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Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense...
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Friday, September 28, 2012

Service Tax leviable in case of transportation of goods by railway w.e.f 1-10-2012

LEVY OF SERVICE TAX ON TRANSPORTATION OF GOODS BY RAIL FROM 1st OCTOBER 2012

In compliance of the provisions contained in Finance Bill 2010 and subsequent notifications issued by Ministry of Finance, the Service Tax in case of transportation of goods by rail, which was exempted upto 30th September 2012, would now be levied on total freight charges with effect from 1st October 2012.

Since an abatement of 70% has been permitted on freight for the taxable commodities by the Ministry of Finance, the Service Tax will be charged on 30% of the total chargeable freight inclusive of all charges (like busy season charges, development charge etc.,) would be calculated as follows:-

(i)  Service Tax of 12% will be charged on 30% of freight (equivalent to 3.6% on the total freight charges)

(ii)  Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total freight) and

(iii)  Higher Education Cess of 1% on Service Tax will also be added (equivalent to 0.036% on total freight)

(iv)  Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total freight charges.

Certain commodities have been exempted from payment of service tax as per Ministry of Finance notification. 

The list of such commodities and further details on the modalities of levy and collection of Service Tax on transportation of goods by rail, may be ascertained from Indian Railways' web site.

The amount of Service Tax collected by Railways would be deposited with the Ministry of Finance as per prescribed procedure.

Levy of Service Tax on Railway Passengers travelling in First Class AC/ First Class w.e.f 1-10-2012


LEVY OF SERVICE TAX ON RAILWAY PASSENGERS TRAVELLING IN AC CLASS/FIRST CLASS W.E.F. 1st OCTOBER 2012

In compliance of the provisions contained in Finance Bill 2012 and subsequent notifications issued by Ministry of Finance, the Service Tax in case of railway travel, which was exempted upto 30th September 2012, will be levied on the fare of passenger services in the following classes from 1st October 2012.

(i)  AC First Class,
(ii)  Executive Class,
(iii)  AC-2 tier Class,
(iv)  AC-3 tier class,
(v)  AC Chair Car class,
(vi)  AC Economy class and
(vii)  First Class.

Since an abatement of 70% has been permitted on passenger services by Ministry of Finance, the Service Tax will be charged on 30% of total fare including reservation charge, development charge, superfast surcharge which would be calculated as follows:-

 (i)  Service Tax of 12% will be charged on 30% of fare (equivalent to 3.6% on the total fare)
(ii)  Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total fare) and
(iii)  Higher Education Cess of 1% on Service Tax will also be added (equivalent to 0.036% on total fare)
(iv)  Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total fare.

On Concessional value tickets/PTO tickets etc. service charge will be levied on 30% of the total fare actually being paid by the passengers.

The Service Tax will also apply to tickets issued in advance for journeys to commence on or after date of implementation of Service tax. In the case of tickets already issued excluding service tax, the service tax on total fare including development charge, superfast surcharge, reservation fee, etc. date of implementation of Service Tax will be recovered either by TTEs in the train or by the Booking Offices before commencement of the journey by the passengers. Commercial Inspectors and TIAs have been instructed to visit all important stations and ensure that service tax is levied on tickets issued as per the revised rates. Commercial Officers have also been asked to make surprise checks at the stations and ensure that Service Charges are levied from date of implementation of Service Tax.

The amount of Service Tax collected from passenger will be deposited with the Ministry of Finance as per procedure. Finance Departments of Zonal Railways have been instructed for proper accountal and remittance of Service Tax amount to the Government.

In case of refund of passenger fare, if any, refund of Service Tax shall be claimed by the passenger from the concerned Service Tax authority. No refund shall be made by the Railways on this account. For the purpose of claiming refund, Chief Commercial Manager (CCM) office of concerned Zonal Railway shall issue a certificate to passenger detailing the amount of refunds to be signed by an Officer authorized by CCM, which shall be countersigned by the Dy. Chief Account Officer (DCAO) or officer authorized by them for this purpose.

Supreme Court says, No Penalty u/s. 271 (1) (c) be levied in case of bonafide, inadvertent & human error

In the case of  Price Waterhouse Coopers vs.Commissioner of Income-tax, Kolkata - I, the levy of penalty u/s. 271 (1) (c) was upheld by The Commissioner of Income Tax-(Appeals), the Hon'ble Income Tax Appellate Tribunal and High Court on the ground that, since the assessee was a well known and reputed Chartered Accountant firm and a tax consultant, it was not expected to make such a mistake and that there had been a failure to discharge the strict liability to furnish true and correct particulars of income.

