Amendment in section 201 amended by Finance Act, 2012 is retrospective.

These two appeals are filed by two different but connected assessees M/s. Sai Panchami Developers and M/s. Panchami Developers and these appeals are directed against two separate orders of learned CIT(A) – 6 Bengaluru, both dated 15.09.2017 for the same Assessment Year 2012-13.

Both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. The grounds raised by the assessee in both these appeals are identical and for the sake of clarity, we reproduce the grounds from one of these appeals viz., ITA No.90/Bang/2018. These grounds are as under:

1. The impugned order of CIT(A) is bad and unsustainable in the eye of law since the same is passed without properly understanding the facts involved.

2. The CIT(A) grossly erred in not appreciating that the expenditure incurred was mainly towards business promotion and hence the same did not warrant deduction of tax at source and therefore, S.40(a)(ia) was not applicable.

3. The CIT(A) ought to have appreciated that the AO being Statutory authority, should have enlightened hapless Assessee as to the benefits/deductions/liabilities and made additions based on materials available on record instead of alleging that the appellant/its AR agreed for addition, which is against the spirits of the Act.

4. Without prejudice, the CIT(A) ought to have appreciated that most of the payments made did not warrant deduction of tax at source and ought to have deleted the disallowance made by the AO.

5. The appellant craves the leave of the court to amend, alter, modify, delete or withdraw any or all of the grounds before or during the arguments.

3. In the course of hearing, it was submitted by learned AR of the assessee that in para 7 of his identical orders, it is noted by learned CIT(A) that the grounds of appeal, assessee’s statement of facts, written submissions, etc.,have been duly considered. He also submitted that the copy of the written submissions filed by the assessee before CIT(A) is available on pages 16-21 of the Paper Book filed before the Tribunal in ITA No.90/Bang/2018 and on pages 19-24 of the Paper Book filed before the Tribunal in in ITA No.91/Bang/2018 and both the written submissions are identical and hence any one can be considered in this regard. He pointed out that various submissions were made before the CIT(A) including these submissions that there was amendment to section 201 of the Income Tax Act, 1961 by Finance Act, 2012 to provide that the payer who fails to deduct the tax from the resident payee shall not be deemed to be an assessee in default in respect of such tax if such resident payee has furnished his return of income under section 139, has taken into account such sum for computing income in such return of income and has paid the tax due on the income declared by him in such return of income. In the said written submissions submitted before CIT(A), this was also submitted that the payee in the present case has filed return of income and has included the amount paid by the assessee for computing income in such return of income and has paid tax due on the income declared by the payee in such return of income and therefore, the assessee cannot be considered as the assessee in default and no disallowance can be made under section 40(a)(ia) in this regard. He submitted that there is no finding given by learned CIT(A) regarding this part of the written submission filed by the assessee before CIT(A) and hence, his orders should be modified and it should be held that the disallowance made by the AO is not justified. It was the alternative submissions that if required, the matter may be restored back to the file of the AO for a fresh decision after examining these claims of the assessee. Learned DR of the Revenue supported the orders of the authorities below.

4. We have considered the rival submissions. For ready reference, we reproduce paras 7 to 11 from the order of CIT(A) and since these orders of CIT(A) are identical, we reproduce these paras from the order of CIT(A) passed by him in the case of M/s. Sai Panchami Developers in ITA No.90/Bang/2018. These paras read as under:

“7. The grounds of appeal, appellant's statement of facts, written submissions, AO's observations I explanations and legal position have been duly considered.

8. The solitary issue to be adjudicated in the instant appeal concern disallowance of a sum of Rs. 1,31, 80,311/- u/s 40 (a)(ia) on account of non deduction of tax at source by appellant on payments made under the head Sales Promotion, Advertisement, Commission and Audit Fee.

9. In this context it may be noted that as per provisions of section 40 a) (ia), the appellant ought to have deducted tax at source on payments made against Sales Promotion, Advertisement, Commission and Audit Fee. It is to be noted that Explanation to sub clause (ia) of section 40(a) clearly indicates that an assessee ought to deduct tax at source on such payments.

10. In the instant appeal, it is noted that the appellant had no explanation to offer before AO. Even during appellate proceedings, appellant failed to explain reasons for its failure to deduct tax at source.

11. Therefore, in view of the facts narrated above, no interference in AO's order is called for since no infirmity arose.”

5. We also reproduce relevant paras of the written submissions filed by the assessee before CIT(A) in the case of M/s. Sai Panchami Developers in ITA No.90/Bang/2018 from pages 19 to 21 of the Paper Book filed by the assessee regarding this appeal. These paras are as under:

“1. Section 40(a)(ia) favour the Assessee As per Section 40(a)(ia) of the Income Tax the following deduction is not allowed:

(ia) Any interest, commission or brokerage fees for professional services or fees technical services payable to a resident or amounts credited or paid to a contractor or sub-contractor, being resident, for carrying out work (including supply of labour 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 u sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVI-B.

As per the provisions of Chapter XVII-B of the Income Tax Act, a person is required to deduct tax on certain specified payments at the specified rates if the payment exceeds specified threshold. In case of non-deduction of tax in accordance with the provisions of this chapter he is deemed to be an Assessee in default under section 201(1) in respect of the amount of non-deduction.

However, section 191 of the Act provides that a person shall be deemed to be assess default in respect of non/short deduction of tax only in cases where the payee has also to pay the tax directly. Therefore, the deductor cannot be treated as assessee in default respect of non/short deduction of tax if the payee has discharged his tax liability.

