Commissioner Of Income Tax Kolkata Xii vs M/S Calcutta Export Company

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 4339-4340 OF 2018 (Arising out of Special Leave Petiton (C) Nos. 24362-24363 OF 2013

Commissioner of Income Tax Kolkata X ….Appellant(s)

Versus

M/s Calcutta Export Company …. Respondent(s)

WITH

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JUDGMENT

R.K.Agrawal, J.

1) Leave granted.

8 2) The present appeal has been filed against the impugned

final judgment and order dated 03.09.2012 passed by the High

Court at Calcutta in GA No. 2029 of 2012 ITAT No. 175 of

2012 whereby a Division Bench of the High Court dismissed

the appeal filed by the Appellant against the order dated

29.02.2012 passed by the Income Tax Appellate Tribunal (in

short “the Tribunal”) in ITA No. 1487/Kol/2011.

3) Brief facts:-

(a) M/s. Calcutta Export Company - the Respondent is a

partnership firm and is a manufacturer and exporter of

casting materials having its principal place of business at

Kolkata. The Respondent filed its return of income for the

Assessment Year 2005-06 for Rs. 4,18,17,910/-. The case was

selected for scrutiny and the assessment under Section 143(3)

of the Income Tax Act, 1961 (in short ‘the IT Act’) was

completed on 28.12.2007. The Assessing Officer, vide order

dated 12.10.2009, disallowed the export commission charges

paid by the assessee to M/s. Steel Crackers Pvt. Ltd.

9 amounting to Rs. 40,82,089/- while stating that the tax

deducted at source (TDS) on such commission amount on

07.07.2004, 07.09.2004 and 07.10.2004 ought to have been

deposited by the Respondent before the end of the previous

year i.e. 31.03.2005 to get the commission amount deducted

from the total income in terms of the provisions of Section

40(a)(ia) of the IT Act as it stood then. But the same was

deposited on 01.08.2005, hence, the Respondent cannot be

allowed to claim deduction of the commission amount from

the total income. The Assessing Officer revised the total

income to Rs. 4,58,99,999/- with the requirement to pay the

additional tax amount of Rs. 23,88,832/- by the Respondent.

(b) Being aggrieved by the order dated 12.10.2009, the

Respondent preferred an appeal before the Commissioner of

Income tax (Appeals). Learned CIT (Appeals), vide order dated

01.08.2011, allowed the appeal while holding that the

commission amount is eligible for deduction under the said

Assessment Year.

10

(c) Being aggrieved, the Revenue preferred an appeal being

ITA No. 1487/Kol/2011 before the Tribunal which came to be

dismissed on 29.02.2012.

(d) Being aggrieved by the order dated 29.02.2012, the

Revenue preferred an appeal before the High Court. The High

Court, vide judgment and order dated 03.09.2012, had

dismissed the appeal.

(e) Aggrieved by the judgment and order dated 03.09.2012,

the Revenue has preferred this appeal before this Court.

4) Heard learned senior counsel for the parties and perused

the factual matrix of the case.

Point(s) for consideration:-

5) Whether the amendment made by the Finance Act, 2010

in Section 40(a)(ia) of the IT Act is retrospective in nature to

apply to the present facts and circumstances of the case.

Rival contentions:-

6) Learned senior counsel appearing on behalf of the

Revenue contended that the impugned judgment passed by

the High Court is bad in law and is liable to be set aside by

this Court.

11

7) Learned senior counsel further contended that the courts

below have erred in extending the meaning of the amendment

made in Section 40(a) (ia) and in not accepting the plain

meaning of the Section as being prohibitory in nature which

makes the Respondent to deduct the TDS and remit it in

government account within the time limit prescribed under the

Section. He further contended that the amendment made

under Section 40 (a) (ia) by the Finance Act, 2010, clearly

states that the amendment has the retrospective effect from

the Assessment Year 2010-11 and it cannot be held to be

retrospective from the Assessment Year 2005-2006.

8) Learned senior counsel further contended that the High

Court erred in relying on the decision given by the

jurisdictional High Court in ITAT No. 302/2011 (G.A. No.

3200/2011) considering the fact that no appeal was preferred

against the said judgment considering the low tax effect in the

said matter.

9) Learned senior counsel finally contended that though the

tax effect is low in the present case also and the High Court

has decided the issue in favour of the tax payer but in similar

12 situation in the case of Bharati Shipyard Ltd. vs. Deputy

CIT (ITA No. 404/Mumb/2009) the Special Bench of the ITAT

has decided the issue in favour of the Revenue on 09.09.2011.

