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Income Tax Appellate Tribunal, DELHI BENCH ‘F’ NEW DELHI
order dated 18.2.2013 passed by the ld. CIT(A)-II, Faridabad.
The assessee RAASFA-JV (A) is a joint venture through a partnership agreement dated 17.01.2006 between R. Agarwal & Associate and SFA & Associates. The joint venture was to execute the work of Civil construction, erecting, commissioning of sewage treatment plant. Total work done during the year the year was declared at Rs.91,42,310/- against which a loss of Rs.2,87,110/- was declared. The case was selected for scrutiny through CASS. The Assessing Officer in his order u/s 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) made two Assessment year 2008-09 additions. Rs.10,39,891/- was added on account of cash credits and Rs.7,27,815 was disallowed u/s 40(a)(ia) of the Act and the assessment was finalised at a total income of Rs. 14,80,600/-.
The addition of Rs.10,38,991/- was made by the Assessing Officer as, in his opinion, the assessee had failed to furnish the copies of account of any of the creditors. The Assessing Officer was of the view that neither the identity nor the creditworthiness of the creditors could be established. During the proceedings, the Assessing Officer had also sought details of job work done, payments made to the concerned parties, TDS deducted on such payments and the date of depositing the TDS and on a consideration of the details filed, he was of the view that there were payments amounting to Rs. 7,27,815/- on which the requirements pertaining to TDS were not fulfilled and accordingly Rs. 7,27,815/- was disallowed as per section 40(a)(ia) of the Act.
3. Aggrieved, the assessee went into appeal wherein on the issue of addition of Rs.10,39,891, the Ld. CIT(A) gave a finding that the assessee was not able to provide confirmed copies of account of the creditors. The Ld. CIT(A) also gave a finding that there were a large number of petty creditors which were outstanding for as long a period as one year and for which the Assessment year 2008-09 assessee could not offer any explanation. The Ld. CIT(A) went on to confirm the addition. On the issue of TDS disallowance, the assessee was of the view that the provisions of section 40(a)(ia) were applicable only in respect of TDS defaults if the amount was payable. If the amount was actually paid and the tax was not deducted, provisions of section 40(a)(ia) will not be applicable.
However, the ld. CIT(A) did not concur with the assessee on this issue also and this ground was also dismissed.
In the appeal before us, the assessee has raised the following grounds of appeal:-
“Error of Jurisdiction 1. That on the facts and in the circumstances of the case and in law, learned CIT-A erred in not quashing impugned assessment initiated on basis of notice u/s 143(2) being issued by non jurisdictional officer as admitted in initial part of the impugned order and later on case was taken up by jurisdictional officer, which hits at the root of the matter, as it is must that right AO not only completes the proceedings but also right AO initiates the proceedings in valid manner.
Addition for trade outstanding u/s 68 o f the Act (Rs. 10,29,891)
2. That on the facts and in the circumstances of the case and in law, learned CIT-A erred in upholding the addition made by Ld AO u/s 68 of the Act being alleged unexplained cash credit in respect of genuine trade outstanding, duly accepted to be genuine in subsequent 3 Assessment year 2008-09 year scrutiny assessment.
Disallowance u/s 40(a)(ia) of the Act for Rs. 727,215 duly covered by retrospective amendment in 40(a)(ia)
That on the facts and in the circumstances of the case and in law, learned CIT-A erred in upholding the disallowance made by Ld AO u/s 40(a)(ia) of the Act in relation to direct business costs and otherwise also TDS stands deposited within extended period as provided by retrospective amendment in section 40(a)(ia) of the Act.
4. That on the facts and in the circumstances of the case and in law, learned CIT-A erred in upholding the disallowance made by Ld AO u/s 40(a)(ia) of the Act without looking at whether the payee have paid the taxes in their hands which will extinguish need for any further addition in hands of payer.”
At the outset, the Ld. AR submitted that ground No. 1 is not being pressed. Hence, this ground is dismissed as not pressed.
On ground No. 2, the Ld. AR submitted that during the year
under consideration, the work was being executed near Rohtak and the site was being managed by the site in charge. All the transactions were being routed through the site in charge by maintaining his imprest account. The transactions in the imprest account were related to petty purchases, payment of day to day site expenses, payment to labor contractors, job work payments, payment to building material suppliers, wages to site labor etc. He submitted that all the sundry creditors for petty 4 Assessment year 2008-09 purchases, payments to labour contractors etc. were under the direct control of site in charge and as far as the head office was concerned, the nodal person was the site in charge. The Ld. AR further submitted that while accounting the transactions of sundry creditors for petty material supply as well as sundry creditors for labour payments were grouped under the imprest account of site in charge Shri Ashish Gupta and the group credit balance was Rs.9,84,554.25. Ld. AR submitted a copy of group summary in support of his contention.
