1.       
1.   Commissioner of Income Tax, Kolkata vs. Calcutta Export Company
(2018) 404 ITR 654 (SC)

Business
Expenditure – Disallowance u/s. 40(a)(ia) – The amended provision of section
40(a)(ia) of the 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

Calcutta Export Company, a
partnership firm, a manufacturer and exporter of casting materials, 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 u/s. 143(3) of the 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 Steel Crackers
Pvt. Ltd. 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 assessee 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 Act as it stood then.
But the same was deposited on 01.08.2005, hence, the assessee could not 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
assessee.

Being aggrieved by the
order dated 12.10.2009, the assessee 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 was
eligible for deduction under the said Assessment Year.

Being aggrieved, the
Revenue preferred an appeal before the Tribunal, which came to be dismissed on
29.02.2012.

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, dismissed the appeal.

Aggrieved by the judgment
and order dated 03.09.2012, the Revenue has preferred this appeal before the
Supreme Court.

According to the Supreme
Court, the point that arose for its consideration was as to 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.

If it is so, then the tax
duly paid by the assessee on 01.08.2005 was 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.

For deciding as to the
retrospective effect of the amendment made by Finance Act, 2010, the Supreme
Court noted the section as it stood before and after the amendment made through
the Finance Act, 2010 and the purpose of such insertion or amendment to the
said provisions. The Supreme Court noted that the purpose of bringing the said
amendment to the existing provision of section had been highlighted in the
memorandum explaining the provision which read 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”.

According to the Supreme
Court, the purpose was 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 was
further reflected from a bare reading of the provisions of section 40(a)(ia) of
the Act. It only resulted in shifting of the year in which the expenditure
could 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
could 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 government after the expiry of period allowed for such
deposit then the deductions could be claimed only in the previous year in which
such TDS payment was made to the government.

However, it had caused some
genuine and apparent hardship to the assessees 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 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 u/s. 40(a)(ia) of Act.

With a view to mitigate
this hardship, section 40(a)(ia) was amended by the Finance Act, 2008.

The amendments made by the
Finance Act, 2008 thus provided that no disallowance u/s. 40(a)(ia) of the Act
shall be made in respect of the expenditure incurred in the month of March if
the tax deducted at source on such expenditure had been paid before the due
date of filing of the return. The amendment was given retrospective operation
from the date of 01.04.2005 i.e., from the very date of substitution of the provision.

Therefore, the assessees
were, after the said amendment in 2008, classified in two categories namely;
one; those who 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 u/s. 40(a)(ia) of the 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 Act for the said previous year. In case, the assessees
were falling under the second category, no disallowance u/s. 40(a)(ia) of 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.
According to the Supreme Court, the net effect was that the assessee could not
claim deduction in the previous year in which the tax was deducted and the
benefit of such deductions could be claimed in the next year only.

The
Supreme Court observed that the amendment though had addressed the concerns of
the assessees falling in the first category but with regard to the case falling
in the second category, it was still resulting into unintended consequences and
causing grave and genuine hardships to the assessees 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 u/s. 139(1) of the 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.

In order to remedy this
position and to remove hardships which were being caused to the assessees
belonging to such second category, amendments were made in the provisions of
section 40(a) (ia) by the Finance Act, 2010.

Thus, the Finance Act, 2010 further relaxed the rigors of section 40(a)(ia) of
the 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 1^st April, 2010 and will, accordingly, apply in
relation to the Assessment Year 2010-11 and subsequent years.”

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.

The Supreme Court held that
the 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, 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.

The Supreme Court further held that 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.

The purpose of the
amendment made by the Finance Act, 2010 was to solve the anomalies that the
insertion of section 40(a)(ia) was causing to the bonafide 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 profit rate and when expenditure which becomes
subject matter of an order u/s. 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, would 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 was required to be given retrospective operation i.e., from the date
of insertion of the said provision.

The Supreme Court concluded
that the amended provision of section 40(a)(ia) of the 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.

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 Act, hence, was allowed to claim the benefit of the
amendment made by Finance Act, 2010 to the provisions of section 40(a)(ia) of
the IT Act.

