Hon’ble Supreme Court holds amendment to Section 40(a)(ia) of the Act to be retrospective in nature
In a recent decision, the Hon’ble Supreme Court has upheld a ruling of the Hon’ble Calcutta High Court to the effect that amendment by Finance Act, 2010 to Section 40(a)(ia) of the Income Tax Act, 1961 (“Act”) is retrospective in nature. The judgement has the effect of relaxing the rigours of Section 40(a)(ia) of the Act to some extent. The decision has been rendered in the case of CIT Kolkata X v/s. M/s. Calcutta Export Company.
Hon’ble SC rejected Revenue's argument for a 'plain'/literal reading of the amendment and notes provided in Finance Act 2008 & 2010. Hon’ble SC observed that while the Finance Act, 2008 amendment (which amended 40(a)(ia) of the Act retrospectively w.e.f 1-04-2005) gave relief in cases where TDS had been deducted in the month of March but deposited before due date of filing return, the amendment vide Finance Act, 2010 (applicable from AY 2010-11) extended this relief to TDS deducted and deposited before the return filing due date for the earlier 11 months as well.
Hon’ble SC, on perusal of the Memorandum explaining the reasons behind the amendment to Section 40(a)(ia), observed that the purpose of the amendment was to ensure tax compliance and not to punish the assessee and hence the same should not be allowed to be converted into an 'iron rod' provision which metes out stern punishment and results in malevolent results. Thus, it held that TDS deducted during the previous year can be deposited with the Government by the due date of filing the return of income for that previous year.
While pronouncing the judgement the Court said “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...” Further the court justified this liberal interpretation citing the adverse consequences on 'marginal' and 'medium' taxpayers if the amendment is not given retrospective operation. Here it relied upon co-ordinate bench ruling in the case of Allied Motors (P) Limited wherein provision to Section 43B of the Act (Certain deductions to be only on actual payment) was held to be retrospective in nature.
Finance Act, 2010 had relaxed the rigors of expense disallowance u/s. 40(a)(ia) of the Act for TDS default by providing that all TDS made during the previous year can be deposited with the Government by the due date of filing the return of income. This ruling by the Hon’ble SC has cleared the ambiguity and given the much needed legal jurisprudence over the matter of deductibility of expenses prior to AY 2010-11 (and upto AY 2005-06 since sub-clause (ia) was introduced by Finance Act, 2004) which were otherwise disallowed u/s 40(a)(ia) of the Act on account of non-deposit of TDS within the due date of filing return of income by the assessee