Second Proviso to Section 40(a)(ia) (of Income Tax Act, 1961) is Retrospective from 1.4.2005, Not a Penalty

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Case Name:

Principal Commissioner of Income Tax vs. Perfect Circle India Pvt. Ltd. (High Court of Bombay)

Income Tax Appeal No.707 of 2016

Key Takeaways

- The second proviso to Section 40(a)(ia) (of Income Tax Act, 1961) is not a penalty.

- The proviso is declaratory and curative in nature.

- It has a retrospective effect from 1.4.2005.

- The payer/deductor can only be asked to pay interest on delayed tax deposits.

Issue

Does the second proviso to Section 40(a)(ia) (of Income Tax Act, 1961), have a retrospective effect from 1.4.2005?

Facts

- The Revenue challenged the Tribunal's decision dated 27.3.2015.

- The Tribunal had rejected the disallowance of Rs.1,44,78,000/- made by the AO under Section 40(a)(ia) (of Income Tax Act, 1961).

- The Revenue argued that the second proviso, effective from 1.4.2013, should be applied prospectively.

Arguments

- Revenue's Argument:

The second proviso should be applied prospectively from 1.4.2013.

- Assessee's Argument:

The proviso is beneficial and curative, thus should be applied retrospectively from 1.4.2005.

Key Legal Precedents

- CIT Vs. Ansal Land Mark Township P Ltd:

The Delhi Court held that Section 40(a)(ia) (of Income Tax Act, 1961) is not a penalty and the second proviso is declaratory and curative, having a retrospective effect from 1.4.2005.

- Hindustan Coca Cola Beverages P Ltd Vs. CIT:

The Supreme Court noted that even without the second proviso, if the payee had already paid the tax, the payer/deductor could only be asked to pay interest on delayed tax deposits.

Judgement

The court dismissed the tax appeal, affirming that the second proviso to Section 40(a)(ia) (of Income Tax Act, 1961) is declaratory and curative, thus having a retrospective effect from 1.4.2005. The payer/deductor can only be asked to pay interest on delayed tax deposits.

FAQs

Q1. What is the main issue in this case?

A1. Whether the second proviso to Section 40(a)(ia) (of Income Tax Act, 1961) has a retrospective effect from 1.4.2005. Q2. What did the court decide?

A2. The court decided that the second proviso is declaratory and curative, thus having a retrospective effect from 1.4.2005.

Q3. What is the significance of this decision?

A3. The decision clarifies that the second proviso to Section 40(a)(ia) (of Income Tax Act, 1961) is not a penalty and should be applied retrospectively, benefiting the assessee.

Q4. What happens if the payer/deductor delays depositing the tax?

A4. The payer/deductor can only be asked to pay interest on the delayed tax deposits.

Q5. Which courts' decisions were referenced in this judgment?

A5. The Delhi Court's decision in CIT Vs. Ansal Land Mark Township P Ltd and the Supreme Court's decision in Hindustan Coca Cola Beverages P Ltd Vs. CIT.

1. This appeal is filed by the Revenue challenging the judgment of the Income Tax Appellate Tribunal ("Tribunal" for short) dated 27.3.2015. Following question is presented for our consideration:-

"Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in rejecting the disallowance of Rs. 1,44,78,000/- made by the AO u/S. 40(a)(ia) (of Income Tax Act, 1961) by holding that the amendment to the proviso of the said section was retrospective in nature without appreciating that the Act specifically provides that the said proviso comes into operation w.e.f. 1.4.2013 and is prospective in nature and cannot be applied retrospectively?"

2. It is not necessary to record background facts since the question of law raised by the Revenue is whether the second proviso to Section 40(a)(ia) (of Income Tax Act, 1961) ("the Act" for short) would have retrospective effect. We may notice that the said proviso was inserted w.e.f 1.4.2013 and in essence, it provides that where an assessee fails to deduct whole or any part of the tax at source but is not deemed to be an assessee in default under the first proviso to Section 201(1) (of Income Tax Act, 1961), then for the purpose of clause 40(a)(ia), 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 payee. The Revenue would content that the benefit of this proviso would be available to the assessee only prospectively w.e.f. 1.4.2013. Various Courts, however, have seen this proviso as beneficial to the assessee and curative in nature. The leading judgment on this point was of the Division Bench of Delhi Court in the case of CIT Vs. Ansal Land Mark Township P Ltd1

.The Court held that Section 40(a)(ia) (of Income Tax Act, 1961) is not a penalty and insertion of second proviso is declaratory and curative in nature and would have retrospective effect form 1.4.2005 i.e the date from the main proviso 40(a)(ia) itself was inserted. Several High Courts have adopted the same lines. We may also note that the Supreme Court in the case of Hindustan Coca Cola Beverages P Ltd Vs. CIT even in absence of second proviso to Section 40(a)(ia) (of Income Tax Act, 1961) had noticed that the payee had already paid the tax. Under such circumstances, the Court held that the payer / deductor can at best be asked to pay the interest on delay in depositing tax.

3. Under such circumstances, no question of law arises. Tax appeal is dismissed.

[ B.P. COLABAWALLA, J. ] [ AKIL KURESHI, J ]