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Assessee-company deducted tax from the salaries of its employees under section 192 but failed to deposit the same to the credit of the Central Government within the prescribed time limit. However, later the company deposited the entire amount of TDS along with interest without any notice of default or demand.
Subsequent to the payment, the assessee received a show cause notice for the institution of prosecution proceedings. In response, the assessee submitted its reply stating that the delay was due to accumulated losses, cash crunch, and delay in receiving tax refunds. Also, it had deposited all the tax liability along with interest even before receiving any notice from the department.
Unsatisfied with the reply, Assessing Officer (AO) initiated the prosecution under which penalty and imprisonment were ordered for the company’s principal officer and penalty on the company.
Aggrieved by the order, the assessee applied compounding of offence to the Chief Commissioner of Income Tax (CCIT) which was rejected placing reliance on the CBDT’s circular, dated 14-6-2019, on the ground that the application was time-barred and the assessee was convicted under law other than Direct Taxes Law.
Guidelines for compounding of offences state that application for compounding of offences cannot be filed after 12 months or the petitioner is convicted under any offence other than Direct Taxes Law. Further, it sets out certain conditions where the time period can be extended
Aggrieved-assessee filed a writ petition to the Bombay High Court.
The High Court held that the directions, orders or instructions issued by the CBDT cannot limit the powers of the authority. It will not curtail the power vested in the Principal Commissioner or Chief Commissioner of Income Tax under Section 279(2) to consider the application for compounding on its own merits and decide the same.
The conditions referred to under the circular are important but they cannot be treated as the only determining factor for the disposal of an application. While exercising the jurisdiction, objective facts with respect to the application shall be considered by the authority.
Further, the reason stated by the authority for rejecting the application based upon a factual assumption that the assessee was convicted by the court for an offence other than the Direct Tax Laws was unsustainable and erroneous. The condition specified in the circular is only a guideline to the authority, not a rule of limitation while considering the application for compounding. It does not take away the jurisdiction of the authority to consider the application for compounding on its own merits and decide the same.
Every year, the announcement of the Union Budget is eagerly awaited as one of the key tax policy events in India. Recently, we have witnessed a series of amendments in the union budget aiming to end the ongoing litigations on certain issues. Most of these amendments favour the taxman and not the taxpayers.
Through retrospective amendments, the Government generally undertakes to undo some of the decisions of courts that it believes are against the legislative intent or for removing certain incongruities in law. While the prospective amendments are undertaken considering the overall outlook of the economy at that point in time and thus, may be quite acceptable. However, retrospective amendments are generally not well accepted by taxpayers as it brings uncertainty.
The Legislatures under our Constitution have within the prescribed limits, powers to make laws prospectively as well as retrospectively. By the exercise of those powers, the Legislature can remove the basis of a decision rendered by a Competent Court thereby rendering that decision ineffective.
In this article, we are discussing some of the clarificatory or retrospective amendments made in recent budgets which got affirmed by the Hon'ble Apex Court.
Applicability of section 43B for deductibility of employees' contribution to PF/ESI for AY prior to 2021-22.
There was a debate on whether the provision of section 43B(b) would apply only to the employer's contribution to a specified fund or if it also applies in the case of an employee's contribution to such funds.
To end this controversy, the Finance Act, 2021 inserted Explanation 5 to section 43B to clarify that the provisions of said section do not apply and are deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section applies. In other words, the employee's contribution to PF, ESI etc will be deductible only under section 36(1)(va), if deposited in the time specified therein and the provisions of section 43B will not apply in that case.
Now the question arises whether even prior to this amendment in Section 43B by Finance Act 2021 w.e.f. 1.4.2021, section 43B will not apply to Employees' Contribution to PF, ESIetc.
The Hon'ble Supreme Court has decided this issue in the case of Checkmate Services (P.) Ltd. v. CIT [2022] 143 taxmann.com 178/[2023] 290 Taxman 19/[2022] 448 ITR 518. The Hon'ble Apex Court held that:-
Allowability of Education Cess while computing business income
As per Section 40(a)(ii) of the Income Tax Act, any expenditure in the nature of income tax is not a deductible expenditure while computing the taxable business income of a taxpayer.
Various courts including the Bombay High Court in the case of Sesa Goa Ltd. v. Jt. CIT [2020] 117 taxmann.com 96/423 ITR 426 and Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. v. Jt. CIT and other judgements pronounced by various tax tribunals, by relying upon CBDT Circular have held that education cess is not a tax, and hence does not need to be disallowed under Section 40(a)(ii) of the Act in computing the taxable business income.
On the other hand, the Kolkata ITAT in the case of M/s. Kanoria Chemicals & Industries Ltd has delivered a judgement in favour of revenue wherein the Hon'ble Kolkata ITAT relied on the decision of the Supreme Court in the CIT v. K. Srinivasan [1972] 83 ITR 346 wherein it was held that surcharge and additional surcharge are to be considered as part of income-tax itself.
The Budget 2022 proposed to disallow health and education cess as well as a surcharge for the purpose of computing income, thereby characterising cess as a tax for the purpose of Section 40(a)(ii) of the Act by placing reliance on the decision of Hon'ble Kolkata Tribunal in the case of M/s. Kanoria Chemicals & Industries Ltd. The Finance Act, 2022 has inserted an Explanation retrospectively so as to clarify that for the purposes of this sub-clause, the term "tax" includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This amendment is proposed to take effect retrospectively from 1 April 2005 and will accordingly, apply in relation to assessment year ('AY') 2005-06 and onwards.
The said retrospective amendment by Finance Act 2022 is also affirmed by the Hon'ble Supreme Court of India in the case of Jt. CIT v. Chambal Fertilisers& Chemicals Ltd [2022] 145 taxmann.com 420.
Conclusion
In our view, the retrospective amendment appears to be in a bad light and harmful to the taxpayers who have relied on the various rulings of the Hon'ble High Courts and Tribunals. Moreover, with the retrospective amendment, the Government steps away from what it called "tax terrorism" on account of such amendments. Retrospective amendments shall be reserved to cure a defect and not to reverse the decisions of the courts and tribunals. Nevertheless, the taxpayers should not be harassed and be subjected to penalties for previous years when the claim of such expenses was made solely relying on the circular and various rulings.
That’s it from us for today! Stay Tuned for more updates from?Taxmann.com.
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