REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

   CIVIL APPEAL NOS. 4339-4340 OF 2018 (Arising out of Special Leave Petiton (C) Nos. 24362-24363

    OF 2013

Commissioner of Income Tax Kolkata XII         ….Appellant(s)  

    Versus

M/s Calcutta Export Company                      …. Respondent(s)

WITH

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J U D G M E N T

R.K.Agrawal, J.

1) Leave granted.

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2) The present appeal has been filed against the impugned

final judgment and order dated 03.09.2012 passed by the High

Court at Calcutta in GA No. 2029 of 2012 ITAT No. 175 of

2012 whereby a Division Bench of the High Court dismissed

the  appeal  filed  by  the  Appellant  against  the  order  dated

29.02.2012 passed by the Income Tax Appellate Tribunal (in

short “the Tribunal”) in ITA No. 1487/Kol/2011.  

3) Brief facts:-

(a) M/s.  Calcutta  Export  Company -  the  Respondent  is  a

partnership  firm  and  is  a  manufacturer  and  exporter  of

casting  materials  having  its  principal  place  of  business  at

Kolkata.  The  Respondent  filed  its  return  of  income  for  the

Assessment Year 2005-06 for Rs. 4,18,17,910/-. The case was

selected for scrutiny and the assessment under Section 143(3)

of  the  Income  Tax  Act,  1961  (in  short  ‘the  IT  Act’)  was

completed on 28.12.2007.  The Assessing Officer, vide order

dated 12.10.2009, disallowed the export commission charges

paid  by  the  assessee  to  M/s.  Steel  Crackers  Pvt.  Ltd.

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amounting  to  Rs.  40,82,089/-  while  stating  that  the  tax

deducted  at  source  (TDS)  on  such  commission  amount  on

07.07.2004, 07.09.2004 and 07.10.2004 ought to have been

deposited by the Respondent before the end of the previous

year i.e. 31.03.2005 to get the commission amount deducted

from the  total  income in terms of  the provisions of  Section

40(a)(ia)  of  the  IT  Act  as  it  stood  then.  But  the  same  was

deposited on 01.08.2005,  hence,  the  Respondent  cannot  be

allowed to claim deduction of  the commission amount from

the  total  income.   The  Assessing  Officer  revised  the  total

income to Rs. 4,58,99,999/- with the requirement to pay the

additional tax amount of Rs. 23,88,832/- by the Respondent.  

(b) Being  aggrieved  by  the  order  dated  12.10.2009,  the

Respondent preferred an appeal before the Commissioner of

Income tax (Appeals). Learned CIT (Appeals), vide order dated

01.08.2011,  allowed  the  appeal  while  holding  that  the

commission amount is eligible for deduction under the said

Assessment Year.  

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(c) Being aggrieved, the Revenue preferred an appeal being

ITA No. 1487/Kol/2011 before the Tribunal which came to be

dismissed on 29.02.2012.

(d) Being  aggrieved  by  the  order  dated  29.02.2012,  the

Revenue preferred an appeal before the High Court. The High

Court,  vide  judgment  and  order  dated  03.09.2012,  had

dismissed the appeal.  

(e) Aggrieved by the judgment and order dated 03.09.2012,

the Revenue has preferred this appeal before this Court.

4) Heard learned senior counsel for the parties and perused

the factual matrix of the case.  

Point(s) for consideration:-

5) Whether the amendment made by the Finance Act, 2010

in Section 40(a)(ia) of the IT Act is retrospective in nature to

apply to the present facts and circumstances of the case.  

Rival contentions:-

6) Learned  senior  counsel  appearing  on  behalf  of  the

Revenue contended that  the impugned judgment  passed by

the High Court is bad in law and is liable to be set aside by

this Court.  

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7) Learned senior counsel further contended that the courts

below have erred in extending the meaning of the amendment

made  in  Section  40(a)  (ia)  and  in  not  accepting  the  plain

meaning of the Section as being prohibitory in nature which

makes  the  Respondent  to  deduct  the  TDS and  remit  it  in

government account within the time limit prescribed under the

Section.  He  further  contended  that  the  amendment  made

under  Section 40  (a)  (ia)  by  the  Finance  Act,  2010,  clearly

states that the amendment has the retrospective effect from

the  Assessment  Year  2010-11 and it  cannot  be  held  to  be

retrospective from the Assessment Year 2005-2006.  

8) Learned senior counsel further contended that the High

Court  erred  in  relying  on  the  decision  given  by  the

jurisdictional  High  Court  in  ITAT  No.  302/2011  (G.A.  No.

