ITAT Pune: TDS on Unpaid Salary Only Upon Payment

The ITAT Pune ruled in favor of the assessee, stating that TDS liability under section 192 of the Income Tax Act arises only upon actual payment of salary, not on unpaid amounts reflected in the Balance Sheet. The tribunal emphasized the need for arithmetical correctness in determining outstanding salary and directed the Assessing Officer not to hold the assessee in default for TDS on unpaid salary. The decision underscored that TDS obligations should align with legal provisions and not solely rely on book entries, overturning the Assessing Officer's error in applying section 192.

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Issues:
1. Whether the assessee is liable for TDS on unpaid salary and is in default under section 201(1) & 201(1A) of the Income Tax Act, 1961.
2. Whether the authorities correctly applied the provisions of section 192 of the Act in determining the default.

Analysis:
1. The appeal concerned the rejection of the assessee's petition seeking rectification of an order passed under section 201(1) & 201(1A) of the Act related to the assessment year 2009-10. The Assessing Officer (TDS) had imposed TDS liability on the assessee for defaults under Chapter XVII-B, specifically regarding salary expenses remaining unpaid. The assessee contended that no default should be attributed to the unpaid salary as per section 192. The Assessing Officer rejected the application under section 154, citing that unpaid salary should reflect as a liability in the Balance Sheet. The CIT(A) upheld this decision, emphasizing the statutory obligation to pay deducted tax to the Government. The ITAT Pune, after reviewing the case, sided with the assessee, stating that TDS liability under section 192 arises only upon actual payment of salary, not on mere book entries. The tribunal directed the Assessing Officer not to hold the assessee in default for TDS on unpaid salary, emphasizing the need for arithmetical correctness in determining the outstanding salary.

2. The key issue revolved around the correct application of section 192 of the Act. The assessee argued that the liability to deduct tax arises only when salary is paid, not when recognized in books. The tribunal agreed, citing precedents and the clear language of section 192. It noted that the provision of unpaid salary in the Balance Sheet does not automatically trigger TDS liability. The tribunal highlighted that the determination of tax liability must align with legal provisions and not solely rely on book entries. The Assessing Officer's error in applying section 192 incorrectly led to the rectification order. The tribunal allowed the assessee's appeal, emphasizing the statutory requirement for TDS only upon actual payment of salary, not on unpaid amounts reflected in the Balance Sheet.

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