Section 40(a)(ia) – Second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is declaratory and curative in nature, and therefore, should be given retrospective effect from the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act, 2004.
Facts
The assessee firm, engaged in business as civil contractor, paid labour charges amounting to Rs. 1,27,44,615 without deducting tax at source u/s. 194C of the Act. Since the income-tax was not deducted at source, the Assessing Officer (AO) invoked the provisions of section 40(a)(ia) of the Act and disallowed the sum of Rs. 1,27,44,615.
Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the order of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that in view of the amendment to the provisions of section 40(a)(ia) of the Act by insertion of the second proviso, the AO be directed to verify if the payees have declared the receipt from the assessee in their return of income and if they have so declared then the addition u/s. 40(a)(ia) of the Act be deleted by the AO.
Held
The Tribunal having noted the provisions of section 201, second proviso inserted to the section 40(a)(ia) and the justification of the amendment of section 40(a)(ia) as given by the Explanatory Memorandum while introducing the Finance Bill, 2012 observed that the provisions of section 40(a)(ia) of the Act are meant to ensure that the assessees perform their obligation to deduct tax at source in accordance with the provisions of the Act. Such compliance will ensure revenue collection without much hassle. When the object sought to be achieved by those provisions are found to be achieved, it would be unjust to disallow legitimate business expenses of an assessee. Despite collection of taxes due, if disallowance of genuine business expenses is made then that would be unjust enrichment on the part of the Government as the payee would have also paid the taxes on such income. In order to remove this anomaly, this amendment has been introduced. The Tribunal noted that the disallowance is not to be made subject to satisfaction of the conditions mentioned in the second proviso.
Keeping in view the purpose behind the introduction of the second proviso, the Tribunal held that the second proviso can be said to be declaratory and curative in nature and therefore, should be given 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. The Tribunal also observed that the Delhi High Court has in the case of CIT vs. Ansal Land Mark Township (P.) Ltd. [2015] 61 taxmann.com 45 has taken a view that the insertion of the second proviso to section 40(a)(ia) of the Act is retrospective and will apply from 1.4.2005.
The alternative prayer made on behalf of the assessee to remain the issue to the AO for verification as to whether payees have included the receipts from the assessee in their returns of income in terms of the decision referred to above was accepted.
This ground of the appeal filed by the assessee was allowed.