2.       
2.    Commissioner of Income Tax vs. HCL
Technologies Ltd. (2018) 404 ITR 719 (SC)

Export of computer
software – Exemption/Deduction – If the deductions on freight,
telecommunication and insurance attributable to the delivery of computer
software u/s. 10A of the Act are allowed only in Export Turnover but not from
the Total Turnover then, it would give rise to illogical result which would
cause grave injustice to the Respondent which could have never been the
intention of the legislature – When the object of the formula is to arrive at
the profit from export business, expenses excluded from export turnover have to
be excluded from total turnover also

The Respondent – HCL
Technologies Ltd., a company registered under the Companies Act, 1956, was
engaged in the business of development and export of computer softwares and
rendering technical services.

The
Respondent had shown gross income from business at Rs. 267,01,76,529/- while
claiming deductions under section 10A of the Act to the tune of Rs.
273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The Respondent filed
its return of income for the Assessment Year 2004-05 on 01.11.2004 declaring
the income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return
of income for Rs. 91,16,99,060/- was filed by the Respondent which was selected
for scrutiny u/s. 143 of the Act.

The Assessing Officer, vide
order dated 28.12.2006, held that the software development charges, as claimed
by the Respondent, were nothing but in the nature of expenses incurred for
technical services provided outside India. Further, in view of the fact that it
was not purely technical services and some element of software development was
also involved in it and in the absence of such bifurcation, the Assessing
Officer estimated such expense at the rate of 40% and remaining 60% for
providing technical services by the Respondent in foreign exchange to its
offshore clients and assessed the taxable income at Rs. 137,20,34,576/- and
levied penalty to the tune of Rs. 21,81,90,239/-.

Being aggrieved, the
Respondent preferred an appeal before the Commissioner of Income Tax (Appeals).
Learned CIT (Appeals), vide order dated 09.05.2007, partly allowed the appeal
while estimating 10% as software development charge incurred for technical
services provided outside India as against 60% estimated by the Assessing
Officer.

Being aggrieved, the
Respondent as well as the Revenue, preferred cross appeals before the Tribunal.
The Tribunal, vide order dated 23.01.2009, dismissed the appeal filed by the
Revenue while allowing the appeal of the Respondent.

Being aggrieved, the
Revenue preferred an appeal before the High Court. The High Court, vide order
dated 15.12.2009, dismissed the appeal of the Revenue.

Hence, Revenue filed
appeals before the Supreme Court.

According to the Supreme Court, the only point for consideration before it was
whether in the facts and circumstances of the case, the software development
charges were to be excluded while working out the deduction admissible u/s. 10A
of the Act on the ground that such charges were relatable towards expenses
incurred on providing technical services outside India?

The Supreme Court noted
that the Respondent was engaged in the business of software development for its
customers engaged in different activities at software development centres of
the Respondent. However, in the process of such customised software
development, certain activities were required to be carried out at the sight of
customers on site, located outside India for which the employees of the
branches of the Respondent located in the country of the customers were
deployed. Moreover, after delivery of such softwares as per requirement, in
order to make it fully functional and hassle free functioning subsequent to the
delivery of softwares in many cases, there could be requirement of technical
personnel to visit the client on site. The Assessing Officer had not brought any
evidence that the Respondent was engaged in providing simply technical services
independent to software development for the client for which the expenditures
were incurred outside India in foreign currency.

The Supreme Court further
noted that the Respondent company had claimed deduction u/s. 10A as per
certificates filed on Form No. 56F. The Respondent, while computing the
deduction, had taken the same figure of export turnover as of total turnover.
The Respondent had cited various judicial cases but all these cases pertained
to deduction u/s. 80HHC.

The Supreme Court also
noted that the definition of total turnover had been defined in section 80HHC
and 80HHE of the Act and that the definition of total turnover had not been
defined u/s. 10A of the Act.

The Supreme Court held that
the definition of total turnover given u/s. 80HHC and 80HHE could not be
adopted for the purpose of section 10A as the technical meaning of total
turnover, which does not envisage the reduction of any expenses from the total
amount, is to be taken into consideration for computing the deduction u/s. 10A.
When the meaning is clear, there is no necessity of importing the meaning of
total turnover from the other provisions. If a term is defined u/s. 2 of the
Act, then the definition would be applicable to all the provisions wherein the
same term appears. As the term ‘total turnover’ has been defined in the
Explanation to section 80HHC and 80HHE, wherein it has been clearly stated that
“for the purposes of this section only”, it would be applicable only
for the purposes of that sections and not for the purpose of section 10A. If
denominator includes certain amount of certain type which numerator does not
include, the formula would render undesirable results.

