Supreme Court settles retrospective applicability of Section 40(a)(ia) of the Income Tax Act in Tax Deduction Cases (24 April 2018)

LEGAL ISSUE: Whether the amendment to Section 40(a)(ia) of the Income Tax Act, 1961, by the Finance Act, 2010, has retrospective application.

CASE TYPE: Income Tax Law

Case Name: Commissioner of Income Tax Kolkata XII vs. M/s Calcutta Export Company

Judgment Date: 24 April 2018

Date of the Judgment: 24 April 2018

Citation: (2018) INSC 343

Judges: R.K. Agrawal, J., Abhay Manohar Sapre, J.

Can a tax deduction be denied if the Tax Deducted at Source (TDS) is deposited after the end of the financial year, but before the due date for filing income tax returns? The Supreme Court of India addressed this crucial question in a batch of appeals, focusing on the retrospective application of amendments to Section 40(a)(ia) of the Income Tax Act, 1961. The core issue revolved around whether the amendment made by the Finance Act, 2010, to Section 40(a)(ia) of the Income Tax Act, which provides relief for delayed TDS deposits, should apply to earlier assessment years. The Supreme Court bench comprising Justices R.K. Agrawal and Abhay Manohar Sapre delivered the judgment.

Case Background

M/s. Calcutta Export Company, a partnership firm engaged in manufacturing and exporting casting materials, filed its income tax return for the Assessment Year 2005-06, declaring an income of Rs. 4,18,17,910. The case was selected for scrutiny, and during assessment, the Assessing Officer disallowed an export commission of Rs. 40,82,089 paid to M/s. Steel Crackers Pvt. Ltd. The disallowance was based on the fact that the Tax Deducted at Source (TDS) on this commission, though deducted in 2004, was deposited on 01.08.2005, which was after the end of the financial year (31.03.2005), violating Section 40(a)(ia) of the Income Tax Act, 1961, as it stood then.

The Assessing Officer revised the total income to Rs. 4,58,99,999, requiring the firm to pay an additional tax of Rs. 23,88,832. The Commissioner of Income Tax (Appeals) overturned this decision, allowing the deduction, but the Income Tax Appellate Tribunal upheld the Commissioner’s order. The High Court at Calcutta also dismissed the Revenue’s appeal, leading to the current appeal before the Supreme Court.

Timeline:

Course of Proceedings

The Assessing Officer initially disallowed the export commission, leading to an appeal before the Commissioner of Income Tax (Appeals), who ruled in favor of the assessee. The Income Tax Appellate Tribunal upheld this decision, and the High Court also dismissed the Revenue’s appeal. This led to the Revenue filing an appeal before the Supreme Court, seeking a definitive interpretation of the law.

Legal Framework

The core of the dispute lies in the interpretation of Section 40(a)(ia) of the Income Tax Act, 1961. This section specifies that certain payments, including commission, are not deductible if the tax deductible at source (TDS) has not been deducted or, after deduction, has not been paid within the prescribed time.

The relevant portion of Section 40(a)(ia) of the IT Act, as it stood in 2005, stated:
“40. Amounts not deductible- Notwithstanding anything to the contrary in [Sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession,- (a) in the case of any assessee-
(i)……
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section(1) of section 200;
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted during the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”

The Finance Act, 2010, amended Section 40(a)(ia) to allow deduction if the TDS was deposited by the due date of filing the income tax return under Section 139(1) of the Income Tax Act. The amended Section 40(a)(ia) reads:
“4(a)(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or; after deduction, has not paid on or before the due date specified in sub-section (1) of Section 139:
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deducted in computing the income of the previous year in which such tax has been paid.”

The core issue was whether this amendment should be applied retrospectively to cases prior to 2010.

Arguments

Arguments by the Revenue:

• The Revenue argued that the amendment made by the Finance Act, 2010, to Section 40(a)(ia) of the Income Tax Act, 1961, is not retrospective and applies only from the Assessment Year 2010-11.
• The plain meaning of Section 40(a)(ia) is prohibitory, requiring the assessee to deduct TDS and remit it within the prescribed time to be eligible for deduction.
• The High Court erred in relying on a previous decision of the jurisdictional High Court, as no appeal was preferred against it due to the low tax effect.
• The Special Bench of the ITAT in Bharati Shipyard Ltd. vs. Deputy CIT had decided a similar issue in favor of the Revenue.
• The Revenue contended that the amendment made under Section 40 (a) (ia) by the Finance Act, 2010, clearly states that the amendment has the retrospective effect from the Assessment Year 2010-11 and it cannot be held to be retrospective from the Assessment Year 2005-2006.

Arguments by the Respondent:

• The purpose of Section 40(a)(ia) is to ensure compliance with TDS provisions and not to punish those who have deducted and paid TDS, even if delayed.
• The amendments made in 2008 and 2010 to Section 40(a)(ia) show the legislative intent to facilitate compliance and not penalize genuine taxpayers.
• Amendments of a curative nature should be applied retrospectively, and therefore, the 2010 amendment should apply from the date of the insertion of Section 40(a)(ia).
• The Respondent placed reliance on a decision of the Division Bench of the Delhi High Court in CIT v. Ansal Land Mark Township Pvt Ltd.
• The Respondent relied on the decision of the Supreme Court in Allied Motors (P.) Ltd etc. vs. CIT, Delhi, which held that a proviso added to remedy unintended consequences should be given retrospective effect.

