Amendment bought to remove hardship retrospective: ITAT restricts Non TDS Deduction disallowance to 30%
The facts in brief are that the assessee in the present case is an individual and engaged in the trading business of wheat, groundnut, seeds of groundnut. The assessee in the year under consideration has incurred go-down rent expenses amounting to 30,000 per month aggregating to ₹3.60 lakhs per annum only. As per the assessee, there were 3 owners of the go-down and each one of them was equally sharing the rent. Accordingly, the rent paid by the assessee to the owners in the year under consideration was ₹1.20 lakhs per person which is less than the limit specified under section 194-I of the Act. Accordingly, it was contended by the assessee that the impugned amount of go down rent was outside the purview of the TDS provisions as specified under section 194-I read with section 40(a)(ia) of the Act.
However, the AO disagreed with the contention of the assessee on the reasoning that there was the single monthly cheque payment towards the rent amounting to ₹30,000 only. Accordingly, the AO concluded that the payment of the rent was paid to one person only. Thus the assessee was liable to deduct the TDS under the provisions of section 194-I read with section 40(a)(ia) of the Act but he failed to do so. Therefore the AO, disallowed the same and added to the total income of the assessee on account of non-deduction of TDS.
The assessee preferred an appeal to the learned CIT-A who also confirmed by holding that the assessee failed to bring any cogent evidence suggesting that the rent was paid to three co-owners instead of one as alleged by the AO.
The learned CIT-A also observed that the amendment brought under the statute under the provisions of section 40(a)(ia) of the Act wherein it was provided to restrict the disallowance of rent to the tune of 30% was prospective in nature and therefore the same cannot be applied in the year under consideration.
Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before ITAT.
9. We have heard the learned DR and perused the materials available on record. As regards the 1st contention of the assessee that the rent was paid to three different parties amounting to ₹1,20,000 per person and therefore there is no violation of the provisions of section 94-I read with section 40(a)(ia) of the Act, appears to be devoid of any merit. It is for the reason that, the assessee has not discharged the onus by furnishing the necessary details about the payees to whom the rent was paid. The assessee has not furnished any agreement for the rent or any other document suggesting that the rent was paid by the assessee to three different parties. Thus in the absence of any other document supporting the contention of the assessee, we do not find any reason to interfere in the finding of the authorities below.
10. As regards the alternate contention of the assessee that the disallowance should be restricted to the tune of 30% of the rent paid under the provisions of section 40(a)(ia) read with section 194-I of the Act, we find force in the argument. The amendment was brought by the Finance Act (No. 2) 2014 effective from 1-4-2015 whereas the year before us relates to the assessment year 2012-13. The Finance Act, 2014 brought an amendment to the first proviso to the section 40(a)(ia) of the Act which reads as under –
“14.4 Accordingly, Section 40(a)(ia) of the Income-tax Act has been amended to provide that in case of non-deduction of tax at source or non-payment of tax so deducted on payments made to residents as specified in section 40(a)(ia) of the Income-tax Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed.”
11. The Clause 14.3 of the explanatory memorandum to Finance Bill 2014 explained rationale behind this amended provision which reads as under –
“14.3 As mentioned above, in case of non-deduction of tax at source or non- payment of tax so deducted from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession”. The disallowance of whole of the amount of expenditure causes hardship, especially in case of payment made to a resident in whose case the withholding of tax is only a mode of collection of tax and does not result into final discharge of tax liability.”
12. Thus, from the explanatory memorandum it is noted that amendment vide Finance Act, 2014 was brought with effect to remove hardships faced by the assessee. However, it has been given w.e.f. 01-04-2015. Thus, the issue which arises for consideration is whether amendment brought by Finance Act, 2014 restricting disallowance of expenditure to 30%, since with object to remove hardship, can by necessary implication be considered as retrospective in its application?
13. In the case of Neena Kaul v. Asstt. CIT [IT Appeal No.1386 (Mum) of 2017, dated 21.05.2019], assessee contended that said provisions have been amended in order to ease the hardships caused to the assessee due to 100% disallowance of the expenditure claimed by the assessee in case of non-deduction of TDS. Assesse also submitted that it has been mentioned in the para 14.3 that withholding of taxes is a mode of collection of tax and does not result into final discharge of tax liability. Upholding this contention, Mumbai Tribunal held that –
“9….. We find merit in the contentions of the assessee that as per the amended provision of section 40(a)(ia) which is a retrospective in nature, the disallowance has to be made equal to 30% of the total disallowance as has been held in the case of M/s. Asphalt India Corporation v. DCIT (supra). The Hon’ble Bombay High Court also has, in the context of the insertion of 2nd proviso to section 40(a)(ia), held that though it has been stated in the 2nd proviso to section 40(a)(ia) of the Act that the same is inserted from 01.04.2013 but the same has retrospective application as the insertion of 2nd proviso is declarative and curative in nature and would be effective from the date of main proviso to section 40(a)(ia) of the Act. We, therefore, respectfully following the ratio laid down in the above decisions, direct the AO to restrict the disallowance equal to 30% of the total expenses. The ground raised by the assessee is allowed.”
14. Further in the case of Amruta Quarry works v. ITO IT Appeal 1481 (Ahd.) of 2013, dated 19.7.2016, it was contended by the assessee that Since the amendment has been brought to remove the hardship caused to the assessee, the amendment assumes the character of being clarificatory in nature and is retrospectively applicable. Reliance is placed on Five Members Constitution Bench of Supreme Court in the case of CIT v. Vatika Township (P.) Ltd.  367 ITR 466/227 Taxman 121/49 taxmann.com 249, wherein it has been observed that in case the amendment is brought to remove the hardship caused to the assessee, the same assumes the character of being clarificatory in nature. Hon’ble Tribunal upheld this contention and allowed appeal in favour of the assessee restricting disallowance to 30%. In view of the above, we hold that the disallowance on account of non-deduction of TDS should be limited to the extent of 30% of the rent expenses incurred by the assessee. Thus the ground of appeal of the assessee is partly allowed.
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