Assessee Can't Be Expected To Deduct TDS From Payments Which Became Taxable Owing To Retrospective Amendment: Bombay High Court

The Bombay High Court at Goa, while upholding the order of the Income Tax Appellate Tribunal (ITAT), has held that the assessee cannot be expected to deduct tax at source from payments that became taxable owing to a retrospective amendment.

The bench of Justice M.S. Karnik and Justice Valmiki Menezes has observed that it is not open to the department to take a divergent view on the expenditure for renovation and construction of schools or temples when it has allowed the expenditure on the purchase of ambulances, which was allowed by CIT(A), based only on the reason that the expenditure was huge.

The bench noted that the tribunal has committed no error in holding that the expenditure was an allowable business expenditure of a revenue nature, having found no capital asset had been acquired by the assessee by incurring the expenditure.

The respondent/assessee is a company that e-filed its return, which was processed by the department. The return was later scrutinized under CASS, and the notice under Section 143(2) was issued to the assessee.

The AO passed the assessment order by making the disallowance in respect of short-term capital gains tax (STCG), which was treated as business income; disallowance being expenditure incurred on the purchase of two ambulances and donations; and disallowance being expenditure incurred on the repair and renovation of two temples. The assessee appealed before the CIT (A), who upheld the order of the AO.

The assessee and the department appealed before the tribunal.

The Tribunal treated STCG as business income and upheld the decision of the AO. The disallowance of Rs. 105,21,316/- under Section 14A r/w 8D was upheld, and the AO was directed to re-compute the disallowance as per the directions of the CIT (A).

The Tribunal held that the assessee was not liable to deduct tax at that time and opined that the disallowance under Section 40(a)(ia) could not be made by allowing the assessee's ground of appeal. The ground of contribution towards the construction of the school building was allowed. The department's appeal on the issue of exchange loss was dismissed.

The department contended that the Tribunal erred in appreciating Explanation 2 to Section 9(1)(vii) of the Income Tax Act in its correct perspective, which is retrospective in nature, and the legislative intent from the beginning, much before the Explanation was introduced in the Finance Act, 2010. The legislative intent always was that the income of the non-resident shall be deemed to accrue or arise in India under clause (v), clause (vi), or clause (vii) of sub-section (1) of Section 9, and it shall be included in his total income, whether or not (a) the non-resident has a residence or place of business or business connection in India or (b) the non-resident has rendered services in India.

The assessee contended that the assessee cannot be obligated to do the impossible, i.e., to apply a provision of a statute when it is not actually and factually in the statute book.

The court relied on the maxim, namely 'impotentia excusat legem' which means that where there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused.

The court, while upholding the order of the tribunal, held that no capital asset has been acquired by the respondent assessee by incurring the expenditure. Therefore, it was held that the expenditure was allowable as revenue expenditure.

Counsel For Petitioner: Nishant Thakkar

Counsel For Respondent: Susan Linhares

Case Title: ACIT Versus Sociedade de Fomento Industrial Pvt. Ltd.

Case No.: Tax Appeal No. 4/2024

Click Here To Read The Order