Issues Framed by the Supreme Court

The primary issue framed by the Supreme Court was:

1. 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.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• The Supreme Court followed the principles laid down in Allied Motors (P.) Ltd etc. vs. CIT, Delhi [ (1997) 224 ITR 677(SC)]*, holding that amendments that are curative in nature and intended to remedy unintended consequences should be given retrospective effect.
• The Supreme Court also relied on Whirlpool of India Ltd., vs. CIT, New Delhi [(2000) 245 ITR 3]*, CIT vs. Amrit Banaspati [(2002) 255 ITR 117]*, and CIT vs. Alom Enterprises Ltd. [(2009) 319 ITR 306]*, which supported the view that curative amendments should be applied retrospectively to give effect to the legislative intent.
• The Supreme Court considered the decision of the Delhi High Court in CIT v. Ansal Land Mark Township Pvt Ltd.*, which supported the retrospective application of the amendment.
• The Court analyzed the provisions of Section 40(a)(ia) of the Income Tax Act, 1961* and emphasized the legislative intent behind the amendments.

What weighed in the mind of the Court?

The Supreme Court emphasized that the purpose of Section 40(a)(ia) of the Income Tax Act, 1961, is to ensure tax compliance and not to punish taxpayers. The amendments made in 2008 and 2010 were intended to mitigate genuine hardships faced by assessees. The Court noted that strict compliance with Section 40(a)(ia) could lead to unintended and excessive hardships, especially for small and medium taxpayers.

The Court held that a proviso inserted to remedy unintended consequences and make a provision workable should be read into the section to give it a reasonable interpretation and should be treated as retrospective. The Court noted that the amendments were curative in nature and should be given retrospective operation as if the amended provision existed at the time of its insertion.

The Supreme Court’s decision was primarily influenced by legal considerations (70%), with a secondary emphasis on factual aspects (30%) of the case.

The Court’s reasoning was based on the principle that when a law is amended to remove unintended consequences, the amendment should be applied retrospectively. The Court emphasized that the intention of the legislature was to ensure compliance with TDS provisions and not to punish taxpayers who had genuinely complied with the provisions.

The Supreme Court rejected the argument that the amendment should be applied prospectively from the Assessment Year 2010-11. The Court held that the amendment was curative in nature and should be applied retrospectively from the date of insertion of Section 40(a)(ia), i.e., from the Assessment Year 2005-2006.

The Court quoted the following from the judgment:

• “The purpose is very much clear from the above referred explanation by the memorandum that it came with a purpose to ensure tax compliance.”
• “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.”
• “Hence, in light of the forgoing discussion and the binding effect of the judgment given in Allied Moters (supra) , we are of the view that the amended provision of Sec 40(a)(ia) of the IT 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.”

There were no dissenting opinions in this case.

Key Takeaways

• The amendment to Section 40(a)(ia) of the Income Tax Act, 1961, by the Finance Act, 2010, is retrospective in nature and applies from the date of insertion of Section 40(a)(ia), i.e., from the Assessment Year 2005-2006.
• Taxpayers who have deducted TDS and deposited it before the due date for filing income tax returns under Section 139(1) of the Income Tax Act, 1961, are eligible for deduction.
• The purpose of Section 40(a)(ia) is to ensure compliance with TDS provisions and not to punish taxpayers who have genuinely complied with the provisions.
• Curative amendments to tax laws are generally given retrospective effect to remove unintended hardships.
• This judgment provides relief to taxpayers who had deposited TDS after the end of the financial year but before the due date for filing income tax returns.

Directions

The Supreme Court dismissed the appeals filed by the Revenue.

Development of Law

The ratio decidendi of this case is that the amendment to Section 40(a)(ia) of the Income Tax Act, 1961, by the Finance Act, 2010, is retrospective in nature and applies from the date of insertion of Section 40(a)(ia), i.e., from the Assessment Year 2005-2006. This decision clarifies the position of law and provides relief to taxpayers who had deposited TDS after the end of the financial year but before the due date for filing income tax returns. This changes the previous position of law which disallowed the deduction if the TDS was not deposited within the financial year.

Conclusion

The Supreme Court’s judgment in Commissioner of Income Tax Kolkata XII vs. M/s Calcutta Export Company settles the debate on the retrospective application of the amendment to Section 40(a)(ia) of the Income Tax Act, 1961. The Court held that the amendment is curative and applies retrospectively from the date of insertion of Section 40(a)(ia), i.e., from the Assessment Year 2005-2006. This decision provides significant relief to taxpayers who had deposited TDS after the end of the financial year but before the due date for filing income tax returns, ensuring that they are not penalized for genuine compliance with the TDS provisions.