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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’: NEW DELHI
Before: SHRI G.D. AGRAWAL, & SHRI CHANDRA MOHAN GARG
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER This appeal filed by the assessee is directed against the order of the CIT(A)-2, Faridabad dated 19/12/2013 for A.Y 2009-10 in appeal No. 391/2011-12.
The assessee has raised the following grounds of appeal:
“1. That having regard to the facts and circumstances of the case, the ld. CIT(A) has erred in law and on the facts in upholding the action of the AO in disallowing a sum of Rs. 2,08,953/- being interest u/s 40a(ia) of the Act.
2. That having regard to the facts and circumstances of the case, the ld. CIT(A) has erred in law and on the facts in confirming the action of the AO in passing the impugned assessment order without giving adequate opportunity of being heard.
3. That in any case and in any view of the matter action of the ld. CIT(A) has erred in law and on the facts in making the impugned addition is bad in law and against the facts and circumstances of the case.”
Briefly stated, the facts of the case are that during the course of assessment proceedings, it came to the notice of the AO that the assessee has debited an amount of Rs. 2,08,953/- on account of interest payment made to Kotak Mahindra. Further, the ARs of the assessee was asked to ascertain whether any TDS has been deducted and deposited to the Central Government Account. The ARs of the assessee has submitted the ledger account of the interest. However, it is seen that no TDS has been deducted and deposited to the Central Government Account as the loan sanctioning department was not a nationalised bank or a central government body etc where deduction of TDS is not required. Thus, section 40(a)(ia) of the Act has been violated by the assessee company. Hence an amount of Rs. 2,08,953/- is disallowed and added back to the income of the assessee. Aggrieved, the assessee went in appeal before the ld. CIT(A) which was also dismissed and now the empty handed assessee is before this Tribunal in this second appeal with the grounds reproduced hereinabove.
After considering the submissions of the rival representatives, the ld. CIT(A) at para 6.7 of his order held as under:
“6.7 A careful consideration of various judicial rulings relied upon by the appellant alongwith other relevant judicial pronouncements make it abundantly clear that unless otherwise specified, a provision of the Act is said to be prospective.
6.8 Since the relevant amendment to section 40a(ia) was introduced by the Finance Act, 2012 w.e.f 1.4.2013 it is held that the amended provision is not applicable to the facts of the case, since it is for the A.Y 2009-10. As per the provisions of section 40a(ia) which were applicable to the A.Y 2009-10 the interest payment in respect of which tax was not deducted at source is to be disallowed. Hence, the AO rightly made the Rs. 2,08,953/- u/s 40a(ia) of the Act. Ground no. 5 of the appeal is thus dismissed.”
The ld. AR submitted that the assessee had submitted all details of expenses at the time of appellate proceedings which were submitted before the AO and explained how these expenses were incurred in relation to its business. Per contra the ld. DR supported the orders of the authorities below.
We have heard the arguments of both the sides and carefully perused the relevant material placed on record before us. We find that the decision of the Hon'ble High Court at New Delhi in the case of CIT Vs. Ansal Land Mark Township [P] Ltd in & 161/2015 vide order dated 26th August 2015 is relevant to the case in hand. Paras 13 to 16 of this order is reproduced hereinbelow:
“13. Turning to the decision of the Agra Bench of ITAT 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 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)(ia), 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 as retrospective 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.
In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in (Rajiv Kumar Agarwal v. ACIT).
No substantial question of law arises in the facts and circumstances of the present case. The appeal is dismissed.
In view of the dicta valid down by the Hon'ble Jurisdictional High Court [supra] the insertion of second proviso to section 40(a)(ia) of the Act is declaratory and curative in nature and it has retrospective effect from 1.4.2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act [No. 2] 2004. From the operative para 6.7 of the first appellate order, it is apparent that the ld. CIT(A) upheld the disallowance by holding that the proviso, inserted by Finance Act 2012, w.e.f 1.4.2014 is not applicable to A.Y 7 2009-10. But in view of proposition rendered by the Hon'ble High Court of Delhi, it is settled that the proviso to section 40(a)(ia) of the Act being declaratory and curative is applicable from 1.4.2005 which is the date of insertion of sub-section (ia) of section 40(A) of the Act. Hence, view taken by the AO for making disallowance and basis on which the same was upheld by the ld. CIT(A) is not sustainable in view of the dicta of Hon'ble Jurisdictional High Court. Thus, we are inclined to hold that the benefit of the proviso to section 40(a)(ia) of the Act is available for the assessee for A.Y 2009-10 as the AO could not controvert the fact supported by the certificate of the payee M/s Kotak Mahindra Pvt. Ltd stating that the payee has enclosed the said amount in its income in the return filed u/s 139 of the Act and has paid tax due on its income declared in the return. In this factual matrix the proviso to section 40(a)(ia) of the Act having retrospective effect from 1.4.2005 come into play to rescue the defaulter assessee and thus disallowance made by the AO and upheld by the ld. CIT(A) is demolished. Accordingly, Ground No. 1 to 3 of the assessee are allowed.
In the result, the appeal of the assessee stands allowed.
The order is pronounced in the open court on 19.02.2016.