* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL No. 603/2018
Reserved on : 28th August, 2018
Date of decision: 17th January, 2019
COMMISSIONER OF INCOME TAX ..... Appellant
Through Mr. Ashok K. Manchanda, Sr. Standing
Counsel.
versus
BHANOT CONSTRUCTION & HOUSING LIMITED.. Respondent
Through Nemo.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J.:
Present appeal by the Revenue under Section 260A of the Income Tax
Act, 1961 (,,Act, for short) assails the order dated 16th November, 2017
passed by the Income Tax Appellate Tribunal (,,Tribunal, for short) in the
case of Bhanot Construction and Housing Limited (,,respondent-assessee,
for short).
2. The appeal relates to Assessment Year 2011-12. During the year,
respondent-assessee was engaged in business of civil construction, real
estate, sale-purchase and infrastructure development. The issue raised
pertains to disallowance under Section 40(a)(ia) of the Act for failure to
deposit tax deducted at source of Rs. 34,00,400/- on or before due date of
ITA No. 603/2018 Page 1 of 13
filing of the income tax return. Accordingly expenditure of
Rs.17,00,20,000/- paid by the respondent-assessee to M/s Arch
Infrastructure Projects Nirman Private Limited was disallowed and declared
income was enhanced from Rs.1,35,11,330/- to Rs.18,35,31,330/- vide
assessment order dated 7th March, 2014.
3. The addition was deleted by Commissioner of Income Tax (Appeals),
which deletion has been affirmed by the Tribunal. The reasoning given by
the Tribunal in the impugned order while dismissing the appeal of the
Revenue reads as under:-
"We have heard the Ld. DR and perused the
relevant records, especially the impugned order. We find
that TDS deducted by the assessee for Rs.34,00,400/- on
account of payment of Rs.17,00,20,000/- to M/s Arch
Infra Projects Nirman Private Ltd. was deposited in the
government account on 03.10.2011, which in case of the
assessee was beyond the due date of filing of Return of
Income for A.Y. 2011-12, but then the rigor of the Act for
disallowance of payment in such cases as mandated u/s.
40(a)(ia) have been softened in terms of first proviso to
section 201 of the I.T. Act (with effect from 01.07.2012)
read with second proviso to section 40(a)(ia) (with effect
from 01.04.2013). We further note that these
amendments are strictly speaking not relatable to
assessment year 2011-12, to which the case of the
assessee pertains, but then considering the fact that it is a
beneficial legislation, the above provisions should in the
interest of justice be considered as being declarative and
curative in nature and consequently be treated as having
retrospective effect from 01.04.2005 which is the date
from which sub clause (ia) of section 40(a) was inserted
by Finance act, 2004. In fact by treating the above
legislation as declaratory and therefore retrospective, it is
the intention of the legislature which is being furthered
ITA No. 603/2018 Page 2 of 13
and that the same would not run counter to the spirit of
the enactment. In this connection, reliance was placed
before the Ld. CIT(A) on the decision of Honble ITAT
in Rajeev Kumar Agarwal vs. ACIT ITA
No.337/Agra/2013 dated 29.05.2014. Now, as in the
facts of this case it has already been confirmed through
the A.O. of the recipient of payment i.e. M/s Arch Infra
Projects Nirman Private Ltd. that they have accounted for
the receipts from the assessee for Rs.17,00,20,000/- in
their return of income for A.Y. 2011-12, which have been
filed on 30.09.2011 and on which taxes have been paid,
as per the copy of acknowledgment. Further, even the
assessee has filed the certificate as required under the first
proviso to section 201. Considering all the above
discussion in totality the addition made for
Rs.17,00,20,000/- was rightly deleted by the Ld. CIT(A),
which does not need any interference on our part, hence,
we uphold the action of the Ld. CIT(A) and reject the
ground raised by the Revenue."
4. We find that the aforesaid reasoning is correct and in accord with the
ratio and decision in Commissioner of Income Tax-XIII versus Naresh
Kumar, (2014) 362 ITR 256 (Del.) holding that insertion of the words- " has
not been paid on or before the due date specified in subsection (1) to Section
139" to Section 40(a)(ia) vide Finance Act, 2010 with effect from 1st April,
2010 should be given retrospective effect for varied reasons, including the
grounds mentioned in paragraphs 14, 15, 16 and 17, which read:-
"14. Provisions relating to deduction of tax at source are
important as this ensures that tax so deducted gets
deposited with the Government and non-taxpayers/filers
can be identified. The deductee do not suffer and are not
deprived of credit of deduction made from their income.
