Income Tax, Issue Update

Amendment made to Section 40(a)(ia) vide by the Finance Act, 2010: Retrospective application vs prospective application

Case:  CIT Vs Archean Cranites Private, Madras HC

Outcome: Assessee

Key points

  • Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Calcutta Export Company, wherein it was concluded that the purpose of the amendment made by the Finance Act, 2010 was to solve the anomalies that the insertion of section 40(a)(ia) was causing to the bona fide tax payer. The amendment, even if not given operation retrospectively, may not materially be of consequence to the Revenue when the tax rates were stable and uniform or in cases of big Assessee’s having substantial turnover and equally huge expenses and necessary cushion to absorb the effect. However, marginal and medium taxpayers, who work at low gross product rate and when expenditure which became subject matter of an order under Section 40(a)(ia) was substantial, could suffer severe adverse consequences if the amendment made in 2010 was not given retrospective operation i.e., from the date of substitution of the provision. Transferring or shifting expenses to a subsequent year, in such cases, would not wipe off the adverse effect and the financial stress. Such could not be the intention of the legislature. Hence, the amendment made by the Finance Act, being curative in nature required to be given retrospective operation i.e., from the date of insertion of the said provision.
  • The High Court also placed reliance on the decision of the Hon’ble Supreme Court in the case of Allied Motors (P) Limited, wherein it was concluded that the new proviso to Section 43B should be given retrospective effect from the inception on the ground that the proviso was added to remedy unintended consequences and supply an obvious omission. The proviso ensured reasonable interpretation and retrospective effect would serve the object behind the enactment.
  • Hence, it was inferred that the amendment made by the Finance Act, 2010 was retrospective in nature.

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