ISSUE FOR CONSIDERATION
In computing the income under the head ‘Profit and
Gains from Business and Profession’, several expenditures specified under
sections 30 to 37 are allowed as deductions. The deductions, however, are
subject to the provisions of sections 38 to 43B of the Act. These provisions of
law stipulate that an expenditure, otherwise allowable, would not be allowed to
be deducted or fully deducted in computing the business income. One such
provision is contained in sub clause (ia) of clause (a) of section 40 of the
Act. The said provision at present provides that 30% of an expenditure shall
not be deducted in computing the business income, involving payments to the
residents on which tax was deductible at source under Chapter XVII-B and, such
tax has not been deducted or, after deduction, has not been paid by the due
date for filing the return of income specified u/s 139(1) of the Act. This
provision introduced by the Finance Act, 2004 w.e.f. 1st April, 2005
has been amended from time to time. A similar provision, in the form of section
40(a)(i), exists for disallowance of expenditure on payments made to
non-residents.
A proviso was introduced by the Finance Act, 2008 with
retrospective effect from 1st April, 2005 to relax the rigors of
disallowance in cases where the assessee has otherwise paid the tax deducted,
after the end of the year, at any time before the due date of filing return of
income. Since then, the benefit of this proviso is now conferred under the main
provision itself. The said proviso is substituted by the Finance Act, 2010
w.e.f. 1st April, 2010 to provide for deduction in any other year,
other than the year of expenditure, in which the tax has been paid.
The Finance Act, 2012 has introduced the second
proviso w.e.f. 1st April, 2013 to deactivate the disallowance
provision in the case of an assessee who is not deemed to be an assessee in
default under the first proviso to section 201(1); in such a case it shall be
deemed that the assessee has deducted and paid the tax on the date of
furnishing the return of income by the payee in question.
Section 201 provides for the consequences of failure
to deduct tax at source or to pay as per the provisions of Chapter XVII-B by
treating the person as an assessee in default. The proviso to section 201(1),
introduced by the Finance Act, 2012 w.e.f. 1st July, 2012, relaxes
the rigors of the consequences of failure in cases where the payee of the
expenditure has paid the tax due on his income, including the sum of
expenditure, has furnished the return of income u/s 139 and has issued a
certificate to this effect in the prescribed form.
It is seen that the provisions of disallowance are
being relaxed by amendments from time to time to alleviate the harsh consequences
of disallowance. All of these amendments are introduced with prospective effect
and apparently do not help cases of assessees with defaults prior to the date
of introduction of the relief. Naturally, attempts are regularly made by the
assessees to seek retrospective application of the amendments for obtaining
relief otherwise made available prospectively, which attempts are resisted by
the Revenue authorities. The conflict about the date of application of the
second proviso to section 40(a)(ia), introduced by the Finance Act, 2012 w.e.f.
1st April, 2013 has reached the courts and conflicting decisions are
available on the subject. The Kerala High Court has consistently held that the
amendment is prospective in its application, while the Delhi, Allahabad,
Bombay, Karnataka, Punjab and Haryana High Courts have held that the benefit of
the second proviso is available retrospectively.
THE CASE OF THOMAS GEORGE MUTHOOT & ORS.
The issue came up for consideration before the Kerala
High Court in the case of Thomas George Muthoot & Ors. vs. CIT, 287
CTR 101. During the relevant assessment years, the assessees had paid
interest on amounts drawn by them from partnership firms of which they were
partners, without deduction of tax at source as was provided under Chapter
XVII-B of the IT Act, 1961. For that reason, the interest paid was disallowed
by the AO in terms of section 40(a)(ia) of the Act. The order passed by the AO
was confirmed by the CIT(A) and further appeals filed before the Tribunal were
dismissed by a common order dated 28th August, 2014. Aggrieved by
the orders passed by the Tribunal, the assessees filed appeals before the High
Court, formulating the following questions of law (the relevant ones):
‘(i) Whether on the facts and in the circumstances of
the case, did not the Tribunal err in law in sustaining the addition of Rs.
6,28,28,000 by invoking section 40(a)(ia) for the A.Y. 2006-07?
(ii) Did not the statutory authorities and the
Tribunal err in law in making addition under s. 40(a)(ia) when the payee has
included the entire interest paid by the appellant in its total income and
filed return of income accordingly?
