The whole discussion will cover following aspects of law-
- Statutory provisions of Disallowance U/S 40(a) (ia).
- Controversy on word "Paid"/"Payable".
- Law of "Retrospective application" of amendments, when amendment is Curative / Remedial in nature or to mitigate the unintended consequences.
- Legal position after Judgment in Shree Choudhary Transport co. Vs. ITO.
Statutory Provision
Statutory provision of S. 40(a) (ia) requires
Disallowance of any sum payable to the extent of thirty percent (Prior to amendment by Finance Act 2014 it was 100%), if tax at source was deductible under chapter XVII-B, and such tax has not been deducted or after deduction, has not been paid on or before the due date specifies in S. 139(1).
There are two provisos to S. 40(a) (ia),
First proviso requires that if the tax has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in S. 139(1), then the sum disallowed originally under S. 40(a) (ia) will be allowed in computing the income of the previous year in which such tax has been paid
Second proviso allows claim of expenditure where tax has not been deducted but the payee has fulfilled certain conditions of S. 201 and furnishes his Return of Income. Expenditure will be allowed in computing the Income of previous year in which payee furnishes his Return of Income.
Facts of case
During Assessment Year 2005-06 Assessee made various payments during course of transport business to various truck operators, engaged by him for carrying goods, without deducting TDS. Assessing officer disallowed expenditure by applying provisions of S. 40 40(a) (ia). Assessee preferred appeals to CIT (A), ITAT and High Court but didn't get any relief.
Contention of Assessee before SC
- Disallowance under Section 40(a)(ia) of the Act is confined to the expenses that are booked during the year but remain payable or outstanding and not the expenses that had already been paid.
- That the said sub-clause (ia), having been inserted to clause (a) of Section 40 of the Act with effect from 01.04.2005 by the Finance (No.2) Act, 2004, would apply only from the financial year 2005-2006 and hence, cannot apply to the present case pertaining to the financial year 2004-2005. In support assessee relied upon the decision of Calcutta High Court in the case of PIU Ghosh v. Deputy Commissioner of Income-Tax & Ors (2016) 386 ITR 322. Supplemental to these contentions, the learned counsel of assesee also argued that, in any case, the Finance (No.2) Act, 2004 received the assent of the President of India on 10.09.2004 and hence, the rigour of sub clause (ia) of Section 40(a) of the Act cannot be applied in relation to the payments already made before 10.09.2004, the date of introduction of this provision.
- That the amendment made to Section 40(a)(ia) of the Act by the Finance(No.2) Act, 2014, restricting and limiting the extent of disallowance to 30%, being curative in nature and having been introduced to ameliorate the hardships faced by the assessee, deserves to be applied retrospectively and from the date of introduction of sub-clause (ia) to Section 40(a) of the Act. The learned counsel has developed this argument by relying on the decision in Commissioner of Income-Tax v. Calcutta Export Company: (2018) 404 ITR 654, wherein Supreme Court has held the remedial amendment of Section 40(a)(ia) of the Act by the Finance Act, 2010 to be retrospective in nature and applicable from the date of insertion of the said provision.
Contention of Revenue
Strongly relying upon judgment of SC in Palam Gas Service v. CIT (2017) 394 ITR 300, revenue contended that provisions of Section 40(a)(ia) covers amount paid as well as remained outstanding in books of assessee and amendment to Section 40(a) of the Act with insertion of sub-clause (ia) by the Finance (No. 2) Act, 2004 with effect from 01.04.2005 directly applies to the assessment year 2005-2006. The learned counsel for revenue also argued that the proviso to Section 40(a)(ia) of the Act, as inserted by the Finance Act, 2014, does not apply to the case at hand pertaining to the assessment year 2005-2006 and hence, the argument for curative benefit (i.e. retrospective application of amendment by treating it remedial in nature) with reference to the said proviso does not hold the ground.
SC Decided
SC decided the all question of law in favour of revenue. The assessee's contention regarding the applicability of S. 40 (a)(ia) on sum payable or outstanding at year end in Books of accounts, was not entertained and SC followed its own Judgment in case of Palam Gas Service v. CIT (2017) 394 ITR 300 and decided that provision is equally applicable on 'sum paid' as well as 'sum payable'.
While deciding, 'Whether sub-clause (ia) of Section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005, is applicable only from the financial year 2005-2006 and, hence, is not applicable to the present case relating to the financial year 2004-2005?, SC overruled the decision of Calcutta High Court in case of PIU Ghosh v. Deputy Commissioner of Income-Tax & Ors (2016) 386 ITR 322 and laid down the well settled principle that the Income-tax Act, as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year.
On question relating to retrospective operation of amendment by Finance Act 2014, SC observed that "It is difficult to find any substance in the argument that the principles adopted by this Court in the case of CIT v. Calcutta Export Company (2018) 404 ITR 654 (SC) dealing with curative amendment, relating more to the procedural aspects concerning deposit of the deducted TDS, be applied to the amendment of the substantive provision by the Finance (No.2) Act, 2014. An amendment made to mitigate the unintended hardship/consequences and making the provision workable must be treated as retrospective but Law regarding substantive provision regarding reduction of quantum of Disallowance cannot be made applicable retrospectively.
