2025 (11) TMI 567 - AT - Income Tax

Additions for non-deduction of TDS on year-end provisions unsustainable without verifying subsequent year deduction and deposit; s.201(1A) interest limited

Saphire Foods India Limited Versus OSD TDS Circle-2 (2), Mumbai

ITAT MUMBAI - AT held that additions for non-deduction of TDS on year-end provisions cannot be sustained without verifying whether TDS was deducted and ... Assessee in default u/s 201(1) - non-deduction of TDS on year-end provisions - HELD THAT:- Addition cannot be sustained without verification of the factual aspect regarding subsequent deduction and deposit of TDS in the succeeding year. The assessee’s contention that no payee was identifiable at the time of making the year-end provision and that TDS was deducted and remitted upon crystallization of liability in the subsequent year is supported by judicial precedents—particularly the decision of Subex Ltd. [2023 (1) TMI 778 - KARNATAKA HIGH COURT] and the coordinate bench decision in Viacom 18 Media Pvt. Ltd. (supra). These authorities hold that where year-end provisions are made only for accounting compliance and no payee is identified, TDS provisions do not get triggered until such liability crystallizes. However, as the factual verification on deduction of TDS in the subsequent year has not been undertaken by the revenue authorities, the matter is remanded to the file of the Ld. AO for the limited purpose of verifying whether tax was duly deducted and deposited in the following financial year in respect of the impugned expenses. The interest U/s 201(1A) of the Act is restricted only up to the date of actual payment of tax. The assessee shall be afforded adequate opportunity of hearing and to produce all necessary evidence in support of its claim. Subject to the above direction, the appeal of the assessee is allowed for statistical purposes, with other grounds adjudicated in favour of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessee can be treated as an 'assessee in default' under Section 201(1) of the Income-tax Act for non-deduction of tax at source on year-end provisions of expenses where (a) no payee was identified and (b) the provisions were made only for accounting accruals. 2. Whether tax deduction at source provisions (Chapter XVII-B) apply to year-end provisions where no income is credited to a specific payee and liability has not crystallized. 3. Whether disallowance under Section 40(a)(ia) in the year of provision precludes or limits invocation of liability under Section 201(1) / interest under Section 201(1A) for non-deduction of TDS on such provisions. 4. Whether subsequent deduction and deposit of TDS in the following accounting year (upon receipt of invoices/identification of payees) negates the assessee's status as assessee-in-default and affects computation of interest under Section 201(1A). 5. Whether initiation of penalty proceedings under Sections 221(1) and 271C is warranted where non-deduction on year-end provisions is claimed to be bona fide and the assessee subsequently complies. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Applicability of Section 201(1) / TDS provisions to year-end accounting provisions where payees are not identified Legal framework: Section 201(1) renders the payer an assessee-in-default where tax is required to be deducted at source under the relevant provisions of Chapter XVII-B and such deduction is not made. Chapter XVII-B requires deduction when income is payable/credited to a payee and the payer is in a position to identify the payee to whom payments are made. Precedent treatment: The Tribunal relied on two precedents from the judgment text: a High Court decision holding that where year-end provisions are accounting entries without identifiable payees, TDS is not triggered until liability crystallizes; and a coordinate ITAT decision which examined sample provision entries and held that amounts were credited to a general accrual head (not to individual vendors) and reversed on first day of next year, so TDS did not arise at provisioning stage. An earlier authority cited by Revenue (distinguished in the judgment) involved identified payees, and was thus treated as inapplicable. Interpretation and reasoning: The Court reasoned that mere accounting provision entries made to comply with accrual accounting (Section 145 context) do not amount to crediting income to specific payees. Where the provision posts to an accrual/general expenses head and no vendor/party is credited, the liability has not crystallized and the payee has not been credited with income for purposes of triggering TDS obligations. Consequently, absent factual identification of payees at year-end, the legal requirement to deduct TDS is not engaged. Ratio vs. Obiter: Ratio - TDS provisions do not apply to year-end provisions where no payee is identified and no income is credited; such provisions do not, by themselves, create an assessable default under Section 201(1). Obiter - distinctions with authorities involving identified payees and other fact patterns noted by the Court. Conclusion: The Tribunal concluded that year-end provisioning entries, where no payee is identifiable and entries are to an accrual/general expenses account, do not attract TDS at the provisioning stage; the question of default therefore hinges on factual verification whether payees were identified and whether TDS was subsequently deducted when liability crystallized. Issue 3: Effect of disallowance under Section 40(a)(ia) on liability under Section 201(1) Legal framework: Section 40(a)(ia) disallows certain expenditures in computation of income