(iii) Should not the statutory authorities and the
Tribunal have accepted the contention that the second proviso inserted w.e.f. 1st
April, 2013 was intended to remove the unintended consequences and was a
beneficial provision for removal of hardship and therefore, retrospective in
operation and applicable to the appellant’s case?
On hearing the parties, the Court noted that section
194A(1) of the Act provided that any person, not being an individual or an HUF,
who is responsible for paying to a resident any income by way of interest,
other than income by way of interest on securities, shall at the time of credit
of such income to the account of the payee, or at the time of payment thereof
in cash or by issue of a cheque or draft or by any other mode, whichever was
earlier, deduct income tax thereon at the rate in force. As per the proviso to
the said section, an individual or HUF, whose total sales, gross receipts or
turnover from business or profession carried on by him exceeded the monetary
limits specified u/s 44AB(a) or (b) during the financial year immediately
preceding the financial year in which such interest was credited or paid, was
liable to deduct income tax u/s 194A.
One of the consequences of the non-compliance of
section 194A, as noted by the Court, was contained in section 40 of the Act,
whereunder, notwithstanding anything to the contrary contained in sections 30 to 38, the amounts specified in the
section was not to be deducted in computing the income chargeable under the
head ‘profits and gains of business or profession’. It further observed that
among the various amounts that were specified for deduction of tax, clause
(a)(ia) of section 40, insofar as it was relevant, provided for disallowance of
interest payable to a resident, where tax had not been deducted at source.
The Court also observed that the assessees were
partners of the firms and during the assessment years in question they had paid
interest to the firms without deducting tax as required u/s 194A. It was in
such circumstances that the interest paid by them to the firms was disallowed
u/s 40(a)(ia), which order of the AO had been concurrently upheld by the CIT(A)
and the Tribunal.
The Court took note of the contention raised by the
assessees that the second proviso to section 40(a)(ia) of the Act, introduced
by the Finance Act, 2012, was retrospective in operation and as such, disallowance
could not have been ordered invoking section 40(a)(ia) of the Act, relying on
the judgements in Allied Motors (P) Ltd. vs. CIT-2 24 ITR 677 (SC) and
Alom Extrusions Ltd. 319 ITR 06 (SC).
It was noticed by the Court that the proviso was
inserted by the Finance Act, 2012 and came into force w.e.f. 1st April,
2013. The fact that the second proviso was introduced w.e.f. 1st
April, 2013 was expressly made clear by the provisions of the Finance Act, 2012
itself and the said legal position was clarified by the Court in Prudential
Logistics & Transports, 364 ITR 89 (Ker.).
The Court observed that the judgement in Allied
Motors (P) Ltd. (Supra) was a case where the Apex Court was considering
the scope and applicability of the first proviso to section 43B inserted by the
Finance Act, 1987 w.e.f. 1st April, 1988. On examination of the
legislative history, the Apex Court found that the language of section 43B was
causing undue hardship to the taxpayers and the first proviso was designed to
eliminate the unintended consequences which caused undue hardship to the
assessees and which made the provision unworkable or unjust in a specific
situation. Accordingly, the Apex Court held that the proviso was remedial and
curative in nature and on that basis held the proviso to be retrospective in
operation. Similarly, the Court noted that the Apex Court in Alom
Extrusions Ltd. (Supra) following the judgement in the Allied
Motors (Supra) case, held that the provisions of the Finance Act, 2003
by which the second proviso to section 43B was deleted and the first proviso
was amended, were curative in nature and therefore retrospective.
In conclusion, the Court held that a statutory
provision, unless otherwise expressly stated to be retrospective or by
intention shown to be retrospective, was always prospective in operation. The
Finance Act, 2012 clearly stated that the second proviso to section 40(a)(ia)
had been introduced w.e.f. 1st April, 2013. A reading of the second
proviso did not show that it was meant or intended to be curative or remedial
in nature and even the assessees did not have such a case. Instead, by the
proviso, an additional benefit was conferred on the assessees. Such a provision
could only be prospective as was held by the Court in Prudential
Logistics & Transports (Supra). Therefore, the contention raised
could not be accepted.