Section 40(a)(ia) is a provision incorporated with the said
objective and purpose in mind. It is not basically a penal
provision as when the TDS is deposited, the amount on
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which deduction was made is allowed as an expenditure
incurred in previous year in which the payment of TDS is
made. Thus, it results in shifting of the year in which the
expenditure can be claimed, even if payment has been
made to the recipient and is to be allowed as expenditure
in another year. Principle of matching i.e. matching of
receipts with expenditure to the extent indicated in
Section 40(a)(ia), therefore, gets affected. The provision
can work harshly and may be very stringent in some cases
as is apparent from these facts stated in the case
of Naresh Kumar. Strict compliance of Section 40(1)(ia)
may be justified keeping in view the legislative object
and purpose behind the provision but a provision of such
nature should not be allowed to be converted into an iron
rod provision which metes out stern punishment and
results in malevolent results, disproportionate to the
offending act and aim of the legislation. Legislative
purpose and the object is to ensure payment and deposit
of TDS with the Government. TDS results in collection of
tax. Legislature can and do experiment and intervene
from time to time when they feel and notice that the
existing provision is causing and creating unintended and
excessive hardships to citizens and subjects or have
resulted in great inconvenience and uncomfortable
results. Obedience to law is mandatory and has to be
enforced but the magnitude of punishment must not be
disproportionate by what is required and necessary. The
consequences and the injury caused, if disproportionate
do and can result in amendments which have the effect of
streamlining and correcting anomalies. The amendments
made in 2010 were a step in the said direction and this
aspect has to be kept in mind when we examine and
consider whether the amendment should be given
retrospective effect or not.
15. Question whether the amendment is retrospective or
prospective is vexed and rigid rule can be applied
universally. Various rules of interpretation have
developed in order to determine whether or not, an
ITA No. 603/2018 Page 4 of 13
amendment is retrospective or prospective. Fiscal statutes
imposing liabilities are governed by normal presumption
that they are not retrospective. The cardinal rule is that
the law to be applied, is that which is in force on the first
day of the assessment year, unless otherwise mandated
expressly or provided by necessary implication. The
aforesaid dictum is based upon the principle that a new
provision creating a liability or an obligation, affecting or
taking away vested rights or attaching new disability is
presumed to be prospective. However, it is accepted that
Legislatures have plenary power to make retrospective
amendments, subject to Constitutional restrictions.
16. Based upon the aforesaid broad dictum, Judges and
jurists have drawn distinction between procedural and
substantive provisions. Substantive provisions deal with
rights and the same are fundamental, while procedural
law is concerned with the legal process involving actions
and remedies. Amendments to substantive law are treated
as prospective, while amendments to procedural law are
treated as retrospective. This distinction itself is not free
from difficulties as right to appeal has been held to be a
substantive law, but law of limitation is regarded as
procedural. There is an interplay and interconnect
between what can be regarded as substantive and
procedural law [see Commissioner of Income
Tax v. Shrawan Kumar Swarup & Sons, (1998) 232 ITR
123 (SC)].
17. There are decisions, which hold that process of
litigation or enforcement of law is procedural. Similarly,
machinery provision for collection of tax, rather than tax
itself is procedural. Read in this context, it can be
strongly argued that Section 40(a)(ia) at least to the extent
of the amendment is procedural as by enacting Section
40(a)(ia)the Legislature did not want to impose a new tax
but wanted to ensure collection of TDS and the
amendments made streamline and remedy the anomalies
noticed in the said procedure by allowing deduction in the
year when the expenditure is incurred provided TDS is
ITA No. 603/2018 Page 5 of 13
paid before the due date for filing of the return. Remedial
statutes are normally not retrospective, on the ground that
they may affect vested rights. But these statutes are
construed liberally when justified and rule against
retrospectivity may be applied with less resistance
[See Bharat Singh v. Management of New Delhi
Tuberculosis Centre, (1986) 2 SCC 614 and Workmen of
Messrs Firestone Tyre & Rubber Company of India (P)
Ltd. v. Management, AIR 1973 SC 1227]."
Other paragraphs of the said judgment are equally relevant, but to
avoid prolixity are not being reproduced.
5. Ratio expressed by this Court in the case of Naresh Kumar (supra)
has been accepted as correct by the Supreme Court in Civil Appeal Nos.
4339-4340/2018, Commissioner of Income Tax Kolkata XII versus M/s
Calcutta Export Company and other cases decided on 24th April, 2018. This
judgment refers to the decision in Allied Motors (P) Limited versus
Commissioner of Income Tax, Delhi (1997) 224 ITR 677 (SC) and other
cases. In Calcutta Export Company (supra), it has been held:-
"25) The controversy surrounding the above amendment
was whether the amendment being curative in nature should
be applied retrospectively i.e., from the date of insertion of
the provisions of Section 40(a)(ia) or to be applicable from
the date of enforcement.
