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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
अपीलधथी की ओर से/ Appellant by : Smt.A.Aruna प्रत्यधथी की ओर से / Respondent by : Shri M.N.Murthy Naik, CIT(DR) सुनवधई की तधरीख / Date of Hearing 29.08.2023 : घोर्णध की तधरीख/Date of Pronouncement : 27.09.2023 आदेश /O R D E R
Per Shri Duvvuru RL Reddy, Judicial Member :
1. This appeal is filed by the assessee against the order of Commissioner of Income Tax (Appeals) [CIT(A)], Visakhapatnam-3 vide DIN & Order No.ITBA/APL/S/250/2022-23/1048638380(1) dated 11.01.2023, arising out of assessment order passed u/s 143(1) of the Income Tax Act, 1961 (in short ‘Act’) dated 21.02.2020 for the Assessment Year (A.Y.) 2018-19.
Hero Wiretex Ltd, Vizianagaram
Brief facts of the case are that the assessee company filed it’s return of income admitting taxable income of Rs.2,45,69,950/- for the A.Y.2018- 19 on 31.10.2018 under the head Profits and Gain from Business or Profession. A notice u/s 143(1)(a) was served on the assessee on 10.05.2019 for adjustments to the total income to the tune of Rs.32,47,07,024/- against which no reply was filed by the company. The company was subjected to assessment u/s 143(1) and an order for the same was passed on 21.02.2020 by making an addition of Rs.32,47,07,024/- in addition to the taxable income as assessed by it during the year under consideration. The assessment was completed u/s 143(1) of the Act and the AO arrived at total income of Rs.34,92,76,980/- including returned income of Rs.2,45,69,950/- leading to total addition of Rs.32,47,07,024/- on the following counts :
(i) Inconsistency in amount for non-compliance with the provisions of Chapter XVIIB – Rs.32,46,77,307/-
(ii) Employees contribution to PF or any fund set up under ESI Act – Rs.29,717/-
3. Aggrieved by the order passed by the AO, the assessee preferred an appeal before the Ld.CIT(A) stating that the AO made additions on mere
Hero Wiretex Ltd, Vizianagaram assumptions and presumptions, disregarding the submission, documentary evidences and facts of the case, without personal hearing and cross verification of evidences produced by the assessee and the Ld.CIT(A), after careful consideration of the facts and circumstances of the case, partly allowed the appeal of the assessee.
Aggrieved by the order of the Ld.CIT(A), the assessee preferred an appeal before the Tribunal by raising the following grounds :
The order of the learned Commissioner of Income Tax (Appeals) is contrary to the facts and also the law applicable to the facts of the case.
2. The learned Commissioner of Income Tax (Appeals) ought to have held that the addition of Rs.32,46,77,307/- made by the assessing officer towards disallowance u/s 40(a)(i) of the Act and addition of Rs.29,719 towards disallowance of employees’ contribution to PF and ESI are outside the scope of adjustments that can be made while processing the return of income and issuing the intimation u/s 143(1) of the Act. 3. Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) ought to have deleted the entire addition of Rs.32,46,77,307 made by the assessing officer towards disallowance u/s 40(a)(i) of the Act instead of restricting the disallowance to 30%. 4. Any other grounds may be urged at the time of hearing. 4. Ground No.1 and 4 are general in nature which do not require specific adjudication.
Hero Wiretex Ltd, Vizianagaram
Ground No.2 and 3 are related to addition of Rs.32,46,77,307/- made by the AO towards disallowance u/s 40(a)(ia) of the Act and disallowance of Rs.29,717/- being belated payment of employees contribution to Provident Fund and Employees State Insurance after the due date but before the due date of filing the return u/s 139 of the Act. With regard to disallowance u/s 40(1)(ia), the Ld.AR submitted that the assessee had debited an amount of Rs.32,46,77,308/- towards work contracts and the CPC is not justified in disallowing 100% of the amount u/s 40(a)(ia), on account of non compliance with the provisions of Chapter VII-B. On appeal before the CIT(A), the Ld.CIT(A) restricted the disallowance to 30% of amount on which the assessee has not deducted TDS. Ld.AR pleaded before the Tribunal that the Ld.CIT(A) ought to have deleted the entire addition of Rs.32,46,77,307/- made by the AO towards disallowance u/s 40(a)(ia) of the Act, instead of restricting the disallowance to 30%. He, therefore, pleaded to set aside the order passed by the Ld.CIT(A) and allow the appeal of the assessee on this ground.
