Income Tax

Bharati Shipyard Ltd. v. Deputy Commissioner of Income Tax

The ITAT Mumbai pronounced a landmark judgement in the case tilted Bharati Shipyard Ltd. v. Deputy Commissioner of Income Tax on 9^th September 2011, which was regarding the amendment made to Section 40(a)(ia)  of the Finance Act 2010 with effect from 1-4-2010  being retrospective from the AY 2005-06 wherein the tribunal held that such an amendment isn’t remedial and curative in nature and be declared as having retrospective effect from the date of insertion of provision, i.e., 1-4-2005. The present article shall discuss the various aspects covered in this case.

Facts of the Case

• The assessee is a company engaged in the business of manufacturing medium-sized ships, barges, tugs etc. A note to the computation of income was attached by the assessee stating that the provisions of section 40(a)(ia) are directory and not mandatory.
• The AO noted that there had been a failure on the part of the assessee towards depositing tax deducted at source (TDS) within the specified time. Upon being served with a show cause notice, it was stated that the amount of tax deducted at source was paid before the filing of income tax return u/s 139(1) of the Act, and hence no disallowance of expenses was called for under Section 40(a)(ia)
• Not convinced, the Assessing Officer made an addition under Section 40(a)(ia). The assessee was partly successful before the learned CIT(A).
• The ld. DR hadn’t brought to the notice of the tribunal any appeal filed by the Revenue against the relief allowed in the first appeal, showcasing that the impugned order has been accepted by the Revenue.
• In the present appeal by the assessee, the point of determination before the tribunal was the confirmation of the disallowance of Rs.50, 12,311, which consists of two amounts. The first is the professional fee of Rs. 4,228, which was credited/paid by the assessee up to 28.02.2005, and the amount of income tax return deducted at source was paid on 8th April 2005 as against the due date of payment of 7th March 2005.
• The second item is the amount paid to contractors totalling Rs.50, 08,083 up to 28.02.2005, on which income tax return deducted at source was actually paid on 23rd June 2005 as against the due date of payment on 7th March 2005.
• The amendment, regarding the point of TDS deducted and remittance thereof in Govt. the account, brought through Finance Act 2008, has been applied retrospectively from A.Y. 2005-06, and hence there is controversy for same.
• The amendment, in respect of the point of TDS deducted and remittance thereof in Govt. account, brought through the Finance Act 2010, has been applied prospectively from 01.04.2010.
• However, it had been held by several courts/tribunals that the same is retrospective on the ground that it has been brought for rationalising and mitigating the provisions of Section 40(a)(ia) of the Act. 

Argument of the AR

• The learned AR argued that the amendment was made with a view of removing the unnecessary hardship caused to the assessee by the earlier provision. It was stated that the TDS provisions caused an unnecessary burden on the assesses in deducting TDS from the payments made by it on behalf of the Government and then depositing the same in the Treasury within the prescribed time.
• He stated that the vicarious liability cast on the assessees couldn’t be made liable to punitive action on non-compliance. It was submitted that non-deduction of income tax return at source from the amounts genuinely spent by the assessee for its business purpose or the due deduction but the late deposit of such tax beyond the time prescribed u/s 200(1) resulting into disallowance u/s 40(a)(ia) caused a lot of hardship to the assessees and thus the amendment by the Finance Act, 2010 relaxing the vigour of such provision should be held to be retrospective from the AY 2005-2006, being the time of insertion of this provision.
• It was also put forth on behalf of the assessee that there wasn’t any warrant for making any disallowance u/s 40(a)(ia) on non-deduction of income tax return at source for the reason that a small default in the non-payment, say 1% of TDS to the Government u/s 194C causes disallowance under this provision of 100% of the expenditure incurred, and the additional income tax return liability results at 33.99%.
• It was further stated that if the effect of interest u/ss 234B and 234C was also taken into consideration, then liability fastened upon the assessee as a consequence of non-deduction of tax at source at 1% would come to around 45% of the amount of expenditure itself.
•  The counsel had also drawn the attention of the tribunal towards certain representations made to the Hon’ble Finance Minister as a Pre-budget memorandum urging the Hon’ble Minister to delete section 40(a)(a) or to bring some suitable amendment to help the assessees in losing genuine deduction on this account.