Facts:The assessee had filed the Return of Income along with the Tax Audit Report (TAR). 

In the TAR, an amount of Rs. 23 lakhs towards provision for gratuity was disclosed which was not allowable u/s 40A(7). However, in the computation of income, the said amount was not disallowed. The Assessing officer overlooked the item and had overlooked to make a disallowance. 

Subsequently, the case was re-opened and assessment u/s 147 was made and accordingly assessing officer disallowed the expenditure and levied penalty u/s 271(1)(c). 

Commissioner of Income Tax (Appeals), ITAT, High Court affirmed and upheld the levy of Penalty u/s. 271 (1) (c).


Supreme Court held as here under:-

"Having heard learned counsel for the parties, we are of the view that the facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it. Notwithstanding this, it is possible that even the assessee could make a "silly" mistake and indeed this has been acknowledged both by the Tribunal as well as by the High Court.

The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable under Section 40A(7) of the Act indicates that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report.

The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bonafide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The caliber and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present, does not mean that the assessee is guilty of either furnishing inaccurate particulars or attempting to conceal its income.

We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bonafide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.

Under these circumstances, the appeal is allowed and the order passed by the Calcutta High Court is set aside."


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Financial difficulty cannot be the Ground to seek waiver of interest u/s. 234B & 234C held Supreme Court

Financial difficulty cannot be the Ground in seeking waiver of interest u/s. 234B & 234C

BEFORE THE SUPREME COURT OF INDIA
De Souza Hotels (P.) Ltd.
vs.
Chief Commissioner of Income-tax
S.H. KAPADIA, CJ.
AND A.K. PATNAIK, J.

CC NO. 13729 OF 2012

AUGUST 21, 2012
---------------------

ORDER

Assessee filed a writ petition contending that grant for waiver/refund should be granted u/s. 234B & 234C as due to financial difficulties. 

The Petition was filed contending that the same has been declined under misinterpretation or may be narrow interpretation of Order F.No. 400/29/2002-IT(B), dated 26-6-2006 issued by the Central Board of Direct Taxes (CBDT).


The said Order was issued by CBDT in exercise of power under section 119(2)(a) and paragraph 2(d) of Order specifically mentioned that it would not apply to sections 234B and 234C of the Income Tax Act, 1961.


Issue: whether in view of the above, the assessee was entitled to waiver/reduction of interest or not? 

Hon'ble Supreme Court dismissed the Special Leave Petition.

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Monday, September 24, 2012

Milk Producers are covered under the exception to Rule 6DD (f) of the Income Tax Rules, 1962 read with Sec- 40A(3) of the Income Tax Act,1961 held ITAT Hyderabad Bench

Recently, Hon'ble Income Tax Appellate Tribunal, Hyderabad in the case of D.C.I.T vs. Heritage Foods (India) Ltd. has held that Cash Payments to the Milk Producers through it's Representatives/ Agents shall be Deemed to be payments made directly to the milk producers and therefore excluded from the rigors of Rule-6DD falling under the exception of clause (f) of Rule 6DD of the Income Tax Rules, 1962.

Provision of Rule - 6DD and Exception

No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified here-under, namely :—

(f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;


Rule 6DD(f) mentions one of the circumstances, which indicates that when the payment is made of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products, injunction specified under Section 40A(3) would not come into play. 


(lwhere the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

Observation by Hon'ble I.T.A.T.:

Bare reading of the provisions of clause (f) indicates that the payments made for purchase of produce of the animal husbandry or dairy etc to its producer are outside the scope of the provisions of section 40A(3) of the Act. 

Stated the following findings while passing the judgment:-



  • that, as per settled issue the expressions 'to the cultivator, grower or producer of such articles, produce or products' placed at the end of clause (f) of the rule 6DD commonly apply to all four sub clauses of the said clause (f).
  • that the payment was made in cash to his agent who was required to make payment in cash for goods or services on behalf of such person,hence, such payments are outside the scope of the provisions of section 40A(3) of the Act. 
  • that there is no bar on the said agent to work in dual capacity to the milk producers too as the representatives are admittedly the agents as evident from the confirmation letters filed before the lower authorities. 
  • that there is no dispute on the fact that the milk, for which the impugned payments are made by the assessee, is not a dairy produce. 
  • that nothing is brought onto the records by the assessee to show that the representatives/agents of MCC are not required to make payments in cash. 
  • that the requirement of making the payments in cash to the producers of milk is much beyond the existence of Banking facilities in that village or nearby villages. 
  • that the economic problems of milk producers are such that the Parliament/ CBDT felt it necessary to incorporate milk producer should be free receive payments in cash. 
  • although such exclusion from the rigor of the provisions of section 40A(3) of the Act, is subjected to certain conditions. 