As a result, the Court did not find any merit in the
contention that the second proviso to section 40(a)(ia) inserted by the Finance
Act, 2012 w.e.f. 1st April, 2013 was prospective in nature. The
relevant questions of law were answered against the assessees and the appeals
were dismissed by the Court.
In a subsequent decision in the case of Academy
of Medical Sciences, 403 ITR 74 (Ker.), the Court reiterated the
proposition propounded in the cases of Prudential Logistics &
Transports, 364 ITR 689 (Ker.) and Thomas George Muthoot 287 CTR
(Ker.).
SHIVPAL SINGH CHAUDHARY’S CASE
The issue again arose recently in the case of CIT
vs. Shivpal Singh Chaudhary, 409 ITR 87 (P&H). The assessee in this
case had filed his return of income for the assessment year 2012-13 on 30th
September, 2012 declaring the total income of Rs. 1,25,96,920. The assessment
was completed u/s 143(3) of the Act on 27th February, 2015 on an
income of Rs. 2,45,41,840 by making the following additions / disallowances:
(i) Rs. 1,90,626 u/s 43B; (ii) Rs. 95,31,276 u/s 40(a)(ia) for non-deduction of
TDS on payment made for job work; (iii) Rs. 54,045 u/s 40(a)(ia) for non-deduction
of TDS on professional charges; (iv) Rs. 3,47,743 and Rs. 21,313 u/s 40(a)(ia)
for non-deduction of TDS on interest paid; (v) Rs. 17,98,420 out of interest on
the ground that the assessee had paid interest-free loans; and (vi) Rs. 1,500
being charity and donation expenses.
In the context of the issue under consideration, the
focused facts are that the assessee during the year in question had debited Rs.
98,99,141 on account of job work, out of which Rs. 95,31,276 was paid to M/s
Jhandu Construction Company without deduction of tax. The AO took the view that
the said payment should have been made only after deduction of tax at source
and, in view of the assessee’s failure to deduct tax at source, the AO
disallowed the payment in question u/s
40(a)(ia) of the Act. The assessee filed an appeal before the CIT(A)
pleading that, in view of the second proviso to section 40(a)(ia) of the Act,
payment should not have been disallowed. The CIT(A), after considering the
submissions of the assessee and going through the evidence on record, found
that the assessee had filed confirmation from the party that the payment made
by him to Jhandu Construction Co. had been reflected in its return of income.
Thus, the CIT(A) vide order dated 10th November, 2016 decided the
issue in favour of the assessee, which was upheld by the Tribunal vide order
dated 26th May, 2017.
The Revenue, aggrieved by the order of the Tribunal
for the assessment year 2012-13, had filed an appeal before the Punjab and
Haryana High Court u/s 260A of the Act raising the following substantial
question of law:
‘Whether on the facts and in the circumstances of the
case and in law, the Hon’ble Tribunal has erred in deleting the addition of Rs.
95,31,276 made under s. 40(1)(ia) for non-deduction of TDS on payment made for
job works by holding that the second proviso to s. 40(a)(ia) has a
retrospective effect and is applicable to the applicant for the relevant
assessment year whereas the said provisions of s. 40(a)(ia) are prospective in
operation w.e.f. 1st April,2013 as was held by the Hon’ble Kerala
High Court in the case of Thomas George Muthoot vs. CIT (IT Appeal No. 278
of 2014), [reported as (2016) 287 CTR (Ker.) 101: (2016) 137 DTR (Ker.)
76—Ed.]?’
On hearing the parties, the Court noted that:
(a) the issue
raised by the Revenue before the Tribunal pertained to the retrospectivity of
the second proviso to section 40(a)(ia) of the Act. Sub-clauses (i), (ia) and
(ib) in section 40(a) were substituted for clause (i) by the Finance (No. 2)
Act, 2004 w.e.f. 1st April, 2005;
(b) the second
proviso to section 40(a)(ia) of the Act was inserted by the Finance Act, 2012
w.e.f. 1st April, 2013;
(c) according to
the aforesaid proviso, a fiction has been introduced where an assessee, who had
failed to deduct tax in accordance with the provisions of Chapter XVII-B of the
Act, is not deemed 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;
(d) the
purpose of insertion of the first proviso to section 201(1) of the Act was to
benefit the assessee. It stipulated that a person who had failed to deduct tax
at source on the sum paid to a resident or on the sum credited to the account
of the resident, should not be deemed to be an assessee in default in respect
of such tax, provided the resident had furnished the return of income u/s 139
of the Act, had taken into account such sum for computing income in the return
of income, and paid tax due on the income declared by him in such return of
income;
(e) a mandatory
requirement existed under Chapter XVII-B of the Act to deduct tax at source
under certain eventualities;
(f) the
consequences for failure to deduct or pay tax deducted at source within the
time permissible under the statute were spelt out in section 201 of the Act.
