2025 (9) TMI 1703 - AT - Income Tax

Year-end general accrual provisions under s.145 do not trigger TDS liability under ss.201(1)/201(1A) for ss.194C/194J/194I

ITAT MUMBAI - AT held that year-end provisions for payments under Sections 194C/194J/194I booked to a general accrual account and reversed on the first ... Assessee in default u/s 201(1)/201(1A) - non-deduction of tax at source on the payments related to Sections 194C, 194J and 194I - whether on accounting for the year-end provisions, is there any liability credited by the assessee company towards any specific, identifiable person/party/vendor to attract provisions of Chapter XVII-B of the Act? HELD THAT:- A conspectus understanding of the facts that the various sample entries with the year-end provisions are estimated on the basis of contract with the vendors, summary of services performed/partly performed till year-end for which no invoices have been raised. Such provision entry is merely for the purpose of accruing the relevant expenditure as required by the accounting standards and are for the purpose of compliance with the provisions of Section 145 of the Act. This provisions are immediately reversed on first day of next accounting year and it is clear from the reversal entry that the individual parties/vendors were not credited at the time of making provisions but the credit was made to “Accrual General – Expenses” and reversed on the first day of the next financial year. Thus, showing that the amount payable to individual vendor has not crystallized. No error or infirmity in the findings of the ld. CIT(A). Accordingly, the effective ground/s raised by the revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether year-end general provisions/estimated accruals credited to a collective account (e.g., 'Accrual General - Expenses') without being credited to specific, identifiable payees constitute amounts 'credited' or 'payable' such that Tax Deducted at Source (Chapter XVII-B) obligations are triggered at the year-end. 2. Whether the assessee, having made such year-end provisions and disallowed 30% under section 40(a)(ia), is an 'assessee-in-default' under section 201(1) and liable for interest under section 201(1A) for non-deduction of TDS in the year in which the provisions were made. 3. The relevance and effect of disclosure of such provisions in the tax audit report (Form 3CD) on the question of TDS liability - i.e., whether disclosure/identification in the audit report converts an estimated, non-credited provision into an ascertainable liability attracting Chapter XVII-B. 4. Whether precedents relied upon by the assessee (where TDS was not held to be attracted on provisions/estimated liabilities) are applicable, distinguishable, or otherwise affect outcome for the year under consideration. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Trigger of TDS on year-end general provisions: Legal framework Chapter XVII-B requires deduction of tax at source at the time of credit of income to the account of the payee or at the time of payment, whichever is earlier. The machinery for recovery and vicarious nature of TDS presupposes a principal tax liability and the ability to identify the person in whose hands the amount will be taxable. Precedent Treatment The assessee relied on multiple tribunal/high court decisions (examples listed by the assessee) supporting the proposition that mere accounting provisions/estimated accruals do not give rise to a crystallized right in favor of payee and therefore do not attract TDS until invoiced/credit is made to identifiable payee. The ld. CIT(A) followed authorities in that vein and held that when payee is not identifiable the machinery provisions cannot be invoked. Interpretation and reasoning The Tribunal examined the commercial facts: (a) the business involves services where rates and final sums are often not fixed at year-end; (b) provisions were made on estimate basis and credited to a general accrual account rather than to named vendors; (c) such provisions were reversed on the first day of the next accounting year and actual invoices, when received, were booked and TDS deducted in the subsequent year. The Tribunal emphasised that the identity of the payee and ascertainability of quantum are sine qua non for operationalizing the vicarious TDS liability. The mere disclosure in the tax audit report of the amount of provisions did not show that the individual parties were credited or that a present right had crystallized in the payees' favor. Ratio vs. Obiter Ratio: Year-end general provisions credited to a collective accrual account, lacking credit to specific payees and lacking ascertainable quantum as to each payee, do not constitute 'credit' to payees or crystallized liabilities for the purpose of Chapter XVII-B; thus they do not trigger TDS obligations at the time of creation of such provisions. Obiter: Observations on commercial practices of the media industry and the mechanics of agency billing are factual/contextual commentary supporting the ratio. Conclusion The Tribunal upheld the ld. CIT(A) holding that Chapter XVII-B could not be invoked in respect of the year-end estimated provisions credited to a general accrual account where payees were not identifiable and amounts not ascertainable. Issue 2 - Assessee-in-default under section 201(1) and