3200/2011) considering the fact that no appeal was preferred

against the said judgment considering the low tax effect in the

said matter.

9) Learned senior counsel finally contended that though the

tax effect is low in the present case also and the High Court

has decided the issue in favour of the tax payer but in similar

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situation in the case of  Bharati Shipyard Ltd.  vs. Deputy

CIT (ITA No. 404/Mumb/2009) the Special Bench of the ITAT

has decided the issue in favour of the Revenue on 09.09.2011.

Learned senior counsel finally contended that in view of the

conflicting  opinions  by  the  coordinate  Benches,  correct

interpretation of law is required by this Court.

10) Per contra, learned senior counsel appearing on behalf of

the  Respondent  submitted  that  the  purpose  of  insertion  of

provisions of Section 40(a)(ia) of the IT Act was to ensure the

compliance  of  TDS  provisions  and  not  to  punish  those

assessees  who  have  deducted  and  paid  the  TDS  to  the

government  sooner  or  later.  The  said  purpose  is  also  very

much clear from the amendment made in 2008 and further by

the amendment in 2010 to the existing provisions of Section

40(a)(ia). In support of this argument, learned senior counsel

placed reliance on a decision of the Division Bench of the Delhi

High Court in CIT v. Ansal Land Mark Township Pvt Ltd. in

ITA No. 160/2015.

11) Learned  senior  counsel  further  submitted  that  the

amendments  of  curative  nature  have  to  be  applied

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retrospectively and hence the amendment made in 2010 to the

existing  provisions  of  Section  40(a)(ia)  should  be  given

retrospective effect from the date of insertion and in support of

this contention learned senior counsel relied on a decision of

this  Court  in  Allied  Motors  (P.)  Ltd  etc.  vs. CIT,  Delhi -

(1997) 224 ITR 677(SC).    

12) Learned  counsel  for  the  Respondent  finally  submitted

that  the  decision  of  the  High  Court  is  well  within  the

parameters of law and requires no interference.   

Discussion:-

13) The dispute in the present case revolves around the fact

that whether the amendment made by the Finance Act, 2010

to  the  provisions  of  Section  40  (a)  (ia)  of  the  IT  Act  is

retrospective in nature so as to apply to the present case or

not.   If  it  is  so, then the tax duly paid by the assessee on

01.08.2005 is well in accordance with law and the assessee is

allowed to claim deduction for the tax deducted and paid to

the  government,  in the previous year  in  which the tax was

deducted.  

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14) For  deciding  as  to  the  retrospective  effect  of  the

amendment made by Finance Act, 2010, it is required to see

the Section as it stands before and after the amendment made

through  the  Finance  Act,  2010  and  the  purpose  of  such

insertion or amendment to the said provisions. The provisions

of  Section 40(a)(ia)  came into force in  the  year  2005 which

stood as under:-  

“40.  Amounts  not  deductible- 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)…… (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  XVIIB  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;

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 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.”

15) The purpose of  bringing the said amendment to the

existing  provision  of  Section has  been highlighted  in  the

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memorandum  explaining  the  provision  which  reads  as

under:-  

“With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of the section 40(a)(ia) to payments  of  interest,  commission  or  brokerage,  fee  for professional  services  or  fee  for  technical  services  to  the residents  and  payments  to  a  residential  contractor  or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the  expiry  of  the  time  prescribed  under  sub-section(1)  of section 200 and in accordance with the provisions of other provisions of Chapter XVII-B.”

16) The purpose is very much clear from the above referred

explanation by the memorandum that it came with a purpose

to ensure tax compliance. The fact that the intention of the

legislature was not to punish the assessee is further reflected

from a bare reading of the provisions of Section 40(a)(ia) of the

IT  Act.  It  only  results  in  shifting  of  the  year  in  which  the

expenditure can be claimed as deduction. In a case where the

tax  deducted  at  source  was  duly  deposited  with  the

government within the prescribed time, the said amount can

be claimed as a deduction from the income in the previous

year  in  which  the  TDS  was  deducted.  However,  when  the

amount deducted in the form of TDS was deposited with the

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government after the expiry of period allowed for such deposit

then the deductions can be claimed for such deposited TDS

amount only in the previous year in which such payment was

made to the government.  

17) However,  it  has  caused  some  genuine  and  apparent

hardship to the assesses especially in respect of tax deducted

at source in the last month of the previous year, the due date

for payment of which as per the time specified in Section 200

(1) of IT Act was only on 7th of April in the next year.  The

assessee in such case, thus, had a period of only seven days to

pay the tax deducted at source from the expenditure incurred

in the month of March so as to avoid disallowance of the said

expenditure under Section 40(a)(ia) of IT Act.

