2015 (6) TMI 323 - AT - Income Tax

Tribunal Decision: TDS Treatment Appeals Allowed, Interest Levy Upheld

The Tribunal allowed the appeals regarding the treatment of the Assessee as an 'Assessee in default' under Section 201(1) of the Income Tax Act, as TDS ... Non deduction of TDS - Assessee in default u/s.201(1) and also levying interest on tax not paid u/s.201(1A) - Consequences of failure to deduct or pay - Held that:- The assessee company has deducted tax at source on these amounts in the subsequent year as and when the same were paid by it.In view of the above, the demand on account of tax u/s.201(1) of the Act, in our view, will no longer survive. The argument that TDS provisions operate on income and not on payment, in the facts and circumstances of the present case, is erroneous. As we have already seen Sec.194C, 194J and 195, which are the sections applicable in the present case, does not use the expression, 'Income'. The above sections use the expression 'Sum' and tax deduction has to be on the 'sum so paid'. Sec.194H and Sec.194-I deal with TDS obligation on payment of commission and rental income. These payments by its nature are specific and the entire payment is attributable to commission or rent and therefore the commission and rent paid is treated as 'income' and therefore the expression income by way of commission or rent is found in these sections. Moreover as person responsible for making payment, it is the duty of the Assessee to deduct tax at source. Sec.194C, 194-J, 194-H and 194-I do not use the expression 'Chargeable to tax'. As we have already seen, it is not the case of the Assessee that the payments are not chargeable to tax in the hands of the payee. As we have already seen, the Assessee deducted tax on the provision made for various expenses in the subsequent financial years when the provision entries were reversed. The Assessee therefore cannot take a plea that the payments in question are not chargeable to tax and therefore there was no obligation on its part to deduct tax at source. As already held that the said CBDT circular No.30/2010 is applicable to banks and cannot be taken advantage by the Assessee who is not a bank. As we have already seen, the Assessee is fully aware of the payee but postpones credit to the account of the payee for want of receipt of invoice. We do not find any merit in the appeals that relate to challenge of levy of interest u/s.201(1A) of the Act. - Decided partly in favour of assessee. Issues Involved:1. Treatment of Assessee as an Assessee in default under Section 201(1) of the Income Tax Act.2. Levy of interest on tax not paid under Section 201(1A) of the Income Tax Act.3. Obligation to deduct tax at source (TDS) on provisions made in the books of accounts.4. Validity of the Assessee's accounting practices under the mercantile system.5. Applicability of CBDT Circular No. 3/2010.Detailed Analysis:1. Treatment of Assessee as an Assessee in Default under Section 201(1):The Assessee, a wholly owned subsidiary of IBM World Trade Corporation, US, was treated as an Assessee in default under Section 201(1) of the Income Tax Act by the Assessing Officer (AO). This was due to the Assessee's failure to deduct tax at source (TDS) on provisions made for expenses in its books of accounts. The Assessee argued that since invoices were not received, there was no accrual of expenditure, and thus no obligation to deduct TDS. However, the AO and CIT(A) held that under the mercantile system of accounting, the accrual of liability for any expenditure is not dependent on the receipt of invoices. The Tribunal agreed with this view, stating that the Assessee had full knowledge of what was due to its vendors and that the provisions in the books were sufficient to trigger TDS obligations.2. Levy of Interest on Tax Not Paid under Section 201(1A):The AO also levied interest on the tax not paid under Section 201(1A) of the Act. The Assessee contended that TDS was deducted and paid when the actual expenses were booked in subsequent financial years. The Tribunal noted that the AO had verified the details and found that the Assessee had indeed deducted and paid TDS in subsequent years. However, the Tribunal upheld the levy of interest for the delayed deduction and remittance of TDS, citing that the Assessee's responsibility was to deduct TDS as soon as the expenditure was debited in the books of accounts.3. Obligation to Deduct TDS on Provisions Made in Books of Accounts:The Assessee argued that TDS obligations arise only when the payee is identified and the amount payable is exactly determined. The Tribunal rejected this argument, stating that various sections of the Income Tax Act, such as Section 194C(2), deem credit to a suspense account as credit to the account of the payee, thus triggering TDS obligations. The Tribunal emphasized that the liability to deduct TDS exists even when the amount is credited to a 'suspense account' or any other account by whatever name called.4. Validity of Assessee's Accounting Practices under the Mercantile System:The Assessee's practice of creating provisions based on estimates or historical data was scrutinized. The CIT(A) and the Tribunal found that this practice was contrary to the mercantile system of accounting. The Tribunal agreed with the CIT(A) that the Assessee had full knowledge of the amounts due to its vendors and that there was no necessity to create provisions on an estimated basis. The Tribunal concluded that the Assessee's accounting practices did not align with the principles of the mercantile system.5. Applicability of CBDT Circular No. 3/2010:The Assessee relied on CBDT Circular No. 3/2010, which clarifies TDS obligations for banks using Core-Branch Banking Solutions (CBS) software. The Tribunal held that this circular was specific to banks and could not be applied to the Assessee's case. The Tribunal noted that the circular addressed a specific issue related to the calculation of interest on time deposits by banks and did not apply to other entities.Conclusion:The Tribunal allowed the appeals concerning the treatment of the Assessee as an 'Assessee in default' under Section 201(1) of the Act, as the Assessee had deducted and paid TDS in subsequent financial years. However, the appeals related to the levy of interest under Section 201(1A) were dismissed, upholding the interest for delayed deduction and remittance of TDS. The Tribunal emphasized the Assessee's obligation to deduct TDS at the time of crediting amounts to a suspense account and found the Assessee's accounting practices contrary to the mercantile system of accounting. The reliance on CBDT Circular No. 3/2010 was also rejected as it was specific to banks.