2010 (12) TMI 172 - AT - Income Tax

Addition of income unreasonable expenses u/s 40A(a)(2b) - Assessee contended that accounts are audited u/s 44AB therefore there was no reason to disallow the claim of expenditure that the sub-contractors were separately assessed to tax by filing their respective returns - That the TDS was deducted on the said payment and the details were furnished before the AO - Held that the approach of the AO of ad hoc disallowance was unwarranted This issue of the appeal is allowed Late deposit of TDS amount - Addition of Rs. 6356387 u/s 40a(ia) - Amendment through Finance Act 2010 - the provisions of section 40(a)(ia) as amended by the Finance Act 2010 w.e.f 1-4-2010 which has newly been inserted by the Finance (No.2) Act 2004 with effect from 1st April 2005 to section 40 of the Act is remedial in nature designed to eliminate unintended consequences which may cause undue hardship to the taxpayers and which made the provision unworkable or unjust in a specific situation and is of clarificatory nature and therefore has to be treated as retrospective with effect from 1st April 2005 the date on which section 40(a)(ia) has been inserted by the Finance (No.2) Act 2004. - Decided in favor of assessee - Deduction allowed.

Summary

Issues Involved:
1. Addition under Section 40A(2)(b) of the Income Tax Act, 1961.
2. Addition under Section 40(a)(ia) of the Income Tax Act, 1961 due to non-payment of TDS within the prescribed due date.

Issue-Wise Detailed Analysis:

1. Addition under Section 40A(2)(b) of the Income Tax Act, 1961
Relevant Ground:
"The Learned Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and on facts of the case by confirming the addition of Rs.4,97,716/-u/s.40A(2)(b) of the Income Tax Act, 1961."

Tribunal's Decision:
Both parties agreed that this issue was already covered by the Tribunal's decision in the assessee's own case for assessment years 2003-04 and 2004-05. The Tribunal had previously ruled that the accounts were audited as prescribed under Section 44AB of the Act, and there was no reason to disallow the claim of expenditure. The Tribunal emphasized that the statute does not prescribe an ad hoc disallowance and that the AO should have identified a particular payment as excessive or unreasonable. The Tribunal cited the CBDT Circular No.6-P(LXXVI-66) of 1968, which states that the provision is meant to check tax evasion through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner causing hardship in bona fide cases. The Tribunal found that the AO's approach of ad hoc disallowance was unwarranted and reversed the findings of the lower authorities.

Conclusion:
The Tribunal found that the facts were identical to previous years and allowed the issue in favor of the assessee by reversing the addition made under Section 40A(2)(b).

2. Addition under Section 40(a)(ia) of the Income Tax Act, 1961 due to non-payment of TDS within the prescribed due date
Relevant Ground:
"The Learned Commissioner of Income Tax (Appeals)-IV, Baroda has erred in law and on facts of the case by confirming the addition of Rs.63,56,387/-u/s.40a(ia) of the Income Tax Act, 1961."

Facts and CIT(A) Decision:
The assessee, a contractor, was required to get work done through sub-contractors and had deducted TDS on sub-labour contract payments. The AO disallowed Rs.1,16,58,614/- under Section 40(a)(ia) due to non-payment of TDS within the due date. The CIT(A) partly confirmed the disallowance at Rs.63,56,387/- but deleted Rs.53,02,227/- since the TDS was deducted in March and paid before the due date of filing the return of income under Section 139(1).

Tribunal's Decision:
The Tribunal considered whether the amendment brought by the Finance Act, 2010, effective from 1-4-2010, was clarificatory and retrospective. The Tribunal reviewed the legislative history and various judicial precedents, including the Supreme Court's decisions in Allied Motors (P) Ltd. v. CIT and CIT v. Alom Extrusions Ltd., which held that amendments designed to remove hardships and clarify the law should be considered retrospective. The Tribunal concluded that the amendments to Section 40(a)(ia) were clarificatory and should be applied retrospectively from 1-4-2005.

Conclusion:
The Tribunal allowed the issue in favor of the assessee, ruling that the provisions of Section 40(a)(ia) as amended by the Finance Act, 2010, are retrospective and applicable from 1-4-2005.

Final Outcome:
The assessee's appeal was allowed on both issues. The Tribunal reversed the additions made under Sections 40A(2)(b) and 40(a)(ia) of the Income Tax Act, 1961.