In the instant case, if the
deductions on freight, telecommunication and insurance attributable to the
delivery of computer software u/s. 10A of the Act are allowed only in Export
Turnover but not from the Total Turnover then, it would give rise to
inadvertent, unlawful, meaningless and illogical result which would cause grave
injustice to the Respondent which could have never been the intention of the
legislature.

Even in common parlance,
when the object of the formula is to arrive at the profit from export business,
expenses excluded from export turnover have to be excluded from total turnover
also.

On the issue of expenses on
technical services provided outside, one has to follow the same principle of
interpretation as followed in the case of expenses of freight, telecommunication
etc., otherwise the formula of calculation would be futile. Hence, in the same
way, expenses incurred in foreign exchange for providing the technical services
outside should be allowed to excluded from the total turnover.

According to the Supreme
Court, the appeal was devoid of merits and thus was dismissed.

3.       3.    Mahaveer Kumar Jain vs. Commissioner of
Income-tax (2018) 404 ITR 738 (SC)

Income-tax Act not
applicable to Sikkim till 1989 – Prize money earned in Sikkim State Lottery in
1986 – Once the assessee having paid the income tax at source in the State of
Sikkim as per the law applicable at the relevant time in Sikkim, the same
income was not taxable under the Income-tax Act, 1961

The Appellant, a resident
of Jaipur, Rajasthan, having income from business and property, won the first
prize of Rs. 20 lakhs in the 287^th Bumper Draw of the Sikkim State
Lottery held on 20.02.1986 at Gangtok organised by the Director, State Lottery,
Government of Sikkim, Gangtok. Out of Rs. 20 lakhs, the Appellant herein
received Rs. 16,20,912/- through two Demand Drafts for Rs. 8,10,000/- and Rs.
8,10,912/- each, after deduction of Rs. 2 lacs being agent’s/seller’s
commission and Rs. 1,79,088/- being Income Tax under the Sikkim State Income
Tax Rules, 1948.

The Appellant herein filed
Income Tax Return for the Assessment Year (AY) 1986-87 disclosing the income
from lottery at Rs. 20 lakhs and deducting the agent/seller commission of Rs. 2
lakhs out of the same. He claimed deduction u/s. 80TT of the Act on Rs.
20,00,000/- i.e. the gross amount of the prize money won in the lottery in
accordance with the provisions of the charging section.

On scrutiny, the Assessing
Officer (AO), vide order dated 08.01.1988, allowed the deduction u/s. 80TT of
the Act on Rs. 18 lakhs instead of Rs. 20 lakhs while holding that the
Government of Sikkim, had deducted the tax at source from the lottery amount of
Rs. 18 lakhs as Rs. 2 lakhs have been paid to the agent directly. In other
words, under the relevant provisions of section 80TT of the Act, the deduction
can be claimed only on net income out of lottery and not on the gross income.
The said order was further confirmed by the Commissioner of Income Tax,
(Appeals) vide order dated 31.10.1988.

Being aggrieved, the
present Appellant preferred an appeal before the Income Tax Appellate Tribunal
challenging the computation by the Assessing Officer (AO) of the deduction u/s.
80TT of the IT Act. The Appellant Assessee raised an additional ground before
the Tribunal claiming that the authorities below have grossly erred in law in
treating the lottery income of Sikkim Government as income under the Act.

Though the Tribunal allowed
the appeal partly vide order dated 26.02.1993 but it dismissed the objections
raised by the Appellant herein as to legality of assessment order and held that
the lottery amount is taxable under the provisions of Act.

However, at the instance of
the Appellant Assessee, the Tribunal framed certain questions under Act and
referred the same to the High Court for opinion, considering them the questions
of law fit for reference which are as under:

1.    Whether on the facts and in the circumstance
of the case, the Hon’ble Tribunal was justified in holding that income from
Sikkim State Lottery is taxable under the Income Tax Act, 1961?

2.    Whether in the facts and circumstances of the
case the Tribunal was justified in holding that deduction u/s. 80TT is
applicable on the net winning amount received by the Assessee and not on the
gross amount of the winning prize?

A Division
Bench of the High Court, vide judgment and order dated 10.09.2004, answered the
questions raised in affirmative.

Aggrieved
by the judgment and order dated 10.09.2004, the Appellant-Assessee preferred
appeal by way of special leave before the Supreme Court.

According
to the Supreme Court, the issue that arose for its consideration in the present
case was whether income from lottery earned is taxable under the Act especially
when such income was already taxed under the provisions of Sikkim State Income
Tax Rules, 1948. If so, whether the deduction that is to be allowed on such
income u/s. 80TT of the Act is on ‘gross income’ or on the ‘net income’.