Also held that the assessee be entitled for relief when the impugned payments are covered under any one of the exceptions prescribed in Rule 6DD, viz. either under clause (f) or clause (l) of Rule 6DD, even if not both. 

Therefore, in any case, cash payments of any amount to such producers of milk are covered by  clauses of (f) and (l) of the Rule 6DD of I T Rules, 1962 and such payments must enjoy the exclusion benefits.



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Amendments, Clarifications, Controversies & Litigation of Section- 40 (a) (ia) of the Income Tax Act, 1961

Amendments, Clarifications, controversies & Litigation of issues revolving around Section- 40 (a) (ia) of the Income Tax Act, 1961

Controversies evolving out of each amendment to section 40 (a) (ia) seem to have  given some sigh of relief to the assessees & their Tax Representatives, "till the time" it receives it’s final verdict from the highest judicial authority i.e. Supreme Court of India

IDEOLOGIES OF TAXATION:

Law of Taxation and changes incorporated by CBDT (Central Board of Direct Taxes) every year has turned out to be more complex and controversial for each passing years. It is a charging statute and levy of tax is separate on each of the individuals and the levy is governed by the Income Tax Act, 1961. The strategy of Taxation can be broadly classified upon considerations like raising revenue/funds, put a check upon consumption and use of articles. The main source of earning of revenue is by way of application of TDS provisions which is laid down by the statute in Chapter-XVII “COLLECTION & RECOVERY OF TAX”.

LEGISLATIVE HISTORY OF THE PROVISIONS OF SECTION - 40 (a) (ia):

Sec- 40 is placed in Chapter- IV D. – Profits and gains of business or profession consists of sec-28 to sec- 44DA, dealing with the “Amounts not deductible” while computing the income under this head. For ready reference, sec- 40 is produced herein, -

“Amounts not deductible

40.  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)  any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—         
    (A) outside India; or
    (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the Page 3 of 26subsequent 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 in 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.
     
Explanation. —For the purposes of this sub-clause, —
     (A)  “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of subsection (1) of section 9;
   (B)  “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

The statute clearly states that Section 40 deals with certain amounts, which will not qualify for deduction in computing the income chargeable to tax. Subsequent insertion of New Sub-Clause (ia) to Section 40 (a) by Finance (No. 2) Act, 2004 w.e.f. 01.04.2005 i.e. from A.Y. 2005-06 was made with a sole objective i.e. to ensure effective compliance with the provisions of TDS (Tax deduction at source).

What the statute reads:

Sec- 40 (a) (ia) reads,-

(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 been 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 deduction in computing the income of the previous year in which such tax has been paid."

Finance (No.2) Act, 2004 states that sec- 40 (a)(ia) would cover, -

a)  any payment made to a resident for any interest covered by Sections 193 and 194A;
b)  commission or brokerage covered by Section 194H;
c)  fees for professional or technical services covered by Section 194J and;
d) payments to contractors or sub contractors covered by Section 194C (specified expenditure)

on which tax has not been deducted, or having been deducted, has not been paid any time during the previous year or in the subsequent year or before expiry of the time limit prescribed u/s 200(1), shall not qualify for deduction in computation of income chargeable to tax under the head “Profits & gains of business or profession”.

It has also provided that, if tax is deducted in any subsequent year, or has been deducted in the previous year but paid in the subsequent year after the expiry of the time limit prescribed u/s. 200(1), then such sum will be allowed as deduction in computing the income of the previous year in which the tax has been paid.

As regards payments to a non resident or a foreign company, the existing Section 40(a)(i) (upto A. Y. 2004-05) provides for disallowances in respect of any interest, royalty, fees for technical services or other sums chargeable under the Act, which are payable outside India or in India to any non resident or to a foreign company, where either tax is not deducted at source or, having deducted the tax, payment is not made before the expiry of time prescribed u/s 200(1).

