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Before: Shri M. Balaganesh
This appeal of the assessee arises out of the order of the Learned CITA in Appeal No. 308/CIT(A)-XXXVI/HG/08-09 dated 04-02-2013 for the Asst Year 2006-07 passed against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
Shri. Somnath Ghosh, Advocate, the Learned AR argued on behalf of the assessee and Shri.D.Lahiri, JCIT, the Learned DR argued on behalf of the revenue.
The first issue to be decided in this appeal is whether in the facts and circumstances of the case the disallowance u/s 40(a)(ia) of the Act could be made towards labour charges of Rs. 18,72,638/-.
3.1. The brief facts of this issue is that the assessee made payments to Mr.Azim Ansari (Ansari Construction), a civil and labour contractor amounting to Rs. 18,72,638/-.
1 M/s. Tirupati Construction Summons was issued u/s 131 of the Act by the Learned AO and the same was duly served on Mr.Azim Ansari but no compliance was made by the said party till the completion of assessment. The Learned AO proceeded to disallow the said expenditure of Rs. 18,72,638/- towards labour charges for non deduction of tax at source and invoked the provisions of section 40(a)(ia) of the Act. On first appeal, who upheld the disallowance u/s 40(a)(ia) of the Act as the payment of labour wages to Mr.Azim Ansari is pursuant to a contract entered into with him which warrants deduction of tax at source. Aggrieved, the assessee is in appeal before us on the following grounds:- “
1. For that the order of the ld CIT(A) is arbitrary, illegal and bad in law.
2. For that the ld. CIT(A) erred in confirming the addition of Rs.18,72,638/- paid as labour wages when the provisions of sec. 40(a)(ia) were not applicable.
3. For that the ld. CIT(A) erred in confirming the addition of Rs.18,72,638/- when no amount remain payable and as such the ld. CIT(A) should have deleted the addition.”
3.2. The Learned AR pleaded that in view of the introduction of second proviso to section 40(a)(ia) read with first proviso to section 201(1) of the Act , the matter may be sent back to Learned AO for verification as to whether the payee had included the receipts from assessee in his returns and paid taxes accordingly. In response to this, the Learned DR vehemently supported the orders of the lower authorities.
3.3 We have heard the rival submissions and perused the materials available on record. We find from the facts that the matter needs to be reconsidered in the light of the second proviso to section 40(a)(ia) read with first proviso to section 201(1) of the Act as pleaded by the Learned AR. We also hold that the second proviso to section 40(a)(ia) though introduced by Finance Act, 2012, with effect from 1.4.2013 , has been held to be retrospective in operation by the recent decision of the Delhi High Court in the case of CIT vs Ansal Land Mark Township (P) Ltd reported in (2015) 61 taxmann.com 45 (Delhi) vide order dated 26.8.2015, wherein the question raised before their Lordships and their decision rendered thereon is as under:-
2 M/s. Tirupati Construction
Question: The issue that arose before the High Court was- “Whether the second proviso to Section 40(a)(ia)( inserted by the Finance Act, 2012), which states that TDS shall be deemed to be deducted and paid by a deductor if resident recipient has disclosed the amount in his return of income and paid tax thereon, is retrospective in nature or not ?”
Held : “Section 40(a)(ia) was introduced by the Finance (No.2) Act, 2004 to ensure that an expenditure should not be allowed as deduction in the hands of an assessee in a situation where income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. Hence, section 40(a)(ia) is not a penalty provision for tax withholding lapse but it is a provision introduced to compensate any loss to the revenue in cases where deductor hasn’t deducted TDS on amount paid to deductee and, in turn, deductee also hasn’t offered to tax income embedded in such amount. The penalty for tax withholding lapse per se is separately provided under section 271C, and, therefore, section 40(a)(ia) isn’t attracted to the same. Hence, an assessee could not be penalized under section 40(a)(ia) when there was no loss to revenue. The Agra Tribunal in the case of Rajiv Kumar Agarwal v. ACIT [2014] 45 taxmann. com 555 (Agra-Trib) had held that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and 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, even though the Finance Act, 2012 had not specifically stated that proviso is retrospective in nature. The High Court affirmed the ratio laid down by The Agra Tribunal and held that said proviso is declaratory and curative in nature and has retrospective effect from 1st April 2005”.