6. Per contra, the Ld.DR submitted that the Ld.CIT(A) is justified in restricting the disallowance to 30% of amount on which the assessee has not deducted TDS and not the entire amount. He, therefore, pleaded to Hero Wiretex Ltd, Vizianagaram uphold the order passed by the Ld.CIT(A) and dismiss the appeal of the assessee on this ground.
7. We have heard both the parties and perused the material placed on record. With regard to addition of Rs.32,6,77,307/- made by the AO towards disallowance u/s 40(a)(ia), it is undisputed fact that the assessee had debited an amount of Rs.32,46,77,307/- towards work contracts to Rollon Projects and Kasukurthi Constructions during the year 2017-18, but no TDS was deducted. The CPC vide intimation u/s 143(1) dated 21.02.2020, disallowed 100% of the amount of Rs.32,46,77,307/- u/s 40(a)(ia), on account of non compliance with the provisions of Chapter XVII-B. On appeal before the CIT(A), the Ld.CIT(A) restricted the disallowance to 30% as per provisions of section 40(a)(ia). The Ld.AR submitted before the Tribunal that appropriate taxes have been paid by the recipients under the relevant provisions of Income Tax Act by duly filing the return of income u/s 139 of the Act. The Ld.AR submitted that the AO made addition on mere assumptions and presumptions disregarding the submissions made by the assessee, without examining the documentary evidences and facts of the case, without personal hearing and cross verification of evidences. He, therefore, pleaded to set aside the orders passed and delete the entire
Hero Wiretex Ltd, Vizianagaram addition of Rs.32,46,77,307/-, instead of restricting the disallowance to 30%. On similar set of facts, coordinate bench of the Delhi Tribunal in the case of CIT Vs.Ansal Landmark Townships(P) Ltd. in I.T.A.No. 2972/Del/2012 and for the Assessment Years ('AYs') 2008-09 and 2009-10 respectively, relying on the decision of Agra Bench of the Tribunal in ITA No. 337/Agra/2013 order dated 29th May, 2013 set aside the issue to the file of AO for the limited purpose of verification to check whether the payee has filed his return of income and paid of the taxes within stipulated time and held that If it has done so no disallowance shall be made, which was challenged before the Hon’ble High Court of Delhi by the revenue and the Hon’ble High Court of Delhi, by giving credence to the decision of the coordinate bench of the Agra Tribunal in the case of Rajiv Kumar Agarwal v. ACIT in ITA No. 337/Agra/2013 dismissed the appeal of the revenue. For the sake of clarity and convenience, we extract relevant part of the order of the High Court of Delhi, which reads as under :
“5. The other issue urged by the Revenue during the course of arguments pertains to the retrospectivity of the second proviso to Section 40(a)(ia) of Act which reads as under: "Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on Hero Wiretex Ltd, Vizianagaram the date of furnishing of return of income by the resident payee referred to in the said proviso"
When it was pointed out to learned counsel for the Appellant that no question as such has been sought to be urged by the Revenue in the memorandum of appeal, learned counsel stated that an application has been filed to amend the memorandum of appeal to include such a question and that perhaps the said application is lying under objection.
Not withstanding the above, the Court has heard learned counsel for the Revenue on the above issue as well.
It is seen that the issue in these AYs arises in the context of the disallowance by the Assessing Officer of the payment made by the Respondent Assessee to Ansal Properties and Infrastructure Ltd. ('APIL') which payment, according to the Revenue, ought to have been made only after deducting tax at source under Section 194J of the Act. Before the ITAT, it was urged by the Assessee that in view of the insertion of the second proviso to Section 40(a)(ia) of the Act, the payment made could not have been disallowed. Reliance was placed on the decision of the Agra Bench of ITAT in (Rajiv Kumar Agarwal v. ACIT) in which it was held that the second proviso to Section 40(a)(ia) of the Act is declaratory and curative in nature and should be given retrospective effect from 1st April 2005.