OBJECTIVE BEHIND INCORPORATION OF SUB- CLAUSE (ia) to SECTION- 40 (a) (ia)

To bring harmony in between the treatments of payments to a non-resident/ foreign company with that of payments to a resident, Section 40(a)(i) is amended retrospectively w.e.f. A. Y. 2005-06. It has been provided that if the tax is deducted and paid within the same previous year, even if the payment is beyond the time prescribed u/s 200(1), the deduction will be allowed in the previous year. Similarly, if tax is deducted in the previous year, and payment is made in the subsequent year before the expiry of time prescribed u/s 200(1), the deduction will be allowed in the previous year. But, if the tax is deducted in the previous year, but paid in the subsequent year beyond the time limit prescribed u/s 200(1), then the sum would be allowable in the subsequent year.

AMENDMENTS TO SEC- 40 (a) (ia):

First Amendment to the provisions of sub-clause (ia) of clause (a) of section 40 of the Income-tax Act was brought in by the Finance Act, 2008.

As per the provisions of sub-clause (ia) of clause (a) of section 40, any interest, commission, brokerage, fees for professional services, fees for technical service payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work, rent and royalty on which tax is deductible at source 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 shall not be allowed as deduction. However, the sum is allowed as a deduction in the year of actual payment of the TDS.

To mitigate any hardship caused by the above provisions of section 40 while maintaining TDS discipline, the Act has amended provisions of sub-clause (ia) of clause (a) of section 40.

This amendment allows an additional time (till due date of filing of return of income) for deposit of TDS pertaining to deductions made for the month of March so that disallowance under sub-clause (ia) of clause (a) of section 40 is not attracted in such cases.

Fore example, if the last date for filing the return of income in case of a taxpayer (deductor) is 30th September, he would get an additional time of six months (i.e. from April to September) for depositing the tax deducted at source on an expenditure incurred or payment made in the month of March so as to escape disallowance under sub-clause (ia) of clause (a) of section 40.

The amendment brought in by this Finance Act, 2008 has been made applicable with retrospective effect from 1st April 2005 and shall accordingly apply to assessment year 2005-06 and subsequent to the said assessment year. 
Thereafter, another amendment to sec- 40 (a) (ia) was brought in by the Finance Act, 2010 which was made applicable with retrospective effect, but from the 1st April 2010 i.e. in relation to the A.Y. 2010-11 and subsequent years.
The provision so amended, reads as under –

“(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 been 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 deduction in computing the income of the previous year in which such tax has been paid.”

To discourage the practice of delaying the deposit of tax after deduction, a significant change was incorporated vide this amendment of Finance Act, 2010 i.e. the rate of interest for non-payment of tax after deduction has been increased from the present one percent (1%) to one-half percent (1 ½ %) for every month or part of month as per provisions of section- 201 (1A) of the Act.   

This amendment has been made applicable w.e.f. 1st July 2010.
DIFFERENCE IN CHANGES BROUGHT IN SEC- 40 (a) (ia) by FINANCE ACT, 2008 & FINANCE ACT, 2010
As per Finance Act, 2008, causing disallowance on the basis of the period of the previous year during which tax was deductible. These two categories of disallowance: -
a)  includes the cases in which tax was deductible and was so deducted during the last month of the previous year but there was failure to pay such tax on or before the due date specified in sub-section (1) of section 139;
b)  includes cases where it requires deposit of tax before the close of the previous year upto 31st March in case of deduction during the first eleven months i.e. a pre-condition for the grant of deduction in the year of incurring expenditure has been eased by extending such time up to the date u/s. 139 (1) of the Act.
The position with reference to first category of cases was left untouched by the Finance Act, 2010, however, in case of the second portion, the only change that has been made by Finance Act, 2010 is that, the assessee deducting tax either in the last month of the previous year or first eleven months of the previous year shall be entitled to deduction of the expenditure incurred during the year, if the tax so deducted at source is paid on or before the due date u/s 139(1).

UNRESOLVED ISSUE RESOLVED BY FINANCE ACT 2012
Recently, Finance Act, 2012 has made some significant amendment in section- 40 (a) (ia), which may have definitely given some sigh of relief to the Tax Practitioners.
The objective behind the amendment brought in by the Finance Act, 2012, is to rationalize the provisions relating to TDS.
The Issue towards Short-Deduction of Tax seems to have eased out the situation.
The amendment to section- 40 (a) (ia) reads that, disallowance of business expenses payable to resident payee due to non-deduction of TDS will not be made if the payer is not considered as an “assessee in default” under first proviso to section 201(1) of the Income Tax Act.