18) With a view to mitigate this hardship, Section 40(a)(ia)

was amended by the Finance Act, 2008 and the provision so

amended read as under:-

“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 “profit and gains of business or profession  (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to  a  resi-dent,  or  amounts  payable  to  a  contactor  or sub-contractor,  being  resident,  for  carrying  out  any  work

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(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- (A)  in  a  case  where  the  tax  was  deductible  and  was  so deducted during the last month of the previous year, on or before the due date specified in sub-section (1)  of  section 139; or (B)  in  any  other  case,  on  or  before  the  last  day  of  the previous year;  Provided that  where in respect  of  any such sum, tax has been  deducted  in  any  subsequent  year,  or  has  been deducted (A) during the last month of the previous year but paid after the said due date; or  (B) during any other month of  the previous year but paid after the end of the said previous year,  such sum shall be allowed as a deduction in computing the income of  the  previous  year  in  which  such  tax  has  been paid.”

19) The above amendments made by the Finance Act, 2008

thus provided that no disallowance under Section 40 (a) (ia) of

the IT Act shall be made in respect of the expenditure incurred

in the month of March if the tax deducted at source on such

expenditure has been paid before the due date of filing of the

return. It is important to mention here that the amendment

was given retrospective operation from the date of 01.04.2005

i.e., from the very date of substitution of the provision.

20) Therefore, the assesses were, after the said amendment

in 2008, classified in two categories namely; one; those who

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have deducted that tax during the last month of the previous

year  and  two;  those  who  have  deducted  the  tax  in  the

remaining eleven months of the previous year.  It was provided

that in case of assessees falling under the first category, no

disallowance under  Section 40(a)  (ia)  of  the  IT Act  shall  be

made if the tax deducted by them during the last month of the

previous year has been paid on or before the last day of filing

of return in accordance with the provisions of Section 139(1) of

the IT Act for the said previous year.  In case, the assessees

are falling under the second category, no disallowance under

Section 40(a)(ia) of IT Act where the tax was deducted before

the last month of the previous year and the same was credited

to the government before the expiry of the previous year. The

net effect is that the assessee could not claim deduction for

the TDS amount in the previous year in which the tax was

deducted and the benefit of such deductions can be claimed in

the next year only.  

21) The amendment though has addressed the concerns of

the assesses falling in the first category but with regard to the

case falling in the second category, it was still resulting into

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unintended  consequences  and  causing  grave  and  genuine

hardships  to  the  assesses  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 under

Section 139(1) of the IT Act. The disability to claim deductions

on account of such lately credited sum of TDS in assessment

of the previous year in which it was deducted, was detrimental

to the small traders who may not be in a position to bear the

burden of such disallowance in the present Assessment Year.

22) In order to remedy this position and to remove hardships

which were being caused to the assessees belonging to such

second  category,  amendments  have  been  made  in  the

provisions of Section 40(a) (ia) by the Finance Act, 2010.  

23) Section 40(a)(ia),  as amended by Finance Act,  2010,

with effect from 01.04.2010 and now reads as under:

“4(a)(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 paid on or before the due date specified in sub-section (1) of Section 139:

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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 deducted in computing the income of the previous year in which such tax has been paid.”  

24) Thus, the Finance Act, 2010 further relaxed the rigors of

Section 40(a)(ia)  of  the IT Act to provide that all  TDS made

during  the  previous  year  can  be  deposited  with  the

Government by the due date of filing the return of income. The

idea was to allow additional time to the deductors to deposit

the TDS so made. However, the Memorandum explaining the

provisions of  the Finance Bill,  2010 expressly mentioned as

follows:  “This  amendment  is  proposed  to  take  effect

retrospectively  from  1st  April,  2010  and  will,  accordingly,

apply  in  relation  to  the  Assessment  Year  2010-11  and

subsequent years.”  

25) The controversy surrounding the above amendment was

whether the amendment being curative in nature should be

applied retrospectively i.e.,  from the date of  insertion of the

provisions of Section 40(a)(ia) or to be applicable from the date

of enforcement.

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26) TDS  results  in  collection  of  tax  and  the  deductor

discharges  dual  responsibility  of  collection  of  tax  and  its

deposition to  the  government.   Strict  compliance  of  Section

40(a)(ia) may be justified keeping in view the legislative object

and  purpose  behind  the  provision  but  a  provision  of  such

nature, the purpose of which is to ensure tax compliance and

not  to  punish  the  tax  payer,  should  not  be  allowed  to  be

converted into an iron rod provision which metes out stern

punishment  and  results  in  malevolent  results,

disproportionate to the offending act and aim of the legislation.