The
Supreme Court noted that prior to 26.04.1975, Sikkim was not considered to be a
part of India. Any income accruing or arising there from would be treated as
income accruing or arising in any foreign country. However, by the 36^th
amendment to the Indian Constitution in 1975, Sikkim became part of the Indian
Union. This, amendment was effected by introducing Article 371F in the
Constitution.

According
to the Supreme Court, on a plain reading of this provisions of Article 371F, it
was clear that all laws which were in force prior to April 26, 1975, in the
territories now falling within the State of Sikkim or any part thereof were
intended to continue to be in force until altered or repealed. Therefore, the
law in force prior to the merger, continued to be applicable.

The
Income-tax Act was made applicable only by Notification made in 1989 and the
first assessment year would be 1990-91 and by the application of this Act, the
Sikkim State Income Tax Manual, 1948 stood repealed.

The
Supreme Court observed that in the present case, it was concerned with the
assessment year 1986-87, and, during this time, the Income-tax Act had not been
made applicable to the territories of Sikkim. The law corresponding to the
Income-tax Act, which immediately was in force in the relevant State was Sikkim
State Income Tax Rules, 1948. Hence, there could be two situations, first is that
the person was a resident of Sikkim during the time period of 1975-1990 and the
income accrued and received by him there only. In such a case, no question of
applicability of the Income-tax Act arises.

However,
the problem arises where the income accrues to a person from the State of
Sikkim who was not a resident of Sikkim but of some other part of India. The
question that arises is whether the provisions of the Income-tax Act are
applicable to such income and whether the same could be subjected to tax under
the said Act especially in light of the fact that the income has already been
subjected to tax under the Sikkim State Income Tax Rules, 1948.

According
to the Supreme Court, the Appellant, being a resident of Rajasthan, received
the income arising from winning of lotteries from Sikkim during the Assessment
Year in question was liable to be included in the hands of the assessee as
resident of India within the State of Rajasthan where Income-tax Act was in
force notwithstanding that the same had accrued or arisen to him at a place
where the Income-tax Act was not in force even in respect of income accruing to
him without taxable territory. Section 5 of the Income-tax Act casts a very
wide net and all incomes accruing anywhere in the world would be brought within
its ambit.

However,
in the present case, that the amount had been earned by the Appellant-Assessee
in the State of Sikkim and the amount of lottery prize was sent by the
Government of Sikkim to Jaipur on the request made by the Appellant. The
result, therefore, was that, while section 5 of the Act would not be
applicable, the existing Sikkim State Income Tax Rules, 1948 would be
applicable, since Sikkim was a part of India for the accounting year,
therefore, on the same income, two types of income-taxes could not be applied.
It was a fundamental Rule of law of taxation that, unless otherwise expressly
provided, income cannot be taxed twice.

According
to the Supreme Court, therefore, the only question remained to be decided was
whether in fact there was a specific provision for including the income earned
from the Sikkim lottery ticket prior to 01.04.1990 and after 1975, in the
income-tax return or not. The Supreme Court after going through the relevant
provisions could not find such a provision in the Act wherein a specific
provision has been made by the legislature for including such an income by an
Assessee from lottery ticket. In the absence of any such provision, according
to the Supreme Court, the Assessee in the present case could not be subjected
to double taxation. Furthermore, a taxing Statute should not be interpreted in
such a manner that its effect will be to cast a burden twice over for the
payment of tax on the taxpayer unless the language of the Statute is so
compelling that the court has no alternative than to accept it. In a case of
reasonable doubt, the construction most beneficial to the taxpayer is to be
adopted. So, it was clear enough that the income in the present case was
taxable only under one law. By virtue of Clause (k) to Article 371F of the
Constitution which starts with a non-obstante clause, it would be clear that
only the Sikkim Regulations on Income-tax would be applicable in the present
case. Therefore, the income could not be brought to tax any further by applying
the rates of the Income-tax Act.

In view of the aforementioned
discussions, the Supreme Court held that once the assessee had paid the income
tax at source in the State of Sikkim as per the law applicable at the relevant
time in Sikkim, the same income was not taxable under the Income-tax Act, 1961.
Having decided so, the other issue whether the income that is to be allowed deduction
u/s. 80TT of the IT Act is on ‘Net Income’ or ‘Gross Income’, became academic.

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