The Supreme Court reiterated that in income-tax matters the law to be applied is the law in force in the assessment year unless otherwise stated or implied. The judgment was delivered on 29th July 2020 by the Supreme Court bench comprising of Justice Dinesh Maheshwari and Justice AM Khanwilkar. The case is titled as Shree Choudhary Transport Company v. Income Tax officer.
Facts of the Case
The appeal was filed challenging the order, whereby, the Rajasthan High Court dismissed the appeal against the order passed by the Income Tax Appellate Tribunal. The computation of total income of the appellant for the assessment year 2005-2006 with disallowance of payments to the tune of Rs. 57,11,625/-, essentially in terms of Section 40(a)(ia) of the Income Tax Act, 1961 , for failure of the appellant to deduct the requisite tax at source (TDS) was upheld by the High Court.
On 28.10.2005, the appellant filed its return for the assessment year 2005-2006, showing total income at Rs. 2,89,633/- in the financial year 2004-2005 arising out of the business of ‘transport contract’. The Assessing officer (AO) observed that while making payment to the truck operators/owners, the appellant had not deducted tax at source even if the net payment exceeded Rs. 20,000/- and notice was issued.
Earlier, before the Income Tax Appellate Tribunal (ITAT), appellant raised the argument that Circular No. 5 was issued only on 15-7-2005 by which date the time for payment of tax at source has also expired and as such it was contended that the provisions as contained in Section 40(a)(ia) of the Act would be applicable not from A.Y. 2005-06 but from 2006-07.
However, ITAT, held that “Since this amendment came before close of the financial year ended on 31/03/2005 in the statute books, the assessee cannot be held to be ignorant of its liability to deduct tax at source.”
The decision of the Supreme Court
One of the contentions of the appellant was that the said sub-clause (ia), having been inserted to clause (a) of Section 40 of the Act with effect from 01.04.2005 would apply only from the financial year 2005-2006 and hence, cannot apply to the present case pertaining to the financial year 2004-2005.
The counsel of the appellant placed reliance on the judgement in PIU Ghosh v. Deputy Commissioner of Income-Tax & Ors. (2016) 386 ITR 322 where The Calcutta High Court observed that the said Finance (No.2) Act, 2004 got presidential assent on 10.09.2004 and it was provided that the provision in question shall stand inserted with effect from 01.04.2005. According to the Calcutta High Court, “the assessee could not have foreseen prior to 10.09.2004 that any amount paid to a contractor without deducting tax at source was likely to become not deductible in computation of income under Section 40 and that the legislature, being conscious of the likely predicament, provided that the provision shall become operative from 01.04.2005. The High Court further proceeded to observe that any other interpretation would amount to punishing the assessee for no fault of his. The High Court further observed that Section 11 of the said Finance Act, inserting sub-clause (ia), did not provide that the same was to become effective from the assessment year 2005-2006.”
However, the Apex Court held that it cannot be treated as final declaration of law on the subject merely because the same has not been appealed against. The Supreme Court held Calcutta High Court’s judgement to be not in conformity with the scheme of assessment of income tax under the Act of 1961.
Court reiterated that “It needs hardly any detailed discussion that in income tax matters, the law to be applied is that in force in the assessment year in question, unless stated otherwise by express intendment or by necessary implication.”
The appeal was ultimately dismissed by the Supreme Court.
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