interest under section 201(1A) Legal framework Section 201(1) treats a person as an assessee-in-default for failure to deduct TDS where deduction is required; section 201(1A) imposes interest for delay in deposit. Section 40(a)(ia) penalises non-deduction by disallowing a portion of the expenditure (30% for the year in question) in computing income, but disallowance under section 40(a)(ia) is distinct from the question of whether TDS was required to be deducted at a specified earlier time. Precedent Treatment The AO relied on the tax audit entries and treated the amounts as ascertained and payees identified; the AO treated prior decisions that applied when 100% disallowance existed as distinguishable because for the relevant year the disallowance was 30%. The ld. CIT(A) and the Tribunal relied on authorities holding that where payee/quantum are not ascertainable, TDS does not get triggered despite accounting provisions and despite subsequent disallowance. Interpretation and reasoning The Tribunal found that because the provisions were not credited to identifiable payees, were reversed in the next year, and actual invoices (with TDS deduction) were accounted in the subsequent year, the preconditions for creating a principal liability (and therefore a vicarious obligation to deduct TDS) were absent in the year under consideration. The fact that 30% of the provision was disallowed under section 40(a)(ia) in the computation of income did not convert the underlying accounting provision into a crystallized, payable sum attracting TDS in that year. Ratio vs. Obiter Ratio: Absence of identifiable payee and ascertainable quantum at the time of year-end provisions negates the conclusion that the payer had a TDS deduction obligation in that year; consequently, the payer cannot be held an assessee-in-default under section 201(1) nor be liable for interest under section 201(1A) for that year in relation to those provisions. Obiter: Commentary distinguishing cases where 100% disallowance formerly existed is explanatory of differing statutory contexts. Conclusion The Tribunal held that the assessee was not an assessee-in-default under section 201(1) for the year under consideration in respect of the year-end general provisions and therefore interest under section 201(1A) did not arise for those provisions (the TDS was deducted when invoices were received in subsequent year). Issue 3 - Effect of disclosure in tax audit report (Form 3CD) Legal framework Disclosure in Form 3CD evidences that provisions exist in the books but does not, without more, constitute credit to specific payees or establish that the payees' right has crystallized for tax-deduction-triggering purposes. Precedent Treatment and Interpretation The AO treated the Form 3CD disclosure as proof that liabilities were ascertainable and payees identifiable; the Tribunal rejected that leap, holding that the statutory trigger for TDS requires credit to or identificaton of the recipient in the books, not merely disclosure of the aggregate provision in an audit statement. The Tribunal treated the audit disclosure as compliance with audit reporting requirements rather than evidence of payment/credit to identifiable vendors. Ratio vs. Obiter Ratio: Tax audit disclosure alone does not transform an estimated, non-credited provision into an ascertainable liability attracting Chapter XVII-B obligations. Conclusion The Tribunal found that disclosure in Form 3CD did not alter the factual position that individual parties were not credited and did not render the assessee liable for TDS at year-end in respect of the provisions. Issue 4 - Treatment of precedents relied on by the assessee Precedent Treatment The assessee relied on several tribunal and High Court decisions supporting the proposition that TDS is not attracted on mere provisions. The Tribunal agreed with the ld. CIT(A)'s reliance on similar authorities and applied the principles to the facts here. Interpretation and reasoning The Tribunal noted that certain earlier decisions relied upon by the AO may have been decided in different statutory circumstances (e.g., when section 40(a)(ia) provided for 100% disallowance), but the core principle from the line of decisions favourable to the assessee - that identify of payee and ascertainable quantum are preconditions - remained applicable and determinative on facts where provisions were not credited to named vendors and were reversed next year. Ratio vs. Obiter Ratio: Authorities holding that non-identifiable, non-ascertainable provisions do not trigger TDS were followed and applied as binding ratio on the facts. Conclusion Precedents relied upon by the assessee were followed to the extent they establish that year-end general provisions not credited to specific payees do not attract TDS; no contrary precedent on identical facts persuaded a different outcome. Overall Disposition The Tribunal upheld the order of the ld. CIT(A), dismissed the revenue's appeal and the assessee's cross-objection, concluding that the year-end general provisions credited to a collective accrual account without credit to identifiable payees and without ascertainable quantum did not attract Chapter XVII-B obligations in the relevant year and hence the assessee could not be treated as an assessee-in-default for those provisions for that year.