Income Tax Appellate Tribunal - Hyderabad
V Dwarakanath Reddy, Chittoor, ... vs Department Of Income Tax on 11 September, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. Nos. 703 & 704/HYD/2015
Assessment Years: 2010-11 & 2011-12
Asst. Commissioner of Sri V. Dwarakanath
Income Tax, Vs Reddy,
Circle-1(1), CHITTOOR
TIRUPATI [PAN: ABZPV2454M]
(Appellant) (Respondent)
For Revenue : Shri Y. Sesha Srinivas, DR
For Assessee : Shri S. Rama Rao, AR
Date of Hearing : 27-08-2015
Date of Pronouncement : 11-09-2015
ORDER
PER B. RAMAKOTAIAH, A.M. :
These two are Revenue appeals for the AYs. 2010-11 and 2011-12 against the orders of Commissioner of Income Tax (Appeals), Tirupati dated 29-01-2015 and 23-02-2015 in respective assessment years. Since common issue is involved in this, we heard these appeals together and decided by this common order.
2. At the outset, these appeals are filed with a delay of 16 days and Assessing Officer (AO) filed an application for condonation of delay stating that the records could not be traced and the appeals were filed with a delay of 16 days. Considering the application and arguments of I.T.A. Nos. 703 & 704/Hyd/2015 :- 2 -: Sri V. Dwarakanath Reddy both the parties, the delay in filing the appeals therefore is condoned and appeals are admitted.
3. In both the years, there is a common issue of disallowance made U/s. 40(a)(ia) of an amount of Rs. 1,59,16,750/- and 1,59,03,231/- in respective assessment years which was deleted by the Ld. CIT(A). The facts of the issue are that assessee, an individual is engaged in the business and also a partner in M/s. B.V. Reddy & Sons. He has withdrawn funds from his current account with the firm and shown to have paid interest of Rs. 1,59,16,750/- in AY. 2010-11 and Rs. 1,59,03,231/- in AY. 2011-12 to the firm. AO noticed that these amounts were paid to the firm without deducting TDS and since assessee is in the business where Books of Accounts are audited, assessee was liable to deduct tax on the interest paid. As assessee has failed in complying with the provisions of Section 40(a)(ia), he made disallowance of interest claim made by assessee in the return of income. It was submitted that there were no liability on the interest paid by firm to the partner and interest paid by assessee was offered as income by the firm and taxes paid, there should be no further liability by disallowing the amounts. It was also contended that there will be double taxation of the same amount as firm and partners are not separate entities legally, hence no TDS was made. AO, however, did not agree and made disallowance.
4. Before the Ld. CIT(A), it was submitted that the said interest payments have been accounted by the payee in their Books of Accounts and payee has offered as part of their computation in the return of income. Since newly inserted second proviso to Section 40(a)(ia) of the Act was inserted by the Finance Act, 2013 w.e.f. 01-04-2013, assessee claimed benefit of the said proviso and relied on the following judicial decisions:
I.T.A. Nos. 703 & 704/Hyd/2015 :- 3 -: Sri V. Dwarakanath Reddy i. DCIT Vs. Ananda Marakala ITA No. 1584/Bang/2012 and CO No. 58/Bang/2013 dated 13-09-2013;
ii. S.M. Anand Vs. ACIT in ITA No. 1831/Bang/2013 dated 21- 02-2014;
iii. Income Tax Officer Vs. Dr. Jaideep Kumar Sharma (2014) 34 ITR (Trib) 565 (Delhi); and iv. G. Shankar Vs. ACIT Circle-I, Bijapur ITA No. 1832 (Bang) 2013.