Learned senior counsel finally contended that in view of the

conflicting opinions by the coordinate Benches, correct

interpretation of law is required by this Court.

10) Per contra, learned senior counsel appearing on behalf of

the Respondent submitted that the purpose of insertion of

provisions of Section 40(a)(ia) of the IT Act was to ensure the

compliance of TDS provisions and not to punish those

assessees who have deducted and paid the TDS to the

government sooner or later. The said purpose is also very

much clear from the amendment made in 2008 and further by

the amendment in 2010 to the existing provisions of Section

40(a)(ia). In support of this argument, learned senior counsel

placed reliance on a decision of the Division Bench of the Delhi

High Court in CIT v. Ansal Land Mark Township Pvt Ltd. in

ITA No. 160/2015.

11) Learned senior counsel further submitted that the

amendments of curative nature have to be applied

13 retrospectively and hence the amendment made in 2010 to the

existing provisions of Section 40(a)(ia) should be given

retrospective effect from the date of insertion and in support of

this contention learned senior counsel relied on a decision of

this Court in Allied Motors (P.) Ltd etc. vs. CIT, Delhi -

(1997) 224 ITR 677(SC).

12) Learned counsel for the Respondent finally submitted

that the decision of the High Court is well within the

parameters of law and requires no interference.

Discussion:-

13) The dispute in the present case revolves around the fact

that whether the amendment made by the Finance Act, 2010

to the provisions of Section 40 (a) (ia) of the IT Act is

retrospective in nature so as to apply to the present case or

not. If it is so, then the tax duly paid by the assessee on

01.08.2005 is well in accordance with law and the assessee is

allowed to claim deduction for the tax deducted and paid to

the government, in the previous year in which the tax was

deducted.

14

14) For deciding as to the retrospective effect of the

amendment made by Finance Act, 2010, it is required to see

the Section as it stands before and after the amendment made

through the Finance Act, 2010 and the purpose of such

insertion or amendment to the said provisions. The provisions

of Section 40(a)(ia) came into force in the year 2005 which

stood as under:-

“40. Amounts not deductible- Notwithstanding anything to the contrary in [Sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession,- (a) in the case of any assessee-

(i)…… (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section(1) of section 200;

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted during the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”

15) The purpose of bringing the said amendment to the

existing provision of Section has been highlighted in the

15 memorandum explaining the provision which reads as

under:-

“With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of the section 40(a)(ia) to payments of interest, commission or brokerage, fee for professional services or fee for technical services to the residents and payments to a residential contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed under sub-section(1) of section 200 and in accordance with the provisions of other provisions of Chapter XVII-B.”

16) The purpose is very much clear from the above referred

explanation by the memorandum that it came with a purpose

to ensure tax compliance. The fact that the intention of the

legislature was not to punish the assessee is further reflected

from a bare reading of the provisions of Section 40(a)(ia) of the

IT Act. It only results in shifting of the year in which the

expenditure can be claimed as deduction. In a case where the

tax deducted at source was duly deposited with the

government within the prescribed time, the said amount can

be claimed as a deduction from the income in the previous

year in which the TDS was deducted. However, when the

amount deducted in the form of TDS was deposited with the

16 government after the expiry of period allowed for such deposit

then the deductions can be claimed for such deposited TDS

amount only in the previous year in which such payment was

made to the government.

17) However, it has caused some genuine and apparent

hardship to the assesses especially in respect of tax deducted

at source in the last month of the previous year, the due date

for payment of which as per the time specified in Section 200

(1) of IT Act was only on 7 th of April in the next year. The

assessee in such case, thus, had a period of only seven days to

pay the tax deducted at source from the expenditure incurred

in the month of March so as to avoid disallowance of the said

expenditure under Section 40(a)(ia) of IT Act.

18) With a view to mitigate this hardship, Section 40(a)(ia)

was amended by the Finance Act, 2008 and the provision so

amended read as under:-

“40. Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “profit and gains of business or profession (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resi-dent, or amounts payable to a contactor or sub-contractor, being resident, for carrying out any work

17 (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid-

(A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or (B) in any other case, on or before the last day of the previous year;

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted (A) during the last month of the previous year but paid after the said due date; or (B) during any other month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”

19) The above amendments made by the Finance Act, 2008

thus provided that no disallowance under Section 40 (a) (ia) of

the IT Act shall be made in respect of the expenditure incurred

in the month of March if the tax deducted at source on such

expenditure has been paid before the due date of filing of the

return. It is important to mention here that the amendment

was given retrospective operation from the date of 01.04.2005

i.e., from the very date of substitution of the provision.