However, under the first proviso to section 201(1) of the Act, inserted w.e.f.
1st July, 2012, an exception had been carved out which showed the
intention of the legislature to not treat the assessee as a person in default,
subject to fulfilment of the conditions as stipulated thereunder;
(g) no different
view could be taken regarding introduction of the second proviso to section
40(a)(ia) of the Act w.e.f. 1st April, 2013 which proviso was also
intended to benefit the assessee by creating a legal fiction in his favour, not
to treat him in default of deducting tax at source under certain contingencies
and that it should be presumed that the assessee had deducted and paid tax on
such sum on the date of furnishing of the return of income by the resident /
payee.
From the legal analysis of the first proviso to
section 201(1) and of the second proviso to section 40(a)(ia) of the Act, it
was discernible to the Court that according to both the provisos, where the
payee / resident had filed its return of income disclosing the payment received
by it or receivable by it, and had also paid tax on such income, the assessee
would not be treated to be a person in default and presumption would arise in
his favour as noted above.
The question that would require an answer from the
Court was whether the insertion of the second proviso to section 40(a)(ia) of
the Act w.e.f. 1st April, 2013 would apply to assessment year
2012-13, being retrospective. In that context, the Court observed that a
similar issue of whether the second proviso to section 40(a)(ia) of the Act was
prospective or retrospective in nature came up for consideration before the
Delhi High Court in Ansal Land Mark Township (P) Ltd. 377 ITR 635 (Del.).
The High Court in that case approved the ratio of the decision of the Agra
Bench of the Tribunal in ITA No. 337/Agra/2013 (Rajiv Kumar Aggarwal vs.
Asstt. CIT) wherein it was held that the second proviso to section
40(a)(ia) of the Act was declaratory and curative in nature and should be given
retrospective effect from 1st April, 2005.
The Court expressed its agreement with the view of the
Delhi High Court in Ansal Land Mark Township (P) Ltd. (Supra),
approving the reasoning of the Agra Bench of the Tribunal upholding the
rationale behind the insertion of the second proviso to section 40(a)(ia) of
the Act, and held that it was merely declaratory and curative and thus was
applicable retrospectively w.e.f. 1st April, 2005.
The Court noticed that the Revenue had relied upon two
decisions of the Kerala High Court in the cases of Prudential Logistics
& Transports (Supra) and Thomas George Muthoot (Supra),
wherein it had been held that the second proviso to section 40(a)(ia) of the
Act w.e.f. 1st April, 2013 was prospective and not retrospective.
The Court noted with respect that it was unable to subscribe to the aforesaid
contrary view of the Kerala High Court in the aforesaid two decisions.
The substantial question of law was answered against
the Revenue and in favour of the assessee and the appeal was dismissed by the
Punjab & Haryana High Court.
The Allahabad High Court in the case of Pr. CIT
vs. Manoj Singh, 402 ITR 238, concurring with Ansal Land Mark
Township (P) Ltd. (Supra) and dissenting with Thomas George
Muthoot & Ors. (Supra) also has held that the second
proviso to section 40(a)(ia) was retrospective in nature. The recent decisions
of the High Courts in CIT vs. S.M. Anand, 3 NYPCTR 383; Principal CIT vs.
Mobisoft Telesolutions (P) Ltd., 411 ITR 607 (P&H); Soma Trg. Joint Venture
vs. CIT, 398 ITR 425 (J&K); Principal CIT vs. Perfect Circle India (P) Ltd.
IT Appeal No. 707 of 2016 (Bom.) and Smt. Deeva Devi vs.
Principal CIT & Anr. WP No. 3928 of 2018 (Karn.), are on similar
lines.
OBSERVATIONS
The issue under consideration moves in a narrow range.