Arguments of DR

In the opposition, the learned Departmental Representative contended that there wasn’t any need to consider the amendment made by the Finance Act 2010 ¹ as retrospective from the assessment year 2005-2006 as the Notes on clauses and the Memorandum explaining the provisions in Finance Bill 2010 clearly indicate that the amendment will be effectuated retrospectively from 1st April 2010 and will accordingly be applicable regarding the assessment year 2010-2011 and subsequent years.

 He stated that the legislature had imposed a burden on the assessee in terms of deducting tax at source on the specified payments and thereafter depositing it within the stipulated time.

Doing this work isn’t charitable, but the discharge of duty cast under the statute, by not depositing the tax deducted at source within the prescribed period, the ld. DR stated that the assessee disobeyed the relevant provisions and that the visiting of the mandate of section 40(a)(a) was a natural consequence.

 It was argued that the addition was rightly sustained by the ld. first appellate authority by holding that the amendment by the Finance Act, 2010 was not retrospective from 01.04.2005.

Observation and Ruling

The tribunal didn’t appreciate the contention raised on behalf of the assessee regarding the undue hardship being caused to the assessee has been by the legislature with the amendment carried out by the Finance Act, 2010. The so-called hardship caused by the insertion of section 40(a)(ia) wef 1st April 2005 is still continuing as such.

It was observed by the tribunal that the effect of amendment by the Finance Act, 2010 is limited only to extending the time available for deposit of tax in the second category of cases from the last day of the previous year (PY) to the time specified u/s 139(1) of the Act. Thus it is vivid that the amendment by the Finance Act 2010 isn’t aimed at the removal of any unintended hardship to the assessee but at relaxing the intended hardship to some extent by increasing the time available for the deposit of tax in one category of cases.

 When the amendment doesn’t remove the unintended hardship or is not explanatory, the same cannot be held to be retrospective unless it is specifically provided.

The tribunal reverted to the case of Varadharaja Theatre (P.) Ltd, laying down the test for deciding whether the amendment is prospective or retrospective. In the words of the Hon’ble Court: `

When the thing which was specifically excluded is subsequently included, such inclusion cannot be regarded as indicative of intention on the part of the legislature to have treated what is now included as having been included at all times.’ It is abundantly clear that the time limit to the deposit tax deducted at source for one category of cases has now been extended by the Finance Act 2010 to the due date u/s 139(1) of the Act. Such a benefit was earlier specifically excluded as it was available only in respect of the other category of cases. As such, it can not be inferred that the later extension of time is indicative of the intention of the legislature to have made it available even in the earlier years.

 46. In view of the fact that section 40(a)(ia) has been amended by the Finance Act, 2010 with retrospective effect from 01.04.2010, we refuse to declare it as having retrospective effect from the date of insertion of the provision, i.e. 01.04.2005

In view of the foregoing reasons, the tribunal was of the opinion that the amendment carried out by the Finance Act, 2010, with retrospective effect from AY 2010- 2011, can’t be held to be retrospective from AY 2005-2006.

Two diametrically opposite views on this issue, expressed, inter alia, by the Mumbai Benches of the tribunal, were placed before the tribunal. With utmost respect to the other, the tribunal was inclined to accept the one in favour of the Revenue.

Therefore it was held by the tribunal that, the authorities were fully justified in sustaining disallowance of Rs.50.12 lakhs u/s 40(a)(a) in the year under consideration. The question posted before the Special Bench is, therefore, answered in negative, in favour of the Revenue and against the assessee by holding that the amendment brought out by the Finance Act, 2010 to section 40(a)(ia) w.e.f. 01.04.2010 isn’t remedial and curative in nature.

Conclusion

While concluding the case, the tribunal held that held the amendment brought out by Finance Act, 2010 to Section 40(a)(ia) with effect from 1-4-2010  isn’t remedial and curative in nature and cannot be declared as having retrospective effect from the date of insertion of provision, i.e., 1-4-2005.

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1. https://en.wikipedia.org/wiki/Finance_Act_2010