2010 (3) TMI 762 - AT - Income Tax

Disallowance - TDS - Truck operators owning up to two trucks - whether the amendment to sub-section (3) of section 194C made through Finance Act 2005 whereby second and third provisos were added to it has retrospective effect though it is specifically stated to be coming into effect on 1-6-2005 - Just for a reason that the proviso was enacted to obviate any procedural hardships faced by small truck owners we cannot say that it was also meant to obviate any hardships to a person who is the payer and not the payee - Assessee was bound to deduct tax under section 194C and could not take refuge under second and third provisos inserted by Finance Act 2005 with effect from 1-6-2005 for justifying its failure to deduct tax at source prior to 1-6-2005 - There being a clear failure on the part of the assessee to make deduction of tax at source in accordance with section 194C of the Act Ld. Assessing Officer was justified in invoking sub-clause (ia) of clause (a) to section 40 of the Act for making the disallowance - Decided against the assessee

Issues Involved:
1. Deletion of disallowance under section 40(a)(ia) on account of freight payments.
2. Retrospective applicability of the amendment to section 194C(3) introduced by the Finance Act, 2005.
3. Requirement for tax deduction at source (TDS) under section 194C for payments exceeding Rs. 50,000.
4. Applicability of the second and third provisos to section 194C(3) for the assessment year 2005-06.

Issue-wise Detailed Analysis:

1. Deletion of disallowance under section 40(a)(ia) on account of freight payments:
The revenue contested the deletion of Rs. 46,70,365 under section 40(a)(ia) related to freight payments. The Assessing Officer (AO) had disallowed this amount because the assessee had failed to deduct tax at source (TDS) as required under section 194C. The CIT(A) had deleted this disallowance, leading to the revenue's appeal.

2. Retrospective applicability of the amendment to section 194C(3) introduced by the Finance Act, 2005:
The core issue was whether the amendment to section 194C(3), which added the second and third provisos, had retrospective effect. The amendment came into force on 1-6-2005. The assessee argued that these provisos were curative and should be applied retrospectively to avoid procedural difficulties for small truck owners who did not own more than two trucks.

3. Requirement for TDS under section 194C for payments exceeding Rs. 50,000:
The AO noted that the assessee had paid Rs. 46,70,365 to 16 parties, with each payment exceeding Rs. 50,000. According to section 194C, TDS was mandatory when the aggregate amount exceeded Rs. 50,000 in a financial year. The assessee had not deducted TDS, leading to the disallowance under section 40(a)(ia).

4. Applicability of the second and third provisos to section 194C(3) for the assessment year 2005-06:
The CIT(A) had held that the second proviso to section 194C(3) was applicable for the assessment year 2005-06, which the AO contested. The AO argued that these provisos were effective only from 1-6-2005 and could not be applied retrospectively to the assessment year 2005-06.

Judgment Analysis:

The tribunal examined whether the second and third provisos to section 194C(3) had retrospective effect. The assessee's argument was that these provisos were curative and intended to alleviate procedural burdens on small truck owners. However, the tribunal noted that the provisos were explicitly stated to be effective from 1-6-2005, and prospectivity is the rule unless explicitly stated otherwise.

The tribunal found that the purpose of these provisos was to ease procedural requirements for small truck owners, not to address any unintended hardships for the assessee. The tribunal emphasized that the literal construction of the provisos did not lead to any absurdity or defeat the enactment's purpose. Therefore, the tribunal concluded that the provisos did not have retrospective effect.

Since the assessee had failed to deduct TDS for payments exceeding Rs. 50,000 before 1-6-2005, the AO was justified in disallowing the expenditure under section 40(a)(ia). The tribunal reinstated the disallowance of Rs. 46,70,365 made by the AO, setting aside the order of the CIT(A).

Conclusion:

The tribunal allowed the revenue's appeal, concluding that the second and third provisos to section 194C(3) introduced by the Finance Act, 2005, did not have retrospective effect. The assessee's failure to deduct TDS as required under section 194C justified the disallowance of Rs. 46,70,365 under section 40(a)(ia).

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