It is seen that the second proviso to Section 40(a)(ia) was inserted by the Finance Act, 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-section (1) of Section 201 of the Act, then, in such event, "it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso".
10. It is pointed out by learned counsel for the Revenue that the first proviso to Section 201(1) of the Act was inserted with effect from 1st July 2012. The said proviso reads as under: "Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident— (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income; And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed."
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 Hero Wiretex Ltd, Vizianagaram 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 fulfilment 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.
12. 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 as long as the payee/resident (which in this case is ALIP) 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 ITAT in Rajiv Kumar Agarwal's case (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
Hero Wiretex Ltd, Vizianagaram 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 271C, 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 SUNIL 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.' 14. 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's case (supra).
No substantial question of law arises in the facts and circumstances of the present case. The appeal is dismissed.” Respectfully following the ratio laid down by the coordinate bench of the Delhi Tribunal and the Hon’ble High Court of Delhi, we are inclined to remit the matter back to the file of the AO to examine whether the recipients have filed their returns of income and paid of the taxes within stipulated time. If it has done so no disallowance shall be made. Appeal of the assessee on this ground is allowed for statistical purpose.
Hero Wiretex Ltd, Vizianagaram 8 With regard to disallowance of Rs.29,717/- being employees contribution to provident fund and employees state insurance, the Ld.AR submitted that the contributions were paid belatedly after the due date but before due date of filing of return u/s 139 of the Act. He, therefore, pleaded to delete the addition made.
9. Per contra, the Ld.DR relied on the order of the Ld.CIT(A) and contended that the Ld.CIT(A) has rightly dismissed the ground, relying on the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. He, therefore, pleaded to uphold the order passed by the Ld.CIT(A) and dismiss the appeal of the assessee on this ground.
We have heard both the parties and perused the material available on record. So far as the belated remittance of employees contribution to PF and ESI is concerned, the issue has attained finality by the order of the Hon’ble Supreme Court in the case of Check Mate Services Pvt. Ltd. Vs. Commissioner of Income Tax-1 in Civil Appeal No.2833 of 2016, order dated 12.10.2022. In the case on hand also, the assessee made remittances before filing the return of income u/s 139(1), but not within the due date specified by the respective PF / ESI Acts. For the sake of Hero Wiretex Ltd, Vizianagaram clarity and convenience, we extract relevant part of the order of the Checkmate Services Pvt. Ltd.(supra) as under :
“They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income is treated as a deduction. Thus, it is an essential condition for deduction that such amounts are deposited on or before the due date.” Since the decision of the Hon’ble Supreme Court pronounced the correct legal position of the allowability of belated payment of PF and ESI under the provisions of the Act, we are of the considered view that there is a mistake arisen as a result of the subsequent interpretation of law by the Hon’ble Supreme Court which would constitute “a mistake apparent from the records”. Therefore, we have no hesitation to come to a conclusion that the disallowance made by the AO as well as the Ld.CIT(A) needs no interference, in view of the decision of the Hon’ble Supreme Court mentioned supra. Hence, the ground No.2 with regard to disallowance of employees contribution to PF and ESI is dismissed.
In the result, appeal of the assessee is partly allowed for statistical purpose.
Hero Wiretex Ltd, Vizianagaram
Order pronounced in the open court on 27th September, 2023.
Sd/- Sd/- (एस बालाकृष्णन) (दुव्वूरु आर.एल रेड्डी) (S.BALAKRISHNAN) (DUVVURU RL REDDY) लेखा सदस्य/ACCOUNTANT MEMBER न्याधयक सदस्य/JUDICIAL MEMBER Dated : 27.09.2023 L.Rama, SPS की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. ननधधाऩरती/ The Assessee – M/s Hero Wiretex Limited, Anthakapalli Village, Ponduru Road, Rajam, Vizianagarm 2. रधजस्व/The Revenue – The Asst.Commissioner of Income Tax, Central Circle-1, Pratyakshakar Bhavan, MVP Colony, Visakhapatnam 3. The Principal Commissioner of Income Tax, Visakhapatnam 4. नवभधगीय प्रनतनननध, आयकर अपीलीय अनधकरण, नवशधखधपटणम / DR,ITAT, Visakhapatnam 5..गधर्ा फ़धईल / Guard file आदेशधनुसधर / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam