made responsible to deduct tax and pay it with the government account.But,the proviso to section 40(a)(ia)made it clear that if the deductee pays the taxes on the entire income liable for taxation then no action would be taken against the deductor.The proviso is quite logical.It ensures that whole of the taxable income is taxed.Once the specific purpose is served there is no justification to indulge in unnecessary litigation.It is not the case of the AO or the FAA that the deductee had not paid the taxes on the taxable income or that it was not paid within the prescribed time limit.Therefore,reversing the order of the FAA we decide the effective ground of appeal in favour of the assessee.