The first proviso to section 201(1) states that, if a payer who fails to deduct TDS from the amount paid to a resident or on the amount credited to the account of a resident shall not be deemed to be an “assessee in default”, if such resident: (conditions)

(a) has furnished his return of income under section 139;
(b) has taken into account such sum for computing income in such return of income;
(c) has paid tax due on the income declared by him in such return of income and;
(d) if the tax payer furnishes a certificate to this effect from an accountant in such form as may be prescribed.

In such a case, it shall be deemed that the payer has deducted and paid the tax on the date of furnishing of return of income by the resident payee.

To obtain the benefit of amendment to section 40(a)(ia), the payer should not be an “assessee in default” as mentioned in proposed first proviso to section 201(1) and all the above conditions need to be fulfilled in order to avoid disallowance of expenses.

The amendment is effective from assessment year 2013-14.

CONSTITUTIONAL VALIDITY OF THE SECTION- 40 (a)(ia) CHALLENGED BEFORE HIGH COURT
The challenge of the constitutionality of the said provision was raised before the Hon’ble Madras High Court in the case of Tube Investments of India v. Asstt. CIT [2009] 325 ITR 610, although the petition was rejected by the High Court. The petition is based on a very interesting ground wherein it was contended that, the effect of disallowance of the whole of expenditure under Section 40(a)(ia) for deduction of tax but when not paid as provided under the relevant rules, could be draconic and so harsh that it had to be held to be highly arbitrary and unreasonable and in violation of Article 14.


Looking at the practical aspect of the contention, it is pertinent to mention that, disallowance u/s. 40 (a)(ia) even if is made for the default committed in complying with the Tds provisions, the punishment is harsh in respect of the disallowing the entire expenditure that has actually being incurred during the previous year. 



Hon’ble High Court of Madras has clarified by stating that,

“in the event of a reasonable doubt about the applicability of Chapter XVII-B, Section 40(a)(ia) cannot be invoked, would be stretching our jurisdiction beyond the permissible limit which cannot be done. In as much as we have reached a conclusion that the object sought to be achieved while enacting Section 40(a)(ia) was for augmenting the provision of TDS, with which object we do not find any impermissibility or lack of constitutionality and hence there is no scope for applying the doctrine of Reading Down to the said provision.”
Another issue that the petitioner had contended before Hon’ble High Court in this case was regarding the issue & controversy of “DOUBLE TAXATION”.

LANDMARK JUDGMENT BY HON’BLE SUPREME COURT IN HINDUSTAN COCA COLA BEVERAGE P. LTD. VS. COMMISSIONER OF INCOME TAX

The Apex Court held that, -
“the rigor of Section 40(a)(ia) is relaxed and thereby whatever tax liability created due to disallowance can be retrieved and thereby in the ultimate process, the collection of tax will be only that of the payee. It is a misnomer to call the process created under Section 40(a)(ia) as one resulting in Double Taxation.

Circular No.275/201/95- IT (B) dated 29.01.1997 issued by the CBDT, which specifically declares “no demand visualized under Section 201(1) of the Income Tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee.

However, this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income Tax Act.” It was in the above stated legal position that decision came to be rendered by the Hon’ble Supreme Court.

Hon’ble High Court strongly quoted in the case of Tube Investments of India v. Asstt. CIT that, the said decision has been rendered in the light of Sections 201(1) and 201(1A) could not have been made applied to a situation where Section 40(a)(ia) gets attracted, as both the provisions stands in different footing under different sets of circumstances.

CONTROVERSY & INTERPRETATION OF THE EXPRESSION ‘PAID’ & ‘PAYABLE’ IMPLIED IN SECTION- 40 (a) (ia)

Section 40(a)(ia) creates a legal anomaly by virtue of which even the genuine and admissible expenses claimed by an assessee and when an assessee does not deduct TDS on such expenses the same are disallowed.

