TDS on year-end provisions depends on actual accrual of income, not merely book entries or reversed accounting provisions.

Tax was not deductible at source on year-end provisions that were reversed in the next accounting year because the decisive test was whether income had actually accrued in the payee's hands. The mere creation of book entries did not by itself establish chargeability to tax, and withholding applies only to sums chargeable to tax. Applying the principle that income tax is levied on real income rather than hypothetical income reflected only in accounts, the absence of actual accrual meant there was no TDS obligation. The assessee therefore could not be treated as an assessee in default under section 201(1).

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Issues: Whether tax was deductible at source on year-end provisions later reversed, and whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961.

Analysis: The provisions were created at the year end and reversed in the opening of the next accounting year. The decisive test was whether income had accrued in the hands of the payee, because the obligation to deduct tax at source arises only in respect of sums chargeable to tax. Mere entries in the books of account do not by themselves establish accrual of income. Applying the principle that income-tax is levied on real income and not on hypothetical income reflected only by accounting entries, the absence of actual accrual meant that the provisions did not attract a withholding obligation.

Conclusion: No tax was deductible at source on the year-end provisions, and the assessee could not be treated as an assessee in default under section 201(1). The issue was decided in favour of the assessee.

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