There is no dispute about the prospective application of the second proviso to
section 40(a)(ia), for allowance of deduction in cases where the assessee is
not deemed to be in default on payment by the payee of an expenditure, subject
to satisfaction of the prescribed conditions. There is also no dispute that the
said proviso, in express language, is made applicable w.e.f. 1st April,
2013. The dispute is limited to reading the said proviso in a manner that
permits the retrospective application of the said proviso to assessment year
2012-13 and the earlier years.
The second proviso to section
40(a)(ia) of the Act reads thus:
‘Provided further that where an assessee fails to
deduct the whole or any part of the tax in accordance with the provisions of
Chapter XVI-IB on any such sum but is not deemed to be an assessee in default
under the first proviso to sub-s. (1) of s. 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.’
Admittedly, this proviso was inserted by the Finance
Act, 2012 and came into force w.e.f. 1st April, 2013. The fact that
the second proviso was introduced w.e.f. 1st April, 2013 is
expressly made clear by the provisions of the Finance Act, 2012 itself. A
statutory provision, unless otherwise expressly stated to be retrospective or
by intendment shown to be retrospective, is always prospective in operation.
The Finance Act, 2012 shows that the second proviso to section 40(a)(ia) has
been introduced w.e.f. 1st April, 2013. A reading of the second
proviso does not show that it was meant or intended to be curative or remedial
in nature. Instead, by this proviso an additional benefit was conferred on the
assessees. Such a provision can only be prospective.
Ordinarily, a law, unless otherwise provided for, is
applicable from the date when it is introduced. This principle holds good even
in a case where the legislature has not expressly provided for the date of its
application. In cases where the date of the application of the law has been
expressly provided for, not much difficulty should arise in holding its
application to be prospective. Further, in cases where the law seeks to cast an
obligation on the subject, it will be fair to hold that such law is applied
prospectively, unless it has been in express terms retrospectively applied by
the legislature.
These understandings, so derived, may be materially
altered in cases where the law seeks to grant a relief or where it seeks to
undo an injustice or unfair practice or a prevailing hardship or remedy a wrong.
This is even in respect of the procedural amendments. Looking at the general
principles governing the date of application of the law or an amendment, it was
not very difficult for the five high courts to hold that the second proviso had
a retrospective application, the reason being that it, in essence, sought to
remove a hardship which was unintended and its application in this manner would
not harm the interest of the other party, namely, Revenue, in any manner in
this case.
Where a law is enacted to benefit a large section of
the public, the benefit may be applied retrospectively, even where it has not
been expressly so provided. The effect of the second proviso is to simply
remedy a wrong. In the circumstances, it was fair for the courts to have applied
the amendment retrospectively, though it was expressly made applicable
prospectively, by reading the retrospectivity into the law. Such a reading, in
our opinion, cannot be viewed to be doing violence to the law.
It is worth noting that most of the high courts have
quoted with approval and appreciation the ratio of the decision of the Agra
Bench of the Tribunal in the case of Rajeev Kumar Agarwal vs. Addl. CIT
165 TTJ (Agra) 228. The relevant part reads thus:
‘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 de-incentivise 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 penalising for the tax deduction at source lapses. There are
separate penal provisions to that effect. Deincentivising a lapse and punishing
a lapse are two different things and have distinctly different, and sometimes
mutually exclusive, connotations. When one appreciates the object of the 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 the Delhi High Court on interpretation of this legal provision, 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) 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 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 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 law-makers 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 the 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, the view cannot be subscribed 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, 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.’
The retrospective operation is substantiated by
relying on the judgement in Allied Motors (P) Ltd. 224 ITR 677 (SC).
That was a case where the Apex Court was considering the scope and
applicability of the first proviso to section 43B inserted by the Finance Act,
1987 w.e.f. 1st April, 1988. On examination of the legislative
history, the Court found that the language of section 43B was causing undue
hardship to the taxpayers and the first proviso was designed to eliminate
unintended consequences which caused undue hardship to the assessees and which
made the provision unworkable or unjust in a specific situation. Accordingly,
the Court held that the proviso was remedial and curative in nature, and on that
basis held the proviso to be retrospective in operation.
In Alom Extrusions Ltd. 319 ITR 306 (SC) also
following the judgement in Allied Motors (Supra), the Apex Court
held that provisions of the Finance Act, 2003 by which the second proviso to
section 43B was deleted and the first proviso was amended, were curative in
nature and therefore retrospective.