Legislature can and do experiment and intervene from time to

time when they feel and notice that the existing provision is

causing and creating unintended and excessive hardships to

citizens and subject or have resulted in great inconvenience

and uncomfortable results. Obedience to law is mandatory and

has to be enforced but the magnitude of punishment must not

be disproportionate by what is required and necessary. The

consequences  and the  injury  caused,  if  disproportionate  do

and  can  result  in  amendments  which  have  the  effect  of

streamlining  and correcting  anomalies.  As  discussed  above,

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the amendments made in 2008 and 2010 were steps in the

said direction only. Legislative purpose and the object of the

said amendments were to ensure payment and deposit of TDS

with the Government.  

27) A  proviso  which  is  inserted  to  remedy  unintended

consequences and to make the provision workable, a proviso

which supplies an obvious omission in the Section, is required

to be read into the Section to give the Section a reasonable

interpretation and requires to be treated as retrospective in

operation so that a reasonable interpretation can be given to

the Section as a whole.

28) The purpose of the amendment made by the Finance Act,

2010 is to solve the anomalies that the insertion of section

40(a)(ia)  was  causing  to  the  bona  fide tax  payer.  The

amendment, even if  not given operation retrospectively, may

not materially be of consequence to the Revenue when the tax

rates  are  stable  and  uniform  or  in  cases  of  big  assessees

having substantial  turnover and equally huge expenses and

necessary cushion to absorb the effect. However, marginal and

medium taxpayers, who work at low gross product rate and

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when expenditure which becomes subject matter of an order

under  Section  40(a)(ia)  is  substantial,  can  suffer  severe

adverse consequences if the amendment made in 2010 is not

given retrospective operation i.e., from the date of substitution

of  the  provision.  Transferring  or  shifting  expenses  to  a

subsequent year, in such cases, will not wipe off the adverse

effect and the financial stress. Such could not be the intention

of the legislature. Hence, the amendment made by the Finance

Act,  2010  being  curative  in  nature  required  to  be  given

retrospective operation i.e., from the date of insertion of the

said provision.

29) Further, in Allied Motors (P) Limited (supra), this Court

while  dealing  with  a  similar  question  with  regard  to  the

retrospective effect of the amendment made in section 43-B of

the  Income Tax Act,1961 has  held  that  the  new proviso  to

Section  43B  should  be  given  retrospective  effect  from  the

inception on the ground that the proviso was added to remedy

unintended  consequences  and  supply  an  obvious  omission.

The  proviso  ensured  reasonable  interpretation  and

retrospective  effect  would  serve  the  object  behind  the

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enactment.  The aforesaid view has consistently been followed

by this Court in the following cases, viz., Whirlpool of India

Ltd., vs.  CIT, New Delhi (2000) 245 ITR 3,  CIT vs.  Amrit

Banaspati (2002) 255 ITR 117 and CIT vs. Alom Enterprises

Ltd. (2009) 319 ITR 306.

30) Hence, in light of the forgoing discussion and the binding

effect of the judgment given in Allied Moters (supra), we are

of the view that the amended provision of Sec 40(a)(ia) of the IT

Act should be interpreted liberally and equitable and applies

retrospectively  from  the  date  when  Section  40(a)(ia)  was

inserted i.e., with effect from the Assessment Year 2005-2006

so  that  an  assessee  should  not  suffer  unintended  and

deleterious consequences beyond what the object and purpose

of the provision mandates. As the developments with regard to

the Section recorded above shows that the amendment was

curative in nature, it should be given retrospective operation

as if  the amended provision existed even at  the time of  its

insertion.  Since  the  assessee  has  filed  its  returns  on

01.08.2005 i.e.,  in accordance with the due date under the

provisions of Section 139 IT Act, hence, is allowed to claim the

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benefit of the amendment made by Finance Act, 2010 to the

provisions of Section 40(a)(ia) of the IT Act.

31) In light of the forgoing discussion, we are of the view that

judgment of the High Court does not call for any interference

and, hence, the appeals are accordingly dismissed.  In view of

the  above,  all  the  connecting  appeals,  interlocutory

applications,  if  any,  transferred  cases  as  well  as  diary

numbers are disposed off accordingly. Parties to bear cost on

their own.

          …………….………………………J.           (R.K. AGRAWAL)                                  

.…....…………………………………J.         (ABHAY MANOHAR SAPRE)         

NEW DELHI; APRIL 24, 2018.  

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