While computing profits and gains of business or profession, S. 40(a)(ia) restricts / disallows deduction of certain specified sums/expenditure paid to the resident, in case provisions of Chapter XVII-B (TDS) are not complied.
Legislative history
2004 Amendment
In order to augment compliance of TDS provision, S.40(a)(ia) was introduced by Finance (No.2) Act, 2004 w.e.f. 1-4-2005 i.e. from AY 2005-06. It provided that any interest, commission or brokerage, fees for professional services or fees for technical services, contract charges payable to any resident person would not be allowed as deducted while computing profits and gains of business or profession of assessee if tax required to be deducted on these payment under Chapter XVII-B is either not deducted or after deduction has not paid. Further deduction would be allowed during the financial year in which tax is deducted or tax has been deposited.
2006 Amendment
Taxation (Amendment) Act, 2006 w.r.e.f. 1-4-2006 has added “rent and royalty” to the list of specified expenditure.
2008 Amendment
In view of the said provision, failure to pay the tax deducted at source, whole of the expenditure is disallowed which is otherwise allowable.
To mitigate hardship caused to the assessee, Finance Act 2008 has amended said section retrospectively from 1-4-2004 i.e. AY 2005-06. It granted relief in respect of the expenditure pertaining to the month of March (last month of financial year) by allowing additional time for depositing TDS on such payment till due date of filing return of income u/s 139(1) ie 31st July (non corporate assessee not liable for audit) and 30th September (corporate and other assessee liable for audit).
This additional period has been allowed only for the purposes of escaping disallowance of expenditure. Additional period does not extends the time limit of payment of TDS. Though expenditure is not disallowed in case tax is deposited late but within additional allowed time, other penal provisions would continue to apply.
2010 amendment
Amendment made in 2008 is further sought to be relaxed by the Finance Act 2010 by substituting the earlier proviso. It states that now disallowance of any specified expenditure (liable for TDS) under section 40(a)(ia) would be attracted only if, tax is not deducted or after deduction not paid, on or before, due date of filing return of income u/s 139(1).
It is also provided that in respect of such expenditure where tax has been deducted in subsequent year or deducted tax has been paid on or after due date of filing return of income, deduction would be allowed in the previous year in which tax has been deducted or paid. This amendment is applicable retrospectively from 1-4-2010 ie AY 2010-11. Thus, this amendment brings the provisions of this section in line with S. 43B.
Impact of the Amendment
Amendment would provide immense relief to the assessee’s who are unable to deposit tax deducted at source within the specified time limit. They would be entitle for additional time up till due date of filing of return of income to deposit the tax deducted at source in order to escape disallowance of expenditure. With this amendment gives away the distinction for allowance of expenditure for first 11 months and last month of the previous year. However it may be noted that such a asseesee may not escape other penal consequences for late deduction and late payment.
Can amendment apply from AY 2005-06?
It is interesting to note that earlier, in order to mitigate the hardship caused to taxpayer, amendment in 2008 was made effective retrospectively from AY 2005-06 where as current relaxation is made effective from the AY 2010-11. The law to be applied in income tax assessments is the law in force in the assessment year unless otherwise provided expressly or by necessary implication . The circumstances under which the amendment is brought in existence and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment is clarificatory or substantive in nature and, whether it will have retrospective effect or not .
Supreme Court in Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1) relying on the Principles of Statutory Interpretation by Justice G.P. Singh, Statute Law by Craies has observed that - it is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant:
(i) general scope and purview of the statute;
(ii) the remedy sought to be applied;
(iii) the former state of the law; and
(iv) what it was the legislature contemplated.
Further Supreme Court in CIT V. J.H. Gotla,(1985) 156 I.T.R. 323 has observed that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.
Recently Supreme Court in certain cases had read the amendment retrospective even though such amendment were not made retrospectively, refer CIT v Gold Coin Health Foods P. Ltd (2008) 304 ITR 308 (SC)and CIT Vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC). Further relieance can also be placed on Supreme Court decision in Allied Motors (P.) Ltd. v CIT [1997] 224 ITR 677 (SC).
There cannot be two views that proposed amendment is sought to provide relief to the taxpayer. Though amendment is stated to be effective from 1-4-2010, considering, judicial proceedings, it may be possible to argue that said amendment to be operative from 1-4-2005.