The issue has been considered by five High Courts to
hold 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. The finding of the judgement in the case of Ansal Land Mark
Township (P) Ltd. (Supra) was considered by the Apex Court in the case
of CIT vs. Calcutta Export Co. 404 ITR 654 (SC), in the context
of the first proviso to section 40(a)(ia) of the Act, which proviso was held to
be retrospective in nature. It is, however, noted that a Special Leave Petition
is granted by the Apex Court against the judgement of the Delhi High Court in CIT
vs. Ansal Land Mark Township (P) Ltd. (Supra) 242 Taxman 5(SC) (St.).
The Apex Court in the case of Hindustan
Coca-Cola Beverage (P) Ltd. vs. CIT, 293 ITR 226 (SC) held that even in
the absence of second proviso to section 40(a)(ia), once the payee has been
found to have already paid the tax, the payer / deductor can at best be asked
to pay the interest on delay in depositing tax.
The Kerala High Court, while deciding the cases of Thomas
George Muthoot (Supra) and Prudential Logistics & Transports
(Supra), did not have the benefit of authority of the Constitution
Bench in Vatika Township (P) Ltd. (Supra). In both these
judgements, as observed by the Allahabad High Court in Manoj Kumar Singh’s
case, the judgement of the Apex Court in the case of Vatika Township (P)
Ltd. (Supra) was not considered.
The Apex Court in CIT vs. Vatika Township (P)
Ltd., 367 ITR 466 (SC) while holding that, unless otherwise provided,
an amendment should be held to be prospective and should apply from the date
expressly specified for its application, nonetheless held as under:
‘31. Of the various rules guiding how a legislation
has to be interpreted, one established rule is that unless a contrary intention
appears, a legislation is presumed not to be intended to have a retrospective
operation. The idea behind the rule is that a current law should govern current
activities. Law passed today cannot apply to the events of the past. If
we do something today, we do it keeping in view the law of today and in force
and not tomorrow’s backward adjustment of it. Our belief in the nature of the
law is founded on the bedrock that every human being is entitled to arrange his
affairs by relying on the existing law and should not find that his plans have
been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As
was observed in Phillips vs. Eyre (1870) LR 6 QB 1, a
retrospective legislation is contrary to the general principle that legislation
by which the conduct of mankind is to be regulated when introduced for the
first time to deal with future acts ought not to change the character of past
transactions carried on upon the faith of the then existing law.
32. The obvious basis of the principle against
retrospectivity is the principle of “fairness” which must be the basis of every
legal rule as was observed in the decision reported in L’Office Cherifien
des Phosphates vs. Yamashita-Shinnihon Steamship Co. Ltd. (1994) 1 AC 486 (HL).
Thus, legislations which modified accrued rights or which impose
obligations or impose new duties or attach a new disability have to be treated
as prospective unless the legislative intent is clearly to give the enactment a
retrospective effect, unless the legislation is for the purpose of
supplying an obvious omission in a former legislation or to explain a former
legislation. We need not note the cornucopia of case law available on the
subject because aforesaid legal position clearly emerges from the various
decisions and this legal position was conceded by the counsel for the parties.
In any case, we shall refer to few judgements containing this dicta a little later.
33. We would also like to point out, for the sake of
completeness, that where a benefit is conferred by a legislation, the rule
against a retrospective construction is different. If a legislation confers
a benefit on some persons but without inflicting a corresponding detriment on
some other person or on the public generally, and where to confer such benefit
appears to have been the legislators’ object, then the presumption would be
that such a legislation, giving it a purposive construction, would warrant it
to be given a retrospective effect. This exactly is the justification to treat
procedural provisions as retrospective. In Government
of India & Ors. vs. Indian Tobacco Association [(2005) 7 SCC 396], the
doctrine of fairness was held to be relevant factor to construe a statute
conferring a benefit, in the context of it to be given a retrospective
operation. The same doctrine of fairness, to hold that a statute
was retrospective in nature, was applied in the case of Vijay vs. State of Maharashtra & Ors. (2006) 6 SCC 289. It was held that where a law is enacted for the benefit of community as
a whole, even in the absence of a provision the statute may be held to be
retrospective in nature. However, we are (not) confronted with any such
situation here.
