The retrospective application of the amended provision of section 40(a)(ia) of the Income Tax Act, 1961 and the need for a liberal and equitable interpretation.

ORDER :

Abhay Ahuja, J.

1. This is an appeal relating to assessment year 2005-06 filed by the revenue under section 260A of the Income Tax Act, 1961 (“the Act”) seeking to challenge the order of the Tribunal dated 26th May, 2017 and proposing the following questions as substantial questions of law:-

“a. Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was correct in holding that the assessee disclosed true and correct facts in the return of income whereas the facts related to further disallowance u/s 40(a)(ia) of the Income Tax Act, 1961 was not available in the return of income and therefore, there was failure on the part of the assessee within the meaning of proviso to section 147 of the Income Tax Act, 1961?

b. Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was correct in holding that the disallowance u/s 40(a)(ia) of the Income Tax Act, 1961 cannot be made in assessment year under consideration i.e. A.Y. 2005-06 as the assessee paid TDS within the due date prescribed u/s 139(1) of the Income Tax Act, 1961 without appreciating that the amendment to section 40(a)(ia) of the Income Tax Act, 1961 by Finance Act, 2010 w.e.f. 01.04.2010 was prospective and is not applicable for A.Y. 2005-06?

c. Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was correct in not appreciating the fact that the assessee was granted relief of Rs.3,97,76,005/- u/s 40(a)(ia) of the Income Tax Act, 1961 in A.Y. 2006-07 based on the provision applicable for A.Y. 2005-06 and accordingly, an amount of Rs.3,97,76,005/- was required to be disallowed u/s 40(a)(ia) of the Income Tax Act, 1961 in A.Y. 2005-06?”

2. Earlier, before the Tribunal, the assessee as well as the revenue filed cross appeals against the order of the CIT (Appeals). The assessee challenged the reopening of the assessment whereas the revenue challenged the deletion of the disallowance/addition made under section 40(a)(ia) of the Act by the CIT (Appeals). The argument with respect to the reopening was that the reopening cannot be done beyond the period of four years. The Tribunal after considering the law on the subject with respect to the facts of this case and after considering the rival contentions observed that there is no justification in reopening the assessment beyond the period of four years. Tribunal accordingly allowed the appeal of the assessee holding that reopening of assessment was not valid beyond four years when the material facts were duly disclosed by the assessee and the tax deducted at source was deposited in the state exchequer before due date of filing of return. It appears that finding on this issue has not been challenged in this appeal. Coming to the issue relating to the section 40(a)(ia) raised by the department in this appeal, the Tribunal considered the following question in appeal of the revenue which was raised as an additional ground by the department :-

“On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeal) is not justified as the assessee has been allowed relief of Rs.3,97,76,005/- in Assessment Year 2006-07 on account of disallowance made u/s 40(a)(ia) of the Act in Assessment Year 2005-06, resultantly the deduction has been allowed twice.”

3. The Tribunal after considering the various submissions observed that since the amendment of section 40(a)(ia) is retrospective with effect from 1st April, 2005, payment of TDS can be deposited in the state exchequer on or before the last date of filing of return under section 139(1) of the Act for the relevant assessment year and such a deduction has to be allowed. The Tribunal relied upon the decision of the Calcutta High Court in the case of Virgin Creations(order dated 23rd November, 2011 in ITA No.302 of 2011) as well as the decision of the Bombay High Court in the case of Commissioner of Income Tax, Vidarbha Vs. Smt. Godavaridevi Saraf Bombay, [113 ITR 589 Bombay]