5. Ld. CIT(A) after considering the submissions of assessee and relying on the principles laid down by various decisions, analysed the issue elaborately and concluded that the said provisions of Section 40(a)(ia) are not applicable to assessee as the payee has offered the amount. However, he directed the AO to verify whether the amounts are paid and subject to outcome of such verification, the grounds are treated as allowed. His detailed order is as under:
"5.3 Gone through the observations of the Assessing Officer in the assessment order, the submissions of the appellant and the case laws relied upon by the appellant. Briefly stated, the facts of the case indicate that the appellant being a partner in a firm by name M/s.B.V.Reddy & Sons, has overdrawn the amounts for which the liability for payment of interest to the extent of Rs.159,16,750/- has arisen during the year under reference and shown to have paid the amounts to the firm for which TDS was not made. The Assessing Officer had applied the provisions of Section 40(a)(ia) for his failure to make the TDS and disallowed the claim of interest expenses of RS.1,59,16,750/-. The appellant initially had argued that TDS provisions are not attracted for the payment of interest as an individual partner, to the firm. However, such argument is found to be not applicable to the facts of the case where the assessee himself is in business and books of account were auditable as per the provisions of Section 44AB of the I.T.Act for the immediately preceding year to the assessment year under reference. Further and alternately, the appellant took the plea that deduction of tax is only one mode of recovery of tax and once income is recovered in other mode, and suffered tax in the hands of payee, taxing the same amount, amounts to double taxation. In this context, the appellant referred to the newly inserted second proviso to Section 40(a)(ia) of the I.T. Act w.e.f. 01.04.2013 which mandates I.T.A. Nos. 703 & 704/Hyd/2015 :- 4 -: Sri V. Dwarakanath Reddy that if the recipient has accounted the said amounts in their books of account and has offered such income for tax and paid taxes thereon, there cannot be any disallowance u/s 40(a)(ia) of the I.T. Act. In further support of the argument that the said amendment is considered as declaratory and curative in nature and, therefore, should be given retrospective effect from the 1st of April, 2005 being the date from which sub-clause (ia) of Section 40(a) was inserted by the Finance Act, 2004, the appellant relied upon the decisions of ITAT, Bangalore in the cases of DCIT Vs. Ananda Marakala and S.M.Anand Vs. ACIT and decision of ITAT, Delhi in the case of ITO Vs. Dr.Jaideep Kumar Sharma as indicated in the submissions. The appellant has furnished Form No.26A as stipulated by the second proviso to Section 40(a)(ia), wherein, the details of the incomes / receipts by the payee are indicated with further indication of offering of the same for taxes and payment of taxes on the said incomes by the payee. In this case, the payee namely M/s.B.V.Reddy & Sons was shown to have received the amount on 31.03.2010 and included such interest of Rs.1,59,16,750/- in their total income while filing the return of income on which the taxes were shown to have been / deemed to have been paid, were indicated. However, since this procedure was not applicable at the time of the assessment with the said interpretation not available for the assessee on the retrospective application of the proviso, the same could not be furnished before the Assessing Officer.
5.4 Coming to the issue of the payment of interest by the to the firm where he is a partner, without making TDS, are governed by the facts of the case laws relied upon by the assessee / appellant, wherein, the Hon'ble Tribunal of Bangalore as well as ITAT, Delhi have categorically stated that the amended second proviso to Section 40(a)(ia), as effective from 01.04.2013 held to be given retrospective effect. The relevant portion of the decision of ITAT, Bangalore in the case of Shri G.Shankar Vs. ACIT (supra) runs as under:
"Earlier, we have held that second proviso to Section 40(a)(ia) of the Act is retrospective in operation w.e.f. 01.04.2005. As per this newly inserted proviso, the assessee is required to file Form No.26A as per rule 31ACB of the I. T. Rules, 1962, so as to not to be held as an assessee in default as per the proviso to Section 201 of the Act. As held in the decision of the co-ordinate Bench in the case of S.M. Anand Vs. ACIT(supra), since the assessee in the period under consideration i.e. A. Y. 2005-06 could not have contemplated that such a compliance was to be made, we also in the case on hand, remit the matter to the file of the A.O. "
I.T.A. Nos. 703 & 704/Hyd/2015 :- 5 -: Sri V. Dwarakanath Reddy Similar was the decision of the Hon'ble ITAT, Bangalore in the case of S.M.Anand Vs. ACIT, and the relevant portion of the decision of the Hon'ble ITAT in this regard run as under:
"In our considered opinion, since the payees / recipients i.e. G. Ramesh and Ramesh Kotian have already shown these amounts in their respective books of account audited under Section 44AB of the Act; declared and offered the same to tax in their returns of income for the relevant period, thus, by virtue of the amendment to the. provisions of section 40(a)(ia) of the Act w.e.f. 01.04.2013, the provisions of section 40(a)(ia) of the Act would not be attracted to the payments made by the assessee t.e. Sri G.Shankar of Rs.2,69,28,500/- and to Shri Ramesh Kotian of Rs.1,54,75,000/-. This view of our, is in accordance with the decision of the co-ordinate bench of this Tribunal in the case of Ananda Markala (supra) wherein it was held that the insertion of the second proviso to section 40(a)(ia) of the Act should be read retrospectively from 01.04.2005 and not prospectively from 01.04.2013. In this view of the matter, the provisions of Section 40(a)(ia) of the Act is not attracted to the payments made by the assessee to Shri G. Shankar of Rs.2,69,21,500/- and to Shri Ramesh Kotian of Rs.1,54,75,000/- since the object of introduction of Section 40(a)(ia) of the Act is achieved for the reason that the payees / recipients have declared and offered to tax the payments received from the assessee in their respective hands. "
