Retrospective Tax Amendment: Court Upholds Tribunal's Decision

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Case Name:

Commissioner of Income Tax & Another Vs Sri Scorpio Engineering P. Ltd. (High Court of Karnataka)

ITA No. 551 of 2015

Date: 29th February 2016

Key Takeaways:

- The court confirmed that the amendment to Section 40(a)(ia) (of Income Tax Act, 1961) is retrospective from April 1, 2005.

- The decision is consistent with previous rulings, including those by the Gujarat High Court and the Delhi High Court.

- The amendment is considered curative, addressing unintended consequences of the original provision.

- The court dismissed the appeal, indicating no substantial question of law arises from the case.

Issue

Is the amendment to Section 40(a)(ia) (of Income Tax Act, 1961), introduced by the Finance Act, 2010, retrospective from April 1, 2005?

Facts

The dispute arose over whether the amendment to Section 40(a)(ia) (of Income Tax Act, 1961), which was introduced by the Finance Act, 2010, should be applied retrospectively from April 1, 2005. The Tribunal had ruled in favor of the retrospective application, which the CIT challenged, arguing that the amendment should only apply from April 1, 2010, as explicitly stated in the Finance Act.

Arguments

- Appellant (CIT): Argued that the amendment should not be applied retrospectively as the Finance Act, 2010, explicitly states it is effective from April 1, 2010.

- Respondent (Shri Santosh Kumar Shetty): Supported the Tribunal's decision, arguing that the amendment is curative and should be applied retrospectively to address the original provision's unintended consequences.

Key Legal Precedents

- CIT v. Shri Santosh Kumar Shetty (2014) 89 CCH 199: The court had previously ruled that the amendment is retrospective.

- Commissioner of Income Tax, Ahmedabad IV Vs. Om Prakash R Chaudhary: The Gujarat High Court held that the amendment is clarificatory and retrospective.

- CIT Vs. Oracle Software India Limited: The Delhi High Court supported the retrospective application of similar amendments.

Judgement

The court upheld the Tribunal's decision, affirming that the amendment to Section 40(a)(ia) (of Income Tax Act, 1961) is retrospective from April 1, 2005. The court found no substantial question of law in the appeal and dismissed it, maintaining that the amendment is curative and aligns with legislative intent.

FAQs

Q1: Why is the amendment considered retrospective?

A1: The amendment is seen as curative, intended to address unintended consequences of the original provision, and thus is applied retrospectively to fulfill its purpose.

Q2: What does this decision mean for taxpayers?

A2: Taxpayers can benefit from the amendment's retrospective application, allowing deductions for TDS paid by the due date of filing returns, even for earlier years.

Q3: Can the decision be challenged further?

A3: While the current decision stands, if the Apex Court takes a different view in future proceedings, the appellant may pursue further legal action.

The appellant-revenue has preferred the present appeal by raising following substantial questions of law:

“Whether, on the facts and in the circumstances of the case, the Tribunal is

right in law in holding that the amendment to the provisions of section 40(a)(ia) (of Income Tax Act, 1961), by the Finance Act, 2010, is retrospective from 01.04.2005, by relying on its earlier decision which has not reached

finality and when it is expressly stated in the Finance Act 2010 that the amendment is with effect from 01.04.2010?”

2. We have heard Mr. Sanmathi E.I, learned counsel appearing for the appellant-Revenue. It appears that the Tribunal while considering the contention of the appellant, at paragraph-6, 7 and 8 it has observed

thus:

“6. We have perused the orders and heard the Ld. DR. Hon’ble jurisdictional High Court in the case of CIT v. Shri. Santhosh Kumar Shetty [(2014) 89 CCH 199] held as under at para 5 to 8 of its order:

5. The argument of the Revenue is,

when the Finance Act, 2010, expressly states

that the said provision would come into

effect from 01.04.2010, it is not permissible

for the Tribunals or the Courts to give it a

retrospective effect prior to the date and

therefore, it is submitted that the order

passed by the Tribunal holding it as

retrospective notwithstanding the fact that

the parliament made its intention clear by

declaring that it comes into effect from

01.04.2010. Therefore, the impugned orders

are liable to be set aside.

6. The question came up for

consideration before the Gujarat High Court

in the case of Commissioner of Income

Tax, Ahmedabad IV Vs. Om Prakash R

Chaudhary in Tax Appeal Nos.412/2013 and

connected matter, which came to be decided

on 22.11.2013, after referring to the

judgments of Alide Motors (P.) Ltd. Vs. CIT

reported in AIR 1997 SC 1361 and CIT Vs.