* Originally this article was published in the Chamber of Tax Consultants popular monthly journal ‘Income Tax Review’ March 2010 issue on "Finance Bill 2010"
Recently similar view has been held in Kanubhai Ramjibhai vs. ITO [2011] 10 taxmann.com 25 (Ahd. - ITAT)/ [2011] 135 TTJ 364 (Ahd)
Legislative history
2004 Amendment
In order to augment compliance of TDS provision, S.40(a)(ia) was introduced by Finance (No.2) Act, 2004 w.e.f. 1-4-2005 i.e. from AY 2005-06. It provided that any interest, commission or brokerage, fees for professional services or fees for technical services, contract charges payable to any resident person would not be allowed as deducted while computing profits and gains of business or profession of assessee if tax required to be deducted on these payment under Chapter XVII-B is either not deducted or after deduction has not paid. Further deduction would be allowed during the financial year in which tax is deducted or tax has been deposited.
2006 Amendment
Taxation (Amendment) Act, 2006 w.r.e.f. 1-4-2006 has added “rent and royalty” to the list of specified expenditure.
2008 Amendment
In view of the said provision, failure to pay the tax deducted at source, whole of the expenditure is disallowed which is otherwise allowable.
To mitigate hardship caused to the assessee, Finance Act 2008 has amended said section retrospectively from 1-4-2004 i.e. AY 2005-06. It granted relief in respect of the expenditure pertaining to the month of March (last month of financial year) by allowing additional time for depositing TDS on such payment till due date of filing return of income u/s 139(1) ie 31st July (non corporate assessee not liable for audit) and 30th September (corporate and other assessee liable for audit).
This additional period has been allowed only for the purposes of escaping disallowance of expenditure. Additional period does not extends the time limit of payment of TDS. Though expenditure is not disallowed in case tax is deposited late but within additional allowed time, other penal provisions would continue to apply.
2010 amendment
Amendment made in 2008 is further sought to be relaxed by the Finance Act 2010 by substituting the earlier proviso. It states that now disallowance of any specified expenditure (liable for TDS) under section 40(a)(ia) would be attracted only if, tax is not deducted or after deduction not paid, on or before, due date of filing return of income u/s 139(1).
It is also provided that in respect of such expenditure where tax has been deducted in subsequent year or deducted tax has been paid on or after due date of filing return of income, deduction would be allowed in the previous year in which tax has been deducted or paid. This amendment is applicable retrospectively from 1-4-2010 ie AY 2010-11. Thus, this amendment brings the provisions of this section in line with S. 43B.
Impact of the Amendment
Amendment would provide immense relief to the assessee’s who are unable to deposit tax deducted at source within the specified time limit. They would be entitle for additional time up till due date of filing of return of income to deposit the tax deducted at source in order to escape disallowance of expenditure. With this amendment gives away the distinction for allowance of expenditure for first 11 months and last month of the previous year. However it may be noted that such a asseesee may not escape other penal consequences for late deduction and late payment.
Can amendment apply from AY 2005-06?
It is interesting to note that earlier, in order to mitigate the hardship caused to taxpayer, amendment in 2008 was made effective retrospectively from AY 2005-06 where as current relaxation is made effective from the AY 2010-11. The law to be applied in income tax assessments is the law in force in the assessment year unless otherwise provided expressly or by necessary implication . The circumstances under which the amendment is brought in existence and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment is clarificatory or substantive in nature and, whether it will have retrospective effect or not .
Supreme Court in Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1) relying on the Principles of Statutory Interpretation by Justice G.P. Singh, Statute Law by Craies has observed that - it is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant:
(i) general scope and purview of the statute;
(ii) the remedy sought to be applied;
(iii) the former state of the law; and
(iv) what it was the legislature contemplated.
Further Supreme Court in CIT V. J.H. Gotla,(1985) 156 I.T.R. 323 has observed that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.
Recently Supreme Court in certain cases had read the amendment retrospective even though such amendment were not made retrospectively, refer CIT v Gold Coin Health Foods P. Ltd (2008) 304 ITR 308 (SC)and CIT Vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC). Further relieance can also be placed on Supreme Court decision in Allied Motors (P.) Ltd. v CIT [1997] 224 ITR 677 (SC).
There cannot be two views that proposed amendment is sought to provide relief to the taxpayer. Though amendment is stated to be effective from 1-4-2010, considering, judicial proceedings, it may be possible to argue that said amendment to be operative from 1-4-2005.
* Originally this article was published in the Chamber of Tax Consultants popular monthly journal ‘Income Tax Review’ March 2010 issue on "Finance Bill 2010"
Recently similar view has been held in Kanubhai Ramjibhai vs. ITO [2011] 10 taxmann.com 25 (Ahd. - ITAT)/ [2011] 135 TTJ 364 (Ahd)
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