where tax was not deducted; Section 201(1) imposes separate liability for deduction and payment of TDS. The provisions operate in their respective spheres (computation of income vs. TDS compliance). Precedent treatment: The Tribunal observed that disallowance under Section 40(a)(ia) does not, by itself, oust the applicability of Section 201(1). The Revenue relied on this principle; the Tribunal nonetheless treated this as separate from the central factual issue of whether TDS obligation arose at provisioning stage. Interpretation and reasoning: The Court accepted that Section 40(a)(ia) operates independently and that claiming disallowance is not determinative of TDS liability. However, where provisions do not legally require TDS because payees were unidentified, invoking Section 201(1) is unsustainable without factual proof of non-deduction when liability crystallized. Thus, disallowance does not automatically justify treating the assessee as in default for provisions that did not create an identifiable credit to payees. Ratio vs. Obiter: Ratio - Section 40(a)(ia) disallowance does not eliminate inquiry under Section 201(1); fact of identification/crystallization of liability is decisive. Obiter - procedural interactions between assessment disallowance and TDS proceedings were discussed but not expanded into a broad holding. Conclusion: Disallowance under Section 40(a)(ia) does not conclusively establish an assessee-in-default for year-end provisions; factual determination remains necessary to determine whether TDS was required at the time of provisioning. Issue 4: Effect of subsequent deduction and deposit of TDS; computation period for interest under Section 201(1A) Legal framework: Section 201(1A) prescribes interest for failure to deduct or remit TDS; interest period and computation depend on the date of deduction/payment. Chapter XVII-B contemplates that deduction must be made when sum is credited or paid as per applicable section. Precedent treatment: Tribunal relied on precedents recognizing that where TDS was deducted and remitted in the subsequent year upon crystallization of liability, the period for which interest is payable should be limited to the period up to actual payment; and that subsequent bona fide compliance can affect final liability. Interpretation and reasoning: The Tribunal held that if factual verification confirms that TDS was deducted and deposited in the following year upon receipt of invoices (i.e., when liability crystallized), the assessee should not be held an assessee-in-default for the earlier year as to those amounts. Interest under Section 201(1A) should be computed only up to the date of actual TDS payment (not until the date of the order), and the assessee must be given opportunity to produce evidence of deduction and remittance. Ratio vs. Obiter: Ratio - Subsequent deduction and deposit of TDS upon crystallization of liability negates a finding of default for the earlier provisioning year insofar as amounts for which TDS was later deducted; interest under Section 201(1A) is to be computed only up to the actual payment date. Obiter - observations on natural justice and double TDS outflow were explanatory. Conclusion: The Tribunal remanded the matter to the assessing authority for limited factual verification of whether TDS was deducted and deposited in the subsequent year; directed that interest be restricted to the period up to actual TDS payment if compliance is proved; and required opportunity of hearing and production of evidence by the assessee. Issue 5: Initiation of penalty proceedings under Sections 221(1) and 271C Legal framework: Penalty provisions require existence of default and, for certain penalties, culpable/deliberate conduct; bona fide compliance and subsequent rectification can bear on penalty imposition. Precedent treatment: The Tribunal did not make a definitive substantive ruling on penalties in the operative reasoning but observed the assessee's claim of bona fide practice and subsequent compliance. Interpretation and reasoning: Because the primary finding was that the factual question of subsequent deduction/remittance had not been verified and that provisioning per se may not trigger TDS, imposition of penalties premised on an unverified finding of deliberate default would be premature. The Court therefore did not sustain penalty measures in the impugned order as adjudicated in favour of the assessee on other grounds. Ratio vs. Obiter: Obiter/ancillary - The judgment's directions effectively require reassessment of penalty necessity in light of factual verification; no conclusive, standalone ratio on penalties was rendered. Conclusion: Penalty proceedings should not be sustained without factual determination of whether (i) payees were identifiable at provisioning, (ii) TDS was subsequently deducted and remitted, and (iii) there was deliberate default; the matter must be examined after remand and opportunity to the assessee. Remedial direction and overall conclusion The Tribunal allowed the appeals for statistical purposes and remanded to the assessing officer for limited factual verification solely to determine whether TDS in respect of the impugned year-end provisions was duly deducted and deposited in the subsequent financial year. If deduction and deposit are shown, the assessee should not be treated as an assessee-in-default for those amounts; interest under Section 201(1A) is to be levied only up to the date of actual payment. The assessee must be given adequate opportunity of hearing and to produce necessary evidence. Related appeals with identical facts to be disposed of mutatis mutandis.