Commissioner of Income Tax vs. Virgin Creations - "matter of review"

Decision of Calcutta High Court in the case of Commissioner of Income Tax vs. Virgin Creations

… Is a matter of review

The decision passed by the Hon’ble Calcutta High Court has created a history of providing relief to the “TDS defaulters” in a very short span of time. The legal applicability of retrospective application of amendment to the provision of sec-40 (a) (ia) of the Income Tax Act, 1961 brought in by the Finance Act, 2010 is said to have sorted out by this Hon’ble High court in the case of C.I.T vs. Virgin creations.

Tax-payers and tax-representatives have considered the said judgment as a “sigh of relief!”. But the question is that, although the amendment in the provision of section 40(a)(ia) of the Act was introduced with an objective to remove hardship faced by the taxpayers, how far an order passed by a Higher judicial authority which is factually erroneous can provide relief to the TDS defaulters?

The Amendment as explained in the Memorandum explaining the provision in Finance Bill, 2010 is as under: -

Disallowance expenditure on account of non-compliance with TDS provisions,

“The existing provisions of section 40(a)(ia) of the Income-tax Act provide for the disallowance of expenditure like interest, commission, brokerage, professional fees, etc. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. However, in case the deduction of tax is made during the last month of the previous year, no disallowance is made if the tax is deposited on or before the due date of filing of return.

It is proposed to amend the said section to provide that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139.

This amendment is proposed to take effect retrospectively from 1^st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.”

The amendment has led to an enormous confusion and controversy in tax litigation. Although this aforesaid provision has been challenged before various court of law since it’s inception vide Finance Act, 2004, the issue of it’s application made with a retrospective effect but with prospective date i.e. w.e.f. 01.04.2010 relevant to A.Y. 2010-11 is the most debated one. Several judicial and quasi-judicial authorities had tried to clarify the position and the applicability of this amendment in number of cases. 

With reference to the already made discussion above, I would like to point out that, Hon’ble High Court while passing the decision in the case of Virgin creations has mentioned that, Hon’ble Supreme Court in the case of Allied Motors Pvt. Ltd. and in the case of Alom Extrusions Ltd. have already decided that sec-40 (a) (ia) has retrospective application”. Relevant extract from the order in the case of Virgin creations is as under, -

“The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April 1, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i.e. well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed.

Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., has already decided that the aforesaid provision has retrospective application.”

Now, I would also like to briefly state the relevant paragraph from the judgment passed by Hon'ble Supreme court in the case of Allied Motors Pvt. Ltd. (P) Ltd. vs. Commissioner of Income Tax, -

 “Whether on the facts and in the circumstances of the case, the sales-tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales-tax law is to be Income-Tax Act, 1961 while computing the business income of the said previous year “?

In this case, the deduction that was claimed by the assessee was disallowed by the Income-tax Officer under Section 43B of the Income-tax Act, 1961 which was inserted in the statute with effect from 1.4.1984.”

Again in the case of Commissioner of Income Tax vs. Alom Extrusions Limited, the issue, which was adjudicated and clarified by Hon'ble Supreme Court of India was that, -

“whether omission [deletion] of the second proviso to Section 43-B of the Income Tax Act, 1961, by the Finance Act, 2003, operated with effect from 1st April, 2004, or whether it operated retrospectively with effect from 1st April, 1988?”

Now, after careful observation of both the afore-mentioned judgments passed by the Hon'ble Supreme Court, I have observed that sec-40 (a) (ia) has in fact not been adjudicated at all by Hon'ble Supreme Court. Therefore, Hon'ble High Court of Kolkata in the case of Virgin Creations has indeed erred in its factual observation while passing the decision, and that the same require some serious review.

Till date, no reported judgment challenging the order of the judgment of the said High Court of Calcutta is found and I am of the opinion that the same requires an immediate review.