26) TDS results in collection of tax and the deductor
discharges dual responsibility of collection of tax and its
deposition to the government. Strict compliance of Section
40(a)(ia) may be justified keeping in view the legislative
object and purpose behind the provision but a provision of
such nature, the purpose of which is to ensure tax
compliance and not to punish the tax payer, should not be
allowed to be converted into an iron rod provision which
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metes out stern punishment and results in malevolent
results, disproportionate to the offending act and aim of the
legislation. Legislature can and do experiment and intervene
from time to time when they feel and notice that the existing
provision is causing and creating unintended and excessive
hardships to citizens and subject or have resulted in great
inconvenience and uncomfortable results. Obedience to law
is mandatory and has to be enforced but the magnitude of
punishment must not be disproportionate by what is
required and necessary. The consequences and the injury
caused, if disproportionate do and can result in amendments
which have the effect of streamlining and correcting
anomalies. As discussed above, the amendments made in
2008 and 2010 were steps in the said direction only.
Legislative purpose and the object of the said amendments
were to ensure payment and deposit of TDS with the
Government.
27) A proviso which is inserted to remedy unintended
consequences and to make the provision workable, a proviso
which supplies an obvious omission in the Section, is
required to be read into the Section to give the Section a
reasonable interpretation and requires to be treated as
retrospective in operation so that a reasonable interpretation
can be given to the Section as a whole.
28) The purpose of the amendment made by the Finance
Act, 2010 is to solve the anomalies that the insertion of
section 40(a)(ia) was causing to the bona fide tax payer. The
amendment, even if not given operation retrospectively,
may not materially be of consequence to the Revenue when
the tax rates are stable and uniform or in cases of big
assessees having substantial turnover and equally huge
expenses and necessary cushion to absorb the effect.
However, marginal and medium taxpayers, who work at low
gross product rate and when expenditure which becomes
subject matter of an order under Section 40(a)(ia) is
substantial, can suffer severe adverse consequences if the
amendment made in 2010 is not given retrospective
operation i.e., from the date of substitution of the provision.
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Transferring or shifting expenses to a subsequent year, in
such cases, will not wipe off the adverse effect and the
financial stress. Such could not be the intention of the
legislature. Hence, the amendment made by the Finance
Act, 2010 being curative in nature required to be given
retrospective operation i.e., from the date of insertion of the
said provision."
6. The facts of the present case are undisputed and not challenged by the
Revenue. The respondent-assessee had filed documents in evidence on
which remand report was obtained to show that M/s Arch Infrastructure
Projects Nirman Private Limited in their return of income filed under
Section 139 for the Assessment Year 2011-12 had included
payment/receipts of Rs.17,00,20,000/- in their total income and had paid
taxes thereon. The said position was affirmed and accepted after reluctance
by the Assessing Officer before the Commissioner of Income Tax (Appeals).
7. Second proviso to Section 40(a)(ia) of the Act introduced by Finance
Act, 2012 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 the date of furnishing of
return of income by the resident payee referred to in the said
proviso."
8. Contention of the Revenue is that the second proviso to Section
40(a)(ia) of the Act has been made applicable with effect from 1 st April,
2013 and is not retrospective.
ITA No. 603/2018 Page 8 of 13
Aforesaid proviso was examined and interpreted by the Delhi High Court in
decision dated 26th August, 2015, ITA Nos.160-161/2015, Commissioner of
Income Tax-1 versus Ansal Land Mark Township (P) Limited and it was
held as under:-
"11. The first proviso to Section 210 (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 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 210 (1) of the
Act is that the 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.
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
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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
ITA No. 603/2018 Page 10 of 13
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."
ITA No. 603/2018 Page 11 of 13
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."
9. The aforesaid quotation also refers to amendment made by enacting
first proviso to Section 201(1) of the Act that was inserted with effect from
1st July, 2012. The judgment in Ansal Landmark Township (P) Limited
(supra) was referred to and noticed by the Supreme Court in their decision in
the case of M/s Calcutta Export Company(supra).
10. There is additional factum, which must be noticed and was referred to
by the Commissioner of Income Tax(Appeals) in his order. Last date for
filing of return for the Assessment Year 2011-12 was 30th September, 2011,
which was Friday and a bank holiday. Banks were also closed on 1 st and 2nd
October being Saturday and Sunday. 2nd October was also a national
holiday. On 3rd October, 2010 respondent-assessee had deposited tax at
source amounting to Rs.34,00,400/- deductible on Rs.17,00,20,000/-.
Respondent-assessee had also paid interest for the delay in deposit of TDS
of two days. This is also not denied and disputed. In these circumstances,
the Revenue should have exercised its discretion and accepted the order of
the Tribunal given the peculiar facts of the present case for every infraction
of provision, when there is substantive compliance, need not be made a
subject matter of challenge before the High Court. At best the disallowance
of expenditure under Section 40(1)(a) in this year would have been allowed
in the next assessment year.
ITA No. 603/2018 Page 12 of 13
11. In view of the aforesaid position, as the issue is already covered
against the Revenue by decision of this Court in Ansal Landmark Township
(P) Limited (supra), no substantial question of law arises for consideration.
The appeal is dismissed, without any order as to costs.
(SANJIV KHANNA)
JUDGE
(CHANDER SHEKHAR)
JUDGE
JANUARY 17th , 2019
VKR
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