The Finance Bill, 2012 proposes to address a major issue arising consequent to insertion of Section 40(a) (ia) whereby any expenditure incurred by the assessee on which tax has not been deducted is disallowed leading to assessment of income at an amount highly disproportionate to the actual income.
TDS not deducted But deductee has taken amount in Income and Filed his return and paid tax on income Then no dis allowance under section 40(a)(ia)
- As per the proposed amendment, in case the assessee has not deducted tax at source on any sum
- but the deductee has filed its return of income under Section 139
- and has taken the same into account such sum while computing its income in the return filed
- and has paid tax due on the income declared as per the return of income
- then for the purposes of Section 40(a)(ia) it shall be deemed that the assessee had deducted tax and paid the tax on such income on the date of furnishing of return of income.
Certificate from Chartered Accountant :For this purpose amendment is being made to Section 201 of the Act to provide that in the above circumstances the person responsible for deducting tax shall not be deemed to be an assessee in default. Such person shall be required to furnish a certificate from a Chartered Accountant.
This amendment will help in addressing the issue of huge tax liability arising consequent to minor technical default of non deduction of tax at source.
Present Rule :At present if assessee has failed to deduct tax at source, he will have an option to deduct and deposit the same before filing its return of income.
Amended benefit : In case he becomes aware of the default after the filing of the return of income then he can approach the deductee to give a copy of his return and the accounts so as to get a certificate from a Chartered Accountant, of the deductee having taken into account the sum while computing its income, paying tax as per the return and having filed the return.
Deductor can persuade the deductee to file the return within the time :Further in case the deductee has not filed the return still the deductor can persuade the deductee to file the return within the time prescribed under Section 139. It may be noted that the Section referred to is 139 only and will include late return as well. However, in case there is a loss as per the return of the deductee then such return has to be filed before the due date of filing, belated return being not a valid return within the meaning of Section 139.
The amendment may not help a situation where the method of accounting being followed by the deductor and deductee are different. In case the deductor follows accrual method of accounting and fails to deduct tax and the payment has not been made of the sum so accrued, and the deductee follows cash method of accounting, in such a situation the deductee would not have taken into account such sum while computing its income and consequently the deductor will be an assessee in default.
This amendment gives statutory recognition to the judgment of the Supreme Court in the case of Hindustan Coca Cola Beverage Pvt. Ltd. Vs. CIT (2007) 293 ITR 226 (SC) whereby it was held that recovery once again cannot be made from the deductor where the deductee included the income on which tax was alleged to have been short deducted in its taxable income and paid taxes thereof. With this amendment there will be no recovery of tax ought to have been deducted from the deductor in case deductee has paid tax and filed return.
Further a proviso is being inserted below sub-section (1A) of Section 201 to provide that in such a situation, the deductor shall be liable to pay interest from the date when the tax was deductible to the date of furnishing of the return of income by deductee. This proviso gives a statutory recognition to the judgment of the Gujarat High Court in the case of CIT vs. Rishikesh Apartments Co-operative Housing Society Ltd. (2002) 253 ITR 310 (Guj.) delivered long time back on June 14, 2001.
Applicable Date :
- It may be noted that this amendment is only in respect of payment to resident i.e. when the deductee is a resident.
- This amendment to Section 201, not to treat the deductor in default is propose to be effective from 1st July, 2012
- whereas the amendment to Section 40(a)(ia) is proposed with effect from 1st April, 2013 i.e. assessment year 2013-14.
It is interesting but not surprising to note that so many amendments favouring Revenue are proposed to be retrospective being clarificatory in nature and the one favouring taxpayer which in real sense is clarificatory is propsed to be effective prospectively. Despite this , considering the fact that a deeming fiction is being created under the proposed amendment it may be interpreted by court to be a clarificatory and hence applicable retrospectively.
The Calcutta High Court recently in the case of CIT vs. Virgin Creations has held that the amendment made to Section 40(a) (ia) by the Finance Act, 2010 of allowing benefit of the payment made before the due date of filing return under Section 139(1) is clarificatory and have retrospective operation. The Calcutta High Court has referred to the judgment of the Supreme Court in the case of R. B. Jodha Mal Kuthiala vs. CIT (1971) 82 ITR 570 (SC) , whereby it was held that the provision, which are inserted as a remedy to make the provision workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well.
Similar amendment is being made to provision of tax collection at source by inserting sub-section (6A) in Section 206C to provide that the seller responsible for tax collection at source will not be considered as an assessee in default in case the buyer has accounted for the amount in its return of income, paid tax on the income declared as per the return and filed the return under Section 139.