Facts of the Case

  • The assessee, engaged in construction and real estate business, made payments of ₹17,00,20,000/- to a contractor.
  • TDS amounting to ₹34,00,400/- was deducted but deposited after the due date of filing return.
  • The Assessing Officer disallowed the expenditure under Section 40(a)(ia), increasing income substantially.
  • CIT(A) and ITAT deleted the disallowance, noting that:
    • The recipient had declared the income and paid taxes.
    • TDS was eventually deposited.

Issues Involved

  1. Whether delayed deposit of TDS attracts disallowance under Section 40(a)(ia)?
  2. Whether the second proviso to Section 40(a)(ia) is retrospective in nature?
  3. Whether disallowance is justified when the recipient has already paid tax on the income?

Petitioner’s Arguments (Revenue)

  • The second proviso to Section 40(a)(ia) is prospective (effective from 01.04.2013).
  • Since TDS was not deposited within the due date, disallowance was valid.
  • Relief granted by CIT(A) and ITAT was incorrect.

Respondent’s Arguments (Assessee)

  • The recipient had already:
    • Declared the income
    • Paid due taxes
  • Amendments to Section 40(a)(ia) are curative and declaratory, hence retrospective.
  • Disallowance would cause unjust hardship without revenue loss.

Court Findings / Order

  • The Delhi High Court dismissed the Revenue’s appeal.
  • Held that:
    • Amendments to Section 40(a)(ia) are curative and retrospective.
    • No disallowance should be made where:
      • The recipient has included income in return, and
      • Taxes have been paid.
  • Relied on precedents including:
    • CIT vs Naresh Kumar
    • CIT vs Ansal Landmark Township (P) Ltd.
    • Supreme Court ruling in CIT vs Calcutta Export Company
  • Observed that Section 40(a)(ia) is not penal but compensatory.
  • Also noted factual leniency:
    • Delay was minimal (due to holidays)
    • Interest on delay was already paid

Important Clarification by Court

  • Section 40(a)(ia) aims to ensure tax collection, not punish taxpayers.
  • Disallowance should not apply when no loss to revenue occurs.
  • Curative amendments must be interpreted retrospectively to avoid undue hardship.
  • Strict compliance should not lead to disproportionate consequences.

Sections Involved

  • Section 40(a)(ia), Income Tax Act, 1961
  • Section 201(1), Income Tax Act, 1961
  • Section 139, Income Tax Act, 1961
  • Section 260A, Income Tax Act, 1961

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:352-DB/SKN17012019ITA6032018.pdf 

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