Time Ads and Publicity vs Commissioner of Income tax (Central)

Dr. Manjula Chellur, C.J.—The substantial questions of law that arise for our consideration in this appeal are as under: "(i) Whether on the facts and circumstances of the case, the Hon''ble Tribunal was justified in upholding the decision of the Assessing Officer invoking the provisions of Section 40(a)(ia) against the appellant, for the revenue expenditure which are the allowable deductions under Section 28(i) of the Income-tax Act?

(ii) Whether in the facts and circumstances of the case, the Hon''ble Tribunal is justified in upholding the order issued by the assessing authority invoking Section 40(a)(ia) against the appellant, in the light of the provisos to Section 40 of the Income-tax Act, added w.e.f. 01.04.2005 and substituted w.e.f. 01.04.2010."

In brief, the facts that led to filing of this appeal are as under: Appellant is a partnership firm engaged in advertisement business. The controversy before us pertains to assessment year 2008-09. According to appellant/ assessee, for this assessment year, on account of unexpected administrative exigencies, delay occurred in filing the returns within the stipulated time, which resulted in delay in deducting and remitting the amount at source under various heads payable to the Government account within the time stipulated. In the return, a total income of Rs. 48,61,090/- was shown for the above assessment year. The assessing authority disallowed total expenditure of Rs. 4,72,59,752/- already incurred by the appellant for earning the business income under different heads invoking the provisions under Section 40(a)(ia) of the Income-tax Act. Aggrieved by the same, an appeal came to be filed by the appellant/assessee before Commissioner of Income-tax (Appeals). Appellate Authority allowed the appeal setting aside the assessment order. Aggrieved by the same, Revenue approached the Income Tax Appellate Tribunal and the Tribunal, by order dated 27.07.2013, set aside the order of CIT (Appeals).

According to appellant/assessee, order of the Appellate Tribunal is a cryptic and non-speaking order. Appellant/assessee raised a legal contention relying on the non-obstante clause contained in Section 40(a)(ia) of the Act that assessing authority is empowered to make deduction only in respect of the items of expenses covered by the provisions of Sections 30 to 38 and any items of expenditure allowable in respect of items of expenses covered by any section preceding or succeeding Section 30 are not covered by the statutory disallowances envisaged under Section 40 of the Act. According to appellant/assessee, all the expenses represent direct costs already incurred by them to earn income from the business under Section 28 of the Act. Therefore, such allowable expenditure will not come under the purview of Section 40. In other words, expenses like ground rent, technical service fee, display expenses etc. represent the costs incurred by the assessee to earn income which is assessable against revenue for the purpose of determining the profits earned under Section 28(1) of the Act. Though, in appeal, the authority actually considered the argument, however, the Tribunal, which could have understood the grave mistake committed by the assessing authority, did not consider the contentions raised by the assessee, totally ignoring the law laid down in Theja Construction''s case by Hyderabad Bench. The reasoning of the authorities is perverse and unsustainable is the stand of the assessee.

So far as facts of the case, appellant had deducted tax at source as stipulated under Chapter XVIIB of the Act and remitted the above amount to the Government account with late fee as stipulated in the Act and Rules. This has not resulted in any loss to revenue of the nation. Before all the authorities, revenue admitted the deduction at source made by the appellant/assessee and the error is such amount was remitted to the Government account with late fee as stipulated in the Act. The delay in filing the return by the assessee in that particular year was beyond their control.

Appellant/assessee also contends that the proviso introduced to Section 40 with effect from the assessment year 2012-13 clarifies the situation that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum, but is not deemed to be an assessee in default under first proviso to Section 201(1), thus for the purpose of this sub clause, it shall be deemed that assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. The first proviso to Section 201(1) was also amended which clarifies the position that the person who failed to deduct the whole or any part of the tax in accordance with the Chapter on the sum paid to a resident or on the sum credited to the account of the resident, he shall not be deemed to be an assessee in default, in respect of such tax, if the resident payee satisfies four conditions and the deductor furnishes a certificate from a Chartered Accountant. Under those conditions, it has to be assumed that for the purpose of Section 40(a)(ia), deductor has deducted and paid the tax on such sum on the date of furnishing return of income by the resident payee. Therefore, the provisos brought to the above two sections also dilute the effect of Section 40(a)(ia) of the Act. Contending as stated above, appellant sought for setting aside the order of the Appellate Tribunal and that demanding a sum of Rs. 2,36,78,830/- towards tax payable is per se arbitrary and untenable in the eye of law.

Learned Senior Counsel arguing for the appellant-assessee relies on the following decisions in support of his contention: Vimaleshwar Nagappa Shet Vs. Noor Ahmed Sheriff and Others, is with regard to concession made by counsel on question of fact whether binds his client. The litigation was in respect of specific performance of agreement to sell. Incidentally co-owners were not parties to agreement claiming to purchase shares of other co-owners. Counsel appearing for plaintiff gives consent to such purchase by co-owner, who was not a party to agreement, at reasonable market value within stipulated period. This resulted in an order passed to execute sale deed in favour of co-owner, who was not a party and order was in the form of a consent order. Relevant paragraphs are 11 and 12, which read as under:

"11. The statement made by the counsel before the High Court, as recorded in the impugned judgment and order, cannot be challenged before this Court, [vide: State of Maharashtra Vs. Ramdas Shrinivas Nayak and Another, ; Shankar K. Mandal and Others Vs. State of Bihar and Others, ; Roop Kumar Vs. Mohan Thedani, ; Guruvayur Devaswom Managing Commit. and Another Vs. C.K. Rajan and Others, .