3.4. In view of the aforesaid decision, we deem it fit and appropriate to set aside this issue to the file of the Learned AO to relook this issue in the light of second proviso to section 40(a)(ia) read with first proviso to section 201(1) of the Act which has been held to be retrospective in operation and hence is applicable for Asst Year 2006-07 , being the assessment year under appeal before us, and decide the issue in accordance with law. Needless to mention that the assessee be given reasonable opportunity of 3 M/s. Tirupati Construction being heard. The assessee is granted liberty to adduce any other evidences or documents in support of its contentions on this issue. Accordingly, the grounds 1 & 2 raised by the assessee in this regard are allowed for statistical purposes.
3.5. The third ground raised by the assessee is covered against the assessee by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Crescent Export Syndicate reported in (2013) 33 taxmann.com 250 (Cal) wherein it was held that the provisions of section 40(a)(ia) could be invoked on amounts paid before the end of the previous year . Accordingly the ground no. 3 raised by the assessee is dismissed.
The last issue to be decided in this appeal is as to whether the addition u/s 40A(3) of the Act could be made in the sum of Rs. 38,000/- in the facts and circumstances of the case.
4.1. The brief facts of this issue is that the assessee made payments to certain parties for purchase of building materials totaling to Rs. 1,90,000/- in cash. According to assessee, though these payments were made by it in cash, no payment exceeding Rs. 20,000/- were made in a single day and accordingly no disallowance u/s 40A(3) would operate. The Learned AO disagreed with the contention of the assessee and proceeded to disallow 20% of Rs. 1,90,000/- amounting to Rs. 38,000/- u/s 40A(3) of the Act which was also upheld by the Learned CITA. Aggrieved the assessee is in appeal before us on the following ground:- “4. For that the ld. CIT(A) erred in confirming the addition of Rs.38000/- u/s. 40A(3) of the I.T Act.”
4.2. The Learned AR pleaded that the subject mentioned payments though made in cash to Sri Deba Prosad Chatterjee (Rs. 1,40,000/-) and Sri Bhattacharya Enterprises (Rs. 50,000/-) towards purchase of building materials, no single payment was made to 4 M/s. Tirupati Construction them on a single day exceeding Rs. 20,000/-. The amendment in section 40A(3) of the Act stating that even if aggregate payments to a single party exceeds Rs 20,000/- then provisions of sectin 40A(3) would be attracted is effective only from Asst Year 2009-10 onwards and not earlier. Accordingly he prayed for deletion of the said addition. In response to this, the Learned DR vehemently supported the orders of the lower authorities.
4.3 We have heard the rival submissions and perused the materials available on record. We find that there is an amendment brought out in section 40A(3) of the Act with effect from Asst Year 2009-10 wherein even the aggregate of payments to a single party in a single day exceeding Rs 20,000/- has been brought under the ambit of disallowance if payment is made otherwise than by an account payee cheque or account payee bank draft. We rely on the decision of Hon’ble Orissa High Court rendered in the case of CIT vs Aloo Supply Co reported in (1980) 121 ITR 680 (Ori) and the decision of this Tribunal rendered in the case of Shanti Ram Mehata vs ACIT reported in (2009) 119 ITD 62 (KOL)(TM ) in this regard. In both the decisions, it has been held that the disallowance contemplated u/s 40A(3) of the Act is applicable for each payment and not for the aggregate of the various payments made to the same party during one day. We also hold that the said amendment is not retrospective in operation. Hence the addition made in the sum of Rs. 38,000/- u/s 40A(3) of the Act is directed to be deleted. Accordingly ground no. 4 raised by the assessee is allowed.
In the result, the appeal of the assessee is partly allowed.
THIS ORDER IS PRONOUNCED IN OPEN COURT ON 15 / 10/2015