Alom Extrusions Limited reported in (2009)

319 ITR 306, has held as under:

“15.4:Thus, considering relevant

legislative changes made by the Parliament

from time to time and. some of the decisions

relevant to consider the question of

retrospectivity raised in these present

appeals, the focal question, therefore, would

be whether the amendment brought about

by way of Finance Act 2010 in Section 40 (of Income Tax Act, 1961)

[a](ia) with effect from 1st April 2010 could

be said to be clarificatory in nature for

attending to unintended consequences, and

therefore, is haiding retrospective effect from

1st April 2005.

16: A closer examination needs to be done as

to whether the amended provision aims to

expand the prevailing position and whether

the same being in the nature of curative,

retrospectivity of the same is permissible as

is being contended for and on behalf of the

assessee. At this stage, therefore, the true

effect of such amendment needs to be

discerned.

16.1:It is demonstrated before us that the

TDS provision caused unintended

inexplicable situation whereby the assessee

who deducted the tax at source from the

payments made by it for and on behalf of the

Government and then if misses out the time

limit of depositing the same with the

Treasury within the time prescribed, the

amount spent for its business purposes on

account of the late deposit of such tax would

result into disallowance of entire expenditure

under Section 40 (of Income Tax Act, 1961)[a](ia). The said proviso

thereby caused immense hardship. The

amendment under consideration made by

the Finance Act 2010 relaxes the rigors of

such prevision by permitting payment of Tax

till the filing of return as provided under

sub-section (1) of Section 139 (of Income Tax Act, 1961).

16.2:One can notice that the object of

brining about provision of Section 40(a)(ia) (of Income Tax Act, 1961) in

the year 2005-06 was to augment

compliance of TDS provision. TDS either not

deducted or deducted but not paid in respect

of payment of interest, commission or

brokerage etc., before the expiry of time

prescribed under sub-section (1) of Section

200 and in accordance with the other

provisions of Chapter XVII, such amount

shall not be deducted in computing the

‘income’ chargeable under the head ‘Profit &

Gains’ of business or profession. Such

provision starts with non obstante clause

which states that notwithstanding anything

contained in Section 30 (of Income Tax Act, 1961) to 38 of the Income-

tax Act, if the tax deducted at source is not

paid within prescribed time [under Section

200 (1)], no amount could be deducted while

computing the income, under Chapter IV of

the ‘computation of business income’.

16.3:Therefore, by way of amendment of

Finance Act, 2008, further amendment was

made whereby TDS deductible and deducted

in the last month of previous year if was not

paid till the due date of filing of return under

sub-section (1) of Section 139 (of Income Tax Act, 1961) and in any

other case, on or before the last day of the

previous year, Section 40(a)(ia) (of Income Tax Act, 1961) provided for

the disallowance of expenses like interest,

commission, brokerage, etc.

16.4:Since, this had created anomaly

whereby tax deducted in the last month was

permitted payment till filing of return as per

sub-section (1) of Section 139 (of Income Tax Act, 1961) whereas for

the TDS deducted during the rest of the

months, period was provided only till 31st

March of the previous year, Finance Act,

2010 was brought. To bring parity, to

remedy unintended consequences and to

make the provision workable, it proposed to

amend the said provision and provided inter

alia that no disallowance would be made if

after deduction of tax during the previous

year, the same has been paid on or before

the due date of filing of return of income as

specified in sub-section (1) of Section 139 (of Income Tax Act, 1961).

1’his has been given retrospective effect from

1st April 2010.

16.5:Of course. the Legislature has given the

effect from a specified date and applied the

same to A.Y. 2010-11 and subsequent years,

this provision being curative in nature, its

effect needs to be read retrospectively in

operation. Its very purpose would not be

sub-served, if the effect is limited to

A.Y.2010.11 and subsequent years only.

Strict construction if leads to a result not

intended to be fulfilled by the object of

legislation and another construction is

possible apart from literal construction, then

that construction needs to be preferred as

held in a decision in case of CIT V. Alom

Extrusion Limited [Supra].

16.6:We also cannot be oblivious of

submissions not denied by the other side

that various representations were made to

the Finance Minister to bring about suitable

amendment as the assessee otherwise was

losing genuine deduction of expenditure on

this count as also reflected in the speech of

Finance Minister so also in the

memorandum explaining the provision of the

Finance Bill.