On similar issue the decision of the Hon'ble ITAT, Delhi in the case of ITO Vs. Dr. Jaideep Kumar Sharma runs as under:
"When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after insertion of the second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non- deduction of tax at source by the assessee. In other words, deductibility of the expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for expenditure is not allowed to the assesses, in cases where assesses had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient. That is the clearly discernible bigger picture, and, unmistakably, a very I.T.A. Nos. 703 & 704/Hyd/2015 :- 6 -: Sri V. Dwarakanath Reddy pragmatic and fair policy approach to the issue-howsoever belated the realisation of unintended and undue hardships to the taxpayers may have been. It seems to proceed on the basis, and rightly so, that seeking tax deduction at source compliance is not an end in itself, so far as the scheme of this legal provision is concerned, but is only a means of recovering due taxes on income embedded in the payments made by the assessee. That is how, as we have seen' a short while ago, the Hon'ble Delhi High Court has visualised the scheme of things as evident from their Lordships' reference to augmentation of recoveries in the context of 'loss of revenue' and 'depriving the Government of the tax due and payable. (para 7 of the order) With the benefit of this guidance from the Hon'ble Delhi High Court, in view of legislative amendments made from time to time, which throw light on what was actually sought to be achieved by this legal provision, and in the light of the above analysis of the scheme of the law, we are of the considered view that section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure-particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. As a corollary to this proposition, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an 'intended consequence' of section 40(a)(ia). It it is not an intended consequence, i.e., if it is an unintended consequence, even going by Bharati Shipyard Ltd. Vs. Deputy CIT [2011J 11 ITR (Trib) 599 (Mum) [SBJ, 'removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively'. The Revenue, thus, does not derive any advantage from the Special Bench decision in the case Bharti Shipyard. (para 8 of the order) On a conceptual note, justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance I.T.A. Nos. 703 & 704/Hyd/2015 :- 7 -: Sri V. Dwarakanath Reddy does deincentivise not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivising a lapse and punishing a lapse are two different things and have distinctly different, .end sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a 'fair, just and equitable' interpretation of law-as is the guidance from the Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an 'intended consequence' to disallow the expenditure, due to non-deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding tepses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax witholding lapse. The penalty for tax withholding lapse per se is separately provided for in section 271C and section 40(a)(ia) does not add to the same. The provisions of section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the Legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of the second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an 'intended consequence' to punish the assesses for non-deduction of tax at source by· declining the deduction ln respect of related payments, even when the corresponding income is duly brought to tax. That will be going I.T.A. Nos. 703 & 704/Hyd/2015 :- 8 -: Sri V. Dwarakanath Reddy much beyond the obvious intention of the section. Accordingly, we hold that the insertion of the second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from April 1, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004. (para 9 of the order)"
5.5 Coming to the facts of the case, the appellant failed to make TDS on the payments of Rs.1,59,16,750/-, for which the provisions of Section 40(a)(ia) were applied by the Assessing Officer. On the lines of the decisions of the Hon'be ITAT, Bangalore and Delhi as cited above, the insertion of second proviso to section 40(a)(ia) was interpreted as effective from 01.04.2005 and in this case assessment year being 2010-11, the interpretation is equally applicable to the facts of the case. Thereby, it is reasonable to hold that provisions of section 40(a)(ia) are not applicable in this case and disallowance cannot be made where the payee admits the income and pays tax. However, since Form 26A was not available to the assessee to be furnished before the Assessing Officer, the Assessing Officer may examine the said details of income offered and taxes paid by the payee and allow the expenses as claimed by the assessee subject to findings of such verification. Thus, on the lines of the decisions of Hon'ble ITAT, Bangalore and decision of Hon'ble ITAT, Delhi (supra), it is reasonable to hold that the provisions of section 40(a)(ia) are not applicable to the case, provided the payee has offered the amount for tax purpose and have paid or deemed to have paid the taxes on such income. Subject to the outcome of such verification, the ground of appeal is treated as allowed".