7. On the issue of disallowance u/s 40(a)(ia), the Ld. AR
submitted that the assessee had paid all its taxes and filed its return of income. He relied on the orders of the Agra Bench of the Tribunal in for the proposition that the second proviso to section 40(a)(ia) is declaratory and curative in nature and that it has retrospective effect upon 01.04.2005.
8. Ld. DR, in response, relied on and supported the orders of the authorities below.
We have heard the rival submissions and carefully perused
the relevant material placed on record. As far as the issue of verification of the sundry creditors is concerned, the Assessing
Officer is of the view that the assessee has tried to cover up Assessment year 2008-09 unexplainable credits by splitting them under 38 names under the imprest account. However, the Ld. AR has submitted that all the entries appearing therein can be explained and correlated by the assessee, if given a chance to do so. Therefore, in the interest of justice, we restore the matter to the file of the Assessing Officer for fresh adjudication. As far as the issue of disallowance u/s 40(a)(ia) of the Act is concerned, we find that the Agra Bench of the ITAT in the case of Rajiv Kumar Agrawal (supra) has held as follows:-
“6. However, the stand so taken by the special bench was disapproved by Hon’ble Delhi High Court in the case of CIT Vs Rajinder Kumar (362 ITR 241). While doing so, Their Lordships observed that, “The object of introduction of Section 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries……..Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable” (Emphasis by underlining supplied by us)”. Having noted the underlying objectives, Their Lordships also put in a word of caution by observing that, “the provision should be interpreted in a fair, just and equitable manner”. Their Lordships thus recognized the bigger picture of realization of legitimate tax dues, as object of Section 40(a)(ia), and the need of its fair, just and equitable interpretation. This approach is qualitatively different from perceiving the object of Section 40(a)(ia) as awarding of costs on the “assessees who fail to comply with the relevant provisions by considering overall objective of boosting TDS compliance”. Not only the conclusions arrived at by the special bench were disapproved but the very fundamental Assessment year 2008-09 assumption underlying its approach, i.e. on the issue of the object of Section 40(a)(ia), was rejected too. In any event, even going by Bharti Shipyard decision (supra), what we have to really examine is whether 2012 amendment, inserting second proviso to Section 40(a)(ia), deals with an “intended consequence” or with an “unintended consequence”.
When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after insertion of second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non deduction of tax at source by the assessee. In other words, deductibility of expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for expenditure is not allowed to the assessees, in cases where assessees had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient. That is the clearly discernable bigger picture, and, unmistakably, a very pragmatic and fair policy approach to the issue – howsoever belated the realization of unintended and undue hardships to the taxpayers may have been. It seems to proceed on the basis, and rightly so, that seeking tax deduction at source compliance is not an end in itself, so far as the scheme of this legal provision is concerned, but is only a mean of recovering due taxes on income embedded in the payments made by the assessee. That’s how, as we have seen a short while ago, Hon’ble Delhi High Court has visualized the scheme of things – as evident from Their Lordships’ reference to augmentation of recoveries in the context of “loss of revenue” and “depriving the Government of the tax due and payable”.
With the benefit of this guidance from Hon’ble Delhi High Court, in view of legislative amendments made from time to time, which throw light on what was actually sought to be achieved by this legal provision, and in the light of the above Assessment year 2008-09 analysis of the scheme of the law, we are of the considered view that section 40(a)(ia) cannot 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 recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. As a corollary to this proposition, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an “intended consequence” of Section 40(a)(ia). If it is not an intended consequence i.e. if it is an unintended consequence, even going by Bharti Shipyard decision (supra), “removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively”. Revenue, thus, does not derive any advantage from special bench decision in the case Bharti Shipyard (supra).
9. 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 8 Assessment year 2008-09 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 1stApril, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.
In view of the above discussions, we deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh adjudication in the light of our above observations and after carrying out necessary verifications regarding related 9 Assessment year 2008-09 payments having been taken into account by the recipients in computation of their income, regarding payment of taxes in respect of such income and regarding filing of the related income tax returns by the recipients. While giving effect to these directions, the Assessing Officer shall give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law and by way of a speaking order. We order so.”
10. Respectfully following the same, we set aside the issue to the file of the Assessing Officer for the limited purpose of verification.
The Assessing Officer shall verify whether the payee has filed his return of income and paid the taxes within stipulated time. If it has done so, no disallowance shall be made.
Hence, this ground is also allowed.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 16th of February, 2016.