Section 40(a)(ia) of the Income Tax Act, 1961 — Business Disallowance — Insertion of second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from April 1, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004.[2019] 51 ITCD 113 (KARN)
Facts: Being aggrieved of the order of Tribunal, revenue went on appeal before High Court and raised the question of law that "Whether the second proviso to Section 40(a)(ia) of the Act inserted by Finance Act, 2012 is clarificatory and retrospective in nature and disallowance under Section 40(a)(ia) of the Act by the Tribunal is justifiable where the recipient of the amount has already discharged his tax liability therein?"
Held that the scheme of section 40(a)(ia) is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in section 271C, and, section 40(a)(ia) does not add to the same. The provisions of section 40(a)(ia), as they existed prior to insertion of second proviso thereto, when much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now, that the Legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well-settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reason set out earlier, we cannot subscribe to the view that it could have been an 'intended consequence' to punish the assessees for non-deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, it was held that the insertion of second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from April 1, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004."