6. After considering the rival contentions, we do not see any reason to interfere with the well reasoned order of CIT(A) as he has considered the legal principles established by the Co-ordinate Benches and accordingly, decided the issue. Therefore, the order of CIT(A) is upheld and Revenue's ground on this is rejected. In fact the Revenue's ground is that second proviso is effective only from 01-04-2013 and not for the impugned assessment years. Since this issue was already considered and decided that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 01-04-2005 from the date in which sub-clause i.e., section 40(a) was inserted by Finance Act. In view of this, we find no merit in the Revenue's I.T.A. Nos. 703 & 704/Hyd/2015 :- 9 -: Sri V. Dwarakanath Reddy contentions. Accordingly, ground No.1 in both the assessment years on this issue is rejected.
7. The next issue for consideration is ground No. 2 in AY. 2011-12. The issue contested is with reference to giving credit for Security Transactions Tax of Rs. 7,58,265/-. In the course of assessment proceedings, AO noticed that assessee paid Security Transaction Tax of Rs. 7,58,263/- and has debited the same in its P&L A/c. While giving credit to the pre-paid taxes, the said Security Transaction Tax has been considered again. AO records that when this was pointed out, assessee's AR has agreed for the disallowance of Rs. 7,58,263/- and was added back to the income returned. Assessee however, took up the issue as a ground before the Ld. CIT(A) and Ld. CIT(A) vide para 6 has directed the AO to allow the amount as a credit by stating as under:
"6.1 During the course of scrutiny proceedings the Assessing Officer had made adjustment of Rs. 7,58,263/- to the total income being the Security Transaction Tax (STT) claimed twice. Having done, the credit as per Section 88E of income tax was not given, which appears an apparent mistake. The appellant requested for giving credit for the same, raising a separate ground for it. Having found the claim to be in order and allowable, the Assessing Officer is directed to give credit for the Security Transaction Tax as per the provisions of Section 88E. Thus, this ground of appeal treated as Allowed".
8. After considering the rival contentions, we have to uphold the Revenue's ground. There is a mistake in the direction of CIT(A) to give credit for the Security Transaction Tax as per the provisions of Section 88E. The Ld. CIT(A) failed to notice that vide sub-section 3 of Section 88E, no deduction under this section shall be allowed in or after the assessment year beginning on the first day of April, 2009. Since, the impugned assessment years are after that date, the direction of CIT(A) is not as per the provisions of law. Accordingly, the order of CIT(A) on this issue is set aside. The order of AO is therefore restored. Revenue's ground is accordingly allowed.
I.T.A. Nos. 703 & 704/Hyd/2015 :- 10 -: Sri V. Dwarakanath Reddy
9. In the result appeal in ITA No. 703/Hyd/2015 (AY. 2010-11) is dismissed and appeal in ITA No. 704/Hyd/2015 (AY. 2011-12) is partly allowed.
Order pronounced in the open Court on 11th September, 2015 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 11th September, 2015 TNMM Copy to :
1. Asst. Commissioner of Income Tax, Circle-1(1), 2nd Floor, Aayakar Bhavan, KT Road, Tirupati.
2. Sri V. Dwarakanath Reddy, D.No. 2-1285, B.V. Reddy Colony, Chittoor.
3. CIT (Appeals), Tirupati.
4. CIT, Tirupati.
5. D.R. ITAT, Hyderabad.
6. Guard File.