The Goa Bench of the Bombay High Court has recently held that, assessee cannot be expected to Deduct Tax at Source on taxability arising a retrospective Income Tax amendment.
The respondent, a company that e-filed its return processed by the department under CASS scrutiny, received a Section 143(2) notice. The Assessing Officer (AO) disallowed short-term capital gains as business income, along with expenditures for ambulances and temple repairs.
The Commissioner of Income Tax (Appeals) [CIT(A)] had upheld this decision initially, leading to appeals before the tribunal where the treatment of short-term capital gains as business income was affirmed, but adjustments were made under Section 14A r/w 8D. The tribunal further ruled that the taxpayer was not liable to withhold tax at the time and that disallowance under Section 40(a)(ia) could not be justified.
The department argued that the Tribunal misunderstood Explanation 2 to Section 9(1)(vii) of the Income Tax Act, which is retrospective. They asserted that the legislative intent, established long before the Explanation was added in the Finance Act of 2010, was always that the income of a non-resident should be considered as accruing or arising in India under clauses (v), (vi), or (vii) of subsection (1) of Section 9. This income should be included in the non-resident’s total income, regardless of whether (a) the non-resident has a residence, place of business, or business connection in India, or (b) the non-resident has rendered services in India.
The bench stated that, “the Tribunal has rendered a finding which cannot be said to be perverse as it based on second principle enunciated by the Supreme Court”, referring to “law does not demand the impossible and impotentia excusat legem, i.e. when there is a disability that makes it impossible to obey the law, the alleged disobedience of law is excused.”
The High Court affirmed the decision of the Income Tax Appellate Tribunal (ITAT), ruled that the taxpayer cannot be expected to withhold tax from payments that became taxable due to a retrospective amendment.
The Bench of Justices M.S. Karnik and Valmiki Menezes also observed that the tax department cannot inconsistently treat expenditures for school or temple renovations differently from ambulance purchases, especially based solely on the amount spent.
The Division Bench of the High Court of Bombay held that the taxpayer cannot be expected to comply with a provision absent from the statute, invoking the legal maxim ‘impotentia excusat legem’. This ruling affirmed that no capital assets were acquired through the expenditures, thus validating them as allowable revenue expenditures.
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