16.7:Giving plain or natural meaning to the

amendment as contended by the

Department, if is likely to create a, situation

enhancing the hardship and advance

discrimination, purposive and. reasonable

interpretation is required to be given by the

Court. When plain interpretation frustrates

the very legislative intent, the Court is

expected to bear in mind the legislative

intent from the language used in the statue

with the help of permissible tools of

interpretation of statute.

17:The core issue as to whether the

amendment made by the Finance Act 2010

of Section 40 (of Income Tax Act, 1961)[a](ia) of the Act is retrospective

from the date of insertion of the provision

i.e., 1st April 2005 therefore needs to be

answered in affirmation. It can be seen that

the amendment made by the Finance Act

2010 allows additional time upto the due

date of filing of the return in respect of even

those instances where TDS has been

deducted during the first eleven months of

the previous year. The additional time till

the due date of filing of the return, in case of

TDS made during the last month of the

previous year was already available by the

amendment made by Finance Act 2008.

Thus, it is apparent that the relaxation made

by the amendment made under the Finance

Act, 2010 brings the law in parity with the

aforementioned situation and accordingly,

for the TDS deducted all throughout the

year, time is extended from payment till the

filing of return. It is thus apparent that

when the amendment introduced by the

Finance Act, 2008 of relaxing the time for

deposit of TDS was made retrospective from

the year 2005 [1st April 2005], the

amendment by Finance Act 2010 with regard

to other limb of time limit for payment of

TDS has be to held, retrospective not from

1st April 2010 only. If we recall at this stage

the speech of Finance Minister while

introducing this provision by way of Finance

Act, 2010, this amendment essentially has

been brought for relaxing the current

provision on disallowajice of expenditure.

The tax, if is deducted at any time during the

financial year and paid before the date of

filing of the return, the Legislature intended

to allow deduction on such expenditure with

an intention to permit additional time for

most deductors upto September of the next

financial year.

17.1:We dravj further support from the fact

that the rigor of payment of interest is also

enhanced by increasing the interest charged

on tax deducted, if any deposit by the

specified date i.e., up to the filing of the

return is not made from 12% to 18% per

annum in the provision of Section 201(1A) (of Income Tax Act, 1961).

Prior to the said amendment of Finance Act,

2010 under Section 201(1A) (of Income Tax Act, 1961), assessee was

liable to p[ay simple interest at one per cent

for every month or part of month, in case of

failure to deduct tax on payment of deducted

tax, increase is made correspondingly from

one per cent to one and half per cent for

every month or part of month for

discouraging delay in deposit.

As rightly contended by the respondents

arithmetical discrepancy can be well judged

from the face that the rates of TDS may vary

between 1% to 10%, whereas, legitimate

business expenditure denied is 100% -

resulting into taxation of gross receipts

coupled with levy of interest and penalty,

which would mean that the possibility

cannot be ruled out of business of the tax

payer getting closed down permanently, if

there is absence of any scope of claiming any

expenses in the next year.

7. Similar is the view expressed by

the Delhi High Court in the cases of CIT

Vs. Oracle Software India Limited reported in

293 ITR page 253, H.S.Mohindra Traders Vs.

I.T.O., Ward 39 (2), New Delhi and Calcutta

High Court in the case of CIT Vs. Virgin

Creations.

8. We are in the respectful agreement

with the view expressed by the Gujarat High

Court in giving retrospective operation to the

said amendment notwithstanding that the

parliament has expressly stated that it

comes into effect from 01.04.2010. The said

amendment is curative in nature. The

tribunal committed an error in holding it as

prospective. The substantial questions of

law is answered in favour of the assesse and

against the revenue.

3. The aforesaid shows that, the question was

already covered by the decision of this Court in case of

CIT Vs. Shri Santosh Kumar Shetty (2014) 89 CCH 199.

4. Once the Tribunal has followed the decision of

this Court, we do not see any substantial question of

law which would arise for consideration. However,

learned counsel for the appellant-revenue did contend

that, subsequently, similar view taken by this Court in

case of Uday Kumar ITA 590/13 is carried before the

Apex Court and therefore, the issue has not yet been

concluded.

5. In our view, as on today, the decision of this

Court operates and therefore, it cannot be said that

substantial questions of law would arise for

consideration in the present appeal. However, if the

Apex Court takes a different view, the appellant may be

in a position to take appropriate proceedings in

accordance with law and at that stage, rights and

contentions of both sides shall remain open.

Subject to the abovesaid observation, the present

appeal need not be entertained. Hence, it is dismissed.

Sd/-

JUDGE

Sd/-

JUDGE