It is also clear that the High Court has recorded in the impugned judgment dated 03.03.2009 that the counsel agreed with instructions from the plaintiff and reiterated this fact in its order dated 28.08.2009 in Misc. Civil No. 13474 of 2009 in the above-mentioned RFA while rejecting the plea of the counsel for the appellant herein that he did not give consent that he had no instructions from his clients. A concession made by a counsel on a question of fact is binding on the client, but if it is on a question of law, it is not binding, [vide: Nedunuri Kameswaramma Vs. Sampati Subba Rao, , B.S. Bajwa and Another Vs. State of Punjab and Others, ".

From paragraphs 11 and 12 extracted above it is clear, if consent is given on question of fact by counsel, it is binding. If consent is given on question of law, it is not binding. It is contended on behalf of appellant that order of Tribunal is without considering legal issues, therefore, it is cryptic and non-speaking order without touching legal issues.

Revenue approached Tribunal aggrieved by order of deletion of disallowance made under Section 40(a)(ai) of Income-tax Act and also aggrieved by deletion of disallowance made out of repairs and maintenance expenses. According to Revenue, TDS amount came to be remitted beyond the due date, therefore, relevant expenses are not leviable during the year under consideration in view of specific provision contained in said Section. In the absence of proper vouchers pertaining to claim of repairs and maintenance, according to department, Assessing Officer was justified in disallowing 10% of expenses on ad hoc basis. To this, learned representative for assessee while supporting the order of CIT (Appeals) contended, expenditure could be claimed in the year of payment of TDS. According to appellant, this concession made by counsel pertains to question of law and not question of fact. Therefore, there was no justification for Income Tax Appellate Tribunal to set aside order of CIT (Appeals).

The next decision relied upon is The Commissioner of Income Tax, West Bengal 1, Calcutta Vs. Vegetables Products Ltd., . This decision refers to taxing provision, which is ambiguous or capable of more than one interpretation and how the benefit has to be extended to assessee. While considering calculation of penalty leviable under Income-tax Act for non-failure of filing returns of income within the time prescribed without reasonable cause, question arose with regard to the language used in taxing provision. Their Lordships held that if the language of a taxing provision is ambiguous or incapable or capable of more meanings than one, then the Court has to adopt that interpretation which favour the assessee, more particularly where the provision relates to imposition of penalty.

Commissioner of Income Tax Kolkata-III Vs. Alom Extrusions Limited, is relied upon to contend that whenever provisions are amended to remove unintended consequences, they must be implemented retrospectively to give effect to. In such cases strict construction not preferred especially when it leads to unintended consequences. Their Lordships relied upon the case of Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, , the relevant portion of which reads as under:

"We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be sub-served by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. 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."

Allied Motors (P.) Ltd. Vs. Commissioner of Income Tax, Delhi, is also with reference to reasonable construction of provisions. Here, Their Lordships held that proviso inserted to remedy unintended consequences to be treated as retrospective.

Rajendra Singh Verma (Dead) through L.Rs Vs. Lt. Governor of NCT of Delhi and Another, is relied upon to contend that in an extraordinary case when the Court is convinced that some real injustice has happened, which ought not to have taken place, has really happened and not merely because there could be any possible view, in such cases judicial review has to be exercised.

In a case where Advocate General gives concession before court to grant benefit of an earlier date of appointment to an employee and if such concession is on point of law, it does not bind State Government or other employee. In this regard, decision in B.S. Bajwa and Another Vs. State of Punjab and Others, is relied upon.

The order of assessment came to be interfered with by CIT (Appeals) by placing reliance in the case of Teja Construction v. Asstt CIT [2010] 39 SOT 13 (Hyd.) (URO). Relevant portion of the order reads as under:

"The bare provision of s. 40(a)(ia) provides for non-deduction of amount which remains payable to a-resident in respect of fees for technical services etc. It is not applicable where expenditure is paid. It is applicable only in cases where the payments are due and outstanding. The word ''payable'' is not defined though the word paid is defined under s. 43(2) to mean actually paid or incurred. Hence, by implication the word payable does not mean actually paid or incurred. Hence, by implication the word ''payable'' does not include paid. The difference in the word paid and payable is also there in the rules for depositing the TDS and also for levy of interest under s. 234B where interest is worked out on the basis of tax actually deducted at source and not on the basis of tax deductible. Sec. 40(a)(ia) otherwise being a legal fiction needs to be construed strictly in view of the decision of Supreme court in Commissioner of Income Tax, Kanpur Vs. Mother India Refrigeration Industries P Ltd., . The CBDT Circular No. 5 of 2005, dt. 15th July, 2005 [(2005) augment compliance of TDS provision in the case of residents and curb bogus payments to them. In the present case the payment is not in dispute and on the issue whether tax is to be deducted at source on such payments is not free from doubt. In any case, if the assessee has paid the impugned amount and (the amount is) not payable at the end of the year on the date of balance sheet then the provisions of s. 40(a) (ia) are not applicable. It is only applicable in respect of "payable amount" shown in the balance sheet as outstanding expenses on which TDS has not been made. Further, tax is deductible under ss.193, 194A, 194C, 194H and 194J either, at the time of payment or at the time of giving credit to the recipient. However, s. 40(a)(ia) is applicable only in respect of TDS capital defaults amount is "payable". If amount is actually paid and tax is not deducted under the above section, s. 40(a)(ia) is not applicable. There is difference between the word ''paid'' or ''Payable'', the legislature used the word very carefully in s. 40(a)(ia) and in all its wisdom at the time of incorporating the section by way of Finance ( No. 2) Bill, 2004. It was inserted in s. 40(a)(ia) that the amount payable to contractor or sub-contractor liable for disallowance, its TDS not deducted. Sec. 40(a)(ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation the default with reference to actual ''payment'' of expenditure would not entail disallowance. This is because, the language used in the s. 40(a)(ia) is very simple, clear and unambiguous. Literal rule of interpretation has to be applied. The speech of Finance Minister or even other provisions of the Act can be pressed into service if there is some ambiguity about the meaning of the section. But the same was not the case in the instant case. Even the principles of liberal interpretation cannot be applied where the language is clear, simple, and the meaning of the word is apparent. As such, the provisions of s. 40(a)(ia) are not applicable in the present facts of the case. The disallowance if any required to be made shall be restricted to the extent of payable shown in the balance sheet at the end of the year. However, this is not the case in the present case because once the estimation of income is made, further disallowances are unwarranted."

Learned counsel appearing for assessee relies upon another decision of Appellate Tribunal, Mumbai in the case of 2011 (9) ITR (Trib) 565. The issue was also with regard to ground No. 2, which relates to disallowance of certain amounts made by assessing officer, which came to be confirmed by CIT (Appeals) in respect of transport charges under Section 40(a)(ia) of Income-tax Act. At paragraph 28 relevant facts are discussed, which reads as under: "28. The assessee in the present case thus had not only deducted tax at source from the payments of freight charges made during the period 1.4.2005 to 28.2.2006, but the tax so deducted was also entirely paid by him to the credit of the Government although beyond the due date as stipulated in section 200 but before the due date of filing of his return of income for the year under consideration. The relevant TDS provisions thus were substantially complied by him and he was in a position to establish such compliance by filing the required documentary evidence along with his return of income. Still he was made to suffer by way of a disallowance of freight charges for which he was otherwise eligible for deduction giving rise to a huge demand as per the provisions of section 40(a)(ia) which was never the legislative intention behind enacting the said provisions. The provisions of section 40(a)(ia) as stood prior to the amendments made by the Finance Act, 2010 thus were resulting into unintended consequences and causing grave and genuine hardships to the assessees who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns u/s. 139(1). In order to remedy this position and to remove the hardships which was being caused to the assessees belonging to such category, amendments have been made in the provisions of section 40(a)(ia) by the Finance Act, 2010. The said amendments, in our opinion, thus are clearly remedial/curative in nature as held by Hon''ble Supreme Court in the case of Allied Motors Pvt. Ltd. (supra) and Alom Extrusions Ltd. (supra) and the same therefore would apply retrospectively w.e.f. 1st April, 2005. In the case of R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, , it was held by the Hon''ble Supreme Court that a proviso which is inserted to remedy unintended consequences and to make the provision workable, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. In the present case, the amount of tax deducted at source from the freight charges during the period 01/04/2005 to 28/02/2006 was paid by the assessee in the months of July and August 2006 i.e. well before the due date of filing of its return of income for the year under consideration. This being the undisputed position, we hold that the disallowance made by the A.O and confirmed by the learned CIT(A) on account of freight charges by invoking the provisions of section 40(a)(ia) is not sustainable as per the amendments made in the said provisions by the Finance Act, 2010 which, being remedial/curative in nature, have retrospective application. Accordingly, we delete the said disallowance and allow ground No. 2 of this appeal."

In the present case, Tribunal, without applying its mind whether CIT (Appeals) was justified in relying upon decision of Hyderabad Bench in similar circumstances with regard to similar issues simply based on the concession given by counsel proceeds to opine that expenditure could be claimed in the year of payment of TDS. The law involved and how the interpretation has to be made was never discussed. Further consequences which would result in incurable hardship to assessee was never discussed. In the light of above reasoning, we are of the opinion, the matter deserves to be remitted back to Tribunal for fresh consideration regarding the provisions which are relied upon by assessee. Accordingly, the Income Tax Appeal is disposed of directing the Tribunal to reconsider the matter afresh in the light of above observations.