It was enacted for the purposes of augment of tax through the strict compliance of TDS provision in the light of furtherance to the said objective.
The issue that revolves around is in respect to the interpretation of the expression ‘paid’ & ‘payable’ implied in the section- 40 (a) (ia). The question is whether sec- 40 (a) (ia) would get attracted in the case when the amount is already being paid although the tax is not deducted or is not deposited after such deduction or not?
Several judicial Authorities have passed its decisions on this issue and ultimately Income Tax Appellate Tribunal Special Bench, Vishakhapatnam in the case M/s. Merilyn Shipping & Transports vs. ACIT has settled the issue by considering the majority view stating that, sec- 40 (a) (ia) of the Act is applicable only to such expenditures which are payable as on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid during the previous year, without deducting tax at source.

AMENDMENTS BY FINANCE ACT, 2010
WHETHER PROSPECTIVE OR RETROSPECTIVE ?
The amendment that has been brought by Finance Act, 2010 in the sec- 40 (a) (ia) states that, the due date of depositing the TDS for all the payments has been made as per Section 139(1) of the Act, i.e. before the due date for filing of the returns.
The question as to whether the Amendment by the Finance Act, 2010 shall be applicable with prospective or retrospective effect or not i.e. from 1.4.2005 came up for consideration before the Mumbai Special Bench Income Tax Appellate Tribunal in the case of Bharati Shipyard Ltd.
It was held that, the amendment made by the Finance Act, 2010 with a retrospective effect from assessment year 2010- 2011 cannot be held to be retrospective from assessment year 2005-2006.
The Special Bench held that the amendment brought in by the Finance Act, 2010 to section 40(a)(ia) w.e.f. 01.04.2010 is not remedial or curative in nature.
Finally, the matter came up before Hon’ble High Court Kolkata in the case of Commissioner of Income Tax vs. Virgin Creations, wherein it was held that, when a provision is inserted with an objective to make the provision workable, the same is required to be treated with retrospective operation.
Subsequently, Hon’ble ITAT Kolkata, Mumbai & Vizag Bench have taken similar views in several cases and thereby have provided a big sigh of relief to the assessee’s as well as to their Tax Representatives. 

PERSONAL OBSERVATION & REMARKS:
The judicial decisions are based on the finding of the correct facts and circumstances supported by law. The issue of whether Sec- 40 (a) (ia) would be applicable with retrospective effect i.e. from A.Y. 2005-06 (inception of the provision) or not, has indeed made me confused.
Although for the time being the issue has been resolved by Calcutta High Court in the case of Commissioner of Income Tax vs. Virgin Creations, however, after careful observation of the Judgment passed by Hon’ble High Court, it is necessary to state the finding & observation of Hon’ble HC, -

“It is argued by Mr. Nizamuddin that this court needs to take decision as to whether section 40(A) (ia) is having retrospective operation or not.

The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April 1, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i.e. well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed.

Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., has already decided that the aforesaid provision has retrospective application. Again, in the case reported in 82 ITR 570, the Supreme Court held that the provision, which has inserted the remedy to make the provision workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well.

In view of the authoritative pronouncement of the Supreme Court, this court cannot decide otherwise.”
Now, it is pertinent to state briefly the issue, which was adjudicated & decided in the case of Allied Motors Pvt. Ltd. (P) Ltd. vs. Commissioner of Income Tax by Hon’ble Supreme Court of India.
This is as follows: -

The following question has been referred to us under Section 256(1): -

"Whether on the facts and in the circumstances of the case, the sales-tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales-tax law is to be Income-Tax Act, 1961 while computing the business income of the said previous year "?

In this case, the deduction that was claimed by the assessee was disallowed by the Income-tax Officer under Section 43B of the Income-tax Act, 1961 which was inserted in the statute with effect from 1.4.1984.

Again in the case of Commissioner of Income Tax vs. Alom Extrusions Limited, the controversy, which was adjudicated and decided by Hon’ble Supreme Court of India was that, -

“whether omission [deletion] of the second proviso to Section 43-B of the Income Tax Act, 1961, by the Finance Act, 2003, operated with effect from 1st April, 2004, or whether it operated retrospectively with effect from 1st April, 1988?

After careful observation of the judgment passed by Hon’ble High Court of Kolkata in the case of Virgin Creations read with the afore-mentioned Supreme Court judgments, it shall not be out of place to mention that, section- 40 (a) (ia) has indeed not been adjudicated by the Hon’ble Apex Court. The judgment that was passed by Hon’ble High Court that states, “has already decided that the aforesaid provision has retrospective application” is erroneous and apparent from record, hence, requires some serious review. 
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