34. In such cases, retrospectively(ity) is attached to
benefit the persons in contradistinction to the provision imposing some burden
or liability where the presumption attaches towards prospectivity. In the
instant case, the proviso added to s. 113 of the Act (surcharge on special tax
in search cases) is not beneficial to the assessee. On the contrary, it is a
provision which is onerous to the assessee. Therefore, in a case like this, we
have to proceed with the normal rule of presumption against retrospective
operation. Thus, the rule against retrospective operation is a fundamental rule
of law that no statute shall be construed to have a retrospective operation
unless such a construction appears very clearly in the terms of the Act, or
arises by necessary and distinct implication. Dogmatically framed, the rule is
no more than a presumption and thus could be displaced by outweighing factors.’
It is not always necessary that an express provision
is made to make a statute retrospective. In fact, where a prohibition has been
deleted by a subsequent amendment, it is possible to presume that the same was
never in existence. It may be true, as noted by the Kerala High Court, that law
in general has to be applied prospectively, but such a presumption against the
retrospective operation may be rebutted by necessary implication, especially in
a case where the new law is made to cure an acknowledged evil for the benefit
of the community as a whole (Zile Singh vs. State of Haryana, 8 SCC 1,
page 9). The material to show that the Legislature intended to cure the
acknowledged evil or to remove any such hardship is available in the form of
the Explanatory memorandum explaining the need to introduce the second proviso.
The language used, the object intended, the nature of rights affected and the
circumstances under which the amendment is passed, support that the same is
retrospective in nature.
The test to be applied for deciding as to whether a
later amendment should be given a retrospective effect, despite a legislative
declaration specifying a prospective date as the date from which the amendment
is to come into force, is as to whether without the aid of the subsequent
amendment, the unamended provision is capable of being so construed as to take
within its ambit the subsequent amendment [CWT vs. B.R. Theatres and
Industrial Concerns (P) Ltd., 272 ITR 177 (Mad.)]. The Kerala High
Court did not, in our respectful opinion, provide adequate reasons as to how
this test was not met in the case of the second proviso under consideration
here, inasmuch as the amendment made provided an important guideline in interpretation
of the law prevailing before the amendment. This is all the more so where the
Apex Court (in the Hindustan Coca-Cola case) had taken a view
that even before the insertion of the proviso to section 201(1), the payer
could not be treated to be an assessee in default if the payee had paid tax on
such income, implying that the failure to deduct tax had been made good on
payment of tax by the payee. The Explanatory Memorandum to the Finance Act,
2012 in the context of this amendment reads as under:
‘In order to rationalise the provisions of
disallowance on account of non-deduction of tax from the payments made to a
resident payee, it is proposed to amend section 40(a)(ia) to provide that where
an assessee makes payment of the nature specified in the said section to a
resident payee without deduction of tax and is not deemed to be an assessee in
default under section 201(1) on account of payment of taxes by the payee, then,
for the purpose of allowing deduction of such sum, 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.
These beneficial provisions are proposed to be
applicable only in the case of resident payee.
These amendments will take effect from 1st April,
2013 and will, accordingly, apply in relation to the assessment year 2013-14
and subsequent assessment years.’
The Explanatory Memorandum therefore does indicate
that this was a measure of rationalisation – in other words, to correct
something which was irrational. This amounts to correction of a wrong.
An amendment is best considered to be curative in
nature if it is introduced to remove the hardship, more so where the amendment
takes care of ensuring that there is no leakage of revenue.
In the context of section 43B itself, the Supreme
Court in Allied Motors (P) Ltd. (Supra), held that the amendment
made in section 43B by the Finance Act, 1987 by way of insertion of the first
proviso is of curative nature and thereby retrospective in application. The
said first proviso was introduced to provide that the payment of taxes, duties,
fees, cess, etc., made by the due date of filing return of income was eligible
for deduction. No express provision was made to provide that the said proviso
had a retrospective effect. In spite of the absence of the express provision,
the Court held that the same was retrospective in nature and should be so
applied in conferring the relief to the assessees.
The better view on the subject is to apply the benefit
of the second proviso retrospectively to assessment year 2012-13 and earlier
years by holding that retrospectivity is called for by necessary and distinct
implication and its express application w.e.f. 1st April, 2013
should be displaced by outweighing factors.