20) Therefore, the assesses were, after the said amendment

in 2008, classified in two categories namely; one; those who

18 have deducted that tax during the last month of the previous

year and two; those who have deducted the tax in the

remaining eleven months of the previous year. It was provided

that in case of assessees falling under the first category, no

disallowance under Section 40(a) (ia) of the IT Act shall be

made if the tax deducted by them during the last month of the

previous year has been paid on or before the last day of filing

of return in accordance with the provisions of Section 139(1) of

the IT Act for the said previous year. In case, the assessees

are falling under the second category, no disallowance under

Section 40(a)(ia) of IT Act where the tax was deducted before

the last month of the previous year and the same was credited

to the government before the expiry of the previous year. The

net effect is that the assessee could not claim deduction for

the TDS amount in the previous year in which the tax was

deducted and the benefit of such deductions can be claimed in

the next year only.

21) The amendment though has addressed the concerns of

the assesses falling in the first category but with regard to the

case falling in the second category, it was still resulting into

19 unintended consequences and causing grave and genuine

hardships to the assesses who had substantially complied

with the relevant TDS provisions by deducting the tax at

source and by paying the same to the credit of the

Government before the due date of filing of their returns under

Section 139(1) of the IT Act. The disability to claim deductions

on account of such lately credited sum of TDS in assessment

of the previous year in which it was deducted, was detrimental

to the small traders who may not be in a position to bear the

burden of such disallowance in the present Assessment Year.

22) In order to remedy this position and to remove hardships

which were being caused to the assessees belonging to such

second category, amendments have been made in the

provisions of Section 40(a) (ia) by the Finance Act, 2010.

23) Section 40(a)(ia), as amended by Finance Act, 2010,

with effect from 01.04.2010 and now reads as under:

“4(a)(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or; after deduction, has not paid on or before the due date specified in sub-section (1) of Section 139:

20

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deducted in computing the income of the previous year in which such tax has been paid.”

24) Thus, the Finance Act, 2010 further relaxed the rigors of

Section 40(a)(ia) of the IT Act to provide that all TDS made

during the previous year can be deposited with the

Government by the due date of filing the return of income. The

idea was to allow additional time to the deductors to deposit

the TDS so made. However, the Memorandum explaining the

provisions of the Finance Bill, 2010 expressly mentioned as

follows: “This amendment is proposed to take effect

retrospectively from 1st April, 2010 and will, accordingly,

apply in relation to the Assessment Year 2010-11 and

subsequent years.”

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.

21

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 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,

22 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

23 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. 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.

29) Further, in Allied Motors (P) Limited (supra), this Court

while dealing with a similar question with regard to the

retrospective effect of the amendment made in section 43-B of

the Income Tax Act,1961 has held that the new proviso to

Section 43B should be given retrospective effect from the

inception on the ground that the proviso was added to remedy

unintended consequences and supply an obvious omission.

The proviso ensured reasonable interpretation and

retrospective effect would serve the object behind the

24 enactment. The aforesaid view has consistently been followed

by this Court in the following cases, viz., Whirlpool of India

Ltd., vs. CIT, New Delhi (2000) 245 ITR 3, CIT vs. Amrit

Banaspati (2002) 255 ITR 117 and CIT vs. Alom Enterprises

Ltd. (2009) 319 ITR 306.

30) Hence, in light of the forgoing discussion and the binding

effect of the judgment given in Allied Moters (supra), we are

of the view that the amended provision of Sec 40(a)(ia) of the IT

Act should be interpreted liberally and equitable and applies

retrospectively from the date when Section 40(a)(ia) was

inserted i.e., with effect from the Assessment Year 2005-2006

so that an assessee should not suffer unintended and

deleterious consequences beyond what the object and purpose

of the provision mandates. As the developments with regard to

the Section recorded above shows that the amendment was

curative in nature, it should be given retrospective operation

as if the amended provision existed even at the time of its

insertion. Since the assessee has filed its returns on

01.08.2005 i.e., in accordance with the due date under the

provisions of Section 139 IT Act, hence, is allowed to claim the

25 benefit of the amendment made by Finance Act, 2010 to the

provisions of Section 40(a)(ia) of the IT Act.

31) In light of the forgoing discussion, we are of the view that

judgment of the High Court does not call for any interference

and, hence, the appeals are accordingly dismissed. In view of

the above, all the connecting appeals, interlocutory

applications, if any, transferred cases as well as diary

numbers are disposed off accordingly. Parties to bear cost on

their own.

…………….………………………J. (R.K. AGRAWAL)

…....…………………………………J. .

(ABHAY MANOHAR SAPRE)

NEW DELHI;

APRIL 24, 2018.

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