In order to provide clarity regarding discharge of tax liability by the resident payee on payment of any sum received by him without deduction of tax, section 201 was amended by Fin Act 2012 to provide that the payer who fails to deduct the whole or any part of the tax o payment made to a resident payee shall not be deemed to be an Assessee in default respect of such tax if such resident payee -

(I) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

The date of payment of taxes by the resident payee shall be deemed to be the date on return has been furnished by the payer.

SUPPORTING STATEMENT

The payee of the amounts has filed the return of income offering to tax the amounts received from the Assessee. The payee has also paid the taxes on its business profits. As the Company is complied with the requirement of the Income tax act, it is said to be company not in default for this purpose.

The Assessee in support of the claim has produced the following documents and details.

1. Income Tax returns with statement of computation of income of Payee

2. Financial statements with schedules and notes of Payee

3. Ledger extract of the Assessee in the books of Payee

4. Declaration on tax payment on the business profits of Payee

5. The statement of amounts paid by the Assessee to the Company towards the marketing/commission

As per the contract the Assessee has to pay the commission to the Company on customer entering into 'agreement to sale'. Based on this, Assessee has accounted/paid Rs 69,92,235/- (Rs Sixty Nine Lacs Ninety Two thousand two hundred and thirty five) during F.Y 2010-11 and 2011-12. The detailed breakup of the amounts paid is provided in Annexure — 1.

The recipient Company has offered Rs 58,39,777 for the A.Y 11-12 and Rs 63,627 for the A.Y 12-13 in its income tax returns against the total payment of Rs . 69,92,235 by the Assessee.

We bring to your notice that as per the insertion made by the Finance Act, 2012 and considering the fact that the recipient of commission has included the income in their filed returns of income tax and has already paid tax, such disallowance cannot be invoked in this case.

We contend that the object of the amendment made was that though the assessee has not deducted TDS but there has been no loss to the Revenue, as such the disallowance under Section 40(a) (ia) should not be invoked.

"In the case of Bharti Shipyard Ltd vs. DCIT (141 TTJ 129), and that of the Hon'ble Delhi High Court in case of Rajinder Kumar wherein it was held that any amendment of a provision which is aimed at removing unintended consequences with the intention to make the provisions operative should be treated as retrospective no matter whether the same has been given effect prospectively.

The Tribunal carefully interpreted the legislative amendment of section 40(a) (ia), as per the Finance Act 2012. Second proviso to Section 40(a) (ia). introduced with effect from 1.4.13 provides that if an assessee fails to deduct TDS according to the provisions of Chapter XVH-B on any such sum but is not an assessee in default under the first proviso of section 201(1), then, it shall be considered that the assessee has deducted and paid the tax on such sum on the date of filing the return of income by the resident. It can be stated that till the assessee is not an assessee in default, the disallowance under section 40(a) (ia) cannot be invoked. It was held that by the amendment as per the Finance Act, 2012 the legislature has expressed its view to decline from deduction for expenditure in connection with payments made on which TDS has not been deducted but has not resulted in any loss to the Revenue was never the intended consequence.

It was declared that the consequences of these amendments is that the disallowance under section 40(a) (ia) cannot be invoked where even if the assessee has not deducted tax at source from the payments for expenses but the recipient has taken them into account while calculating his income and has paid due taxes, if any, and has filed his income tax return under section 139(1).

The Tribunal held that in the circumstances, the proviso shall apply retrospectively_ The appeal was allowed."

We submit that the assesse has provided all the proofs to claim the benefit of the Second proviso to Section 40(a) (ia), of the income tax act. We request you to grant the relief to the Assessee by allowing the so much of expenses stated above in its return of income.

We want to draw your kind attention to the recent amendment to the section 40(a)(ia) restricting the disallowance to 30% from 100% disallowance on the expenses paid on which TDS is not deducted. We request you to consider Assessees request on this and grant any remedy if possible.

The Assessee could not collect the information from the payee for the below amounts paid which are disallowed by the AO.

Sales promotion INR 44,00,000

Advertisement INR 16,60,075

Audit Fee INR 1,28,000

TOTAL INR 61,88,075”

6. From the above paras of identical written submissions filed by the assessee before CIT(A) as reproduced above, we find that various submissions were made by the assessee before CIT(A) regarding section 201 amended by Finance Act, 2012. Reliance was also placed on the Tribunal order rendered in the case of Bharti Shipyard Ltd., Vs. DCIT (141 TTJ 129) wherein it was held that this amendment is retrospective. As per the relevant paras reproduced from the order of CIT(A) as above, it is seen that there is no discussion or decision about these arguments made by the assessee in the written submissions filed by the assessee before CIT(A). Hence, we feel it proper to set aside the order of CIT(A) in both these cases and restore this matter back to the file of AO in both the cases for a fresh decision. Generally,in such a situation, we restore the matter to the file of CIT (A) but in the present case, we are remanding it to the AO because in our considered opinion, in the facts of the preset case, instead of restoring the matter back to the file of CIT(A), restoring the matter back to the file of AO will be better because the claims were made by the assessee before the AO also and he also has not considered these arguments and therefore, we feel it better to remand the matter to the AO for examining these claims of the assessee that the payees have done the needful as required by the amended provisions of section 201 of the Act which are held to be retrospective and therefore, applicable in the present case also.

Accordingly, we set aside the orders of CIT(A) in both these cases and restore the matter back to the file of AO for a fresh decision in the light of above discussion after providing reasonable opportunity of being heard to the assessee. In view of this decision, we make no comment on the merit.

7. In the result, both the appeals of the assessee are allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/-

(PAVAN KUMAR GADALE) (A.K. GARODIA)

Judicial Member Accountant Member

Bangalore,

Dated: 30th June, 2020.