TaxTMI 
TaxTMI 
2022 (8) TMI 1169
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....`assessee-in-default' for not deducting tax at source under section 194C, 1941 and 194J of the Act from the year end provisions made by the appellant for payments aggregating to a sum of Rs. 2,63,94,145 and levying interest of Rs. 66,28,329. 3. That the CIT(A) erred on facts and in law in not appreciating that obligation to deduct tax at source under the provisions of Chapter XVII-B of the Act arises only if - (i) liability recognized by the payer is credited to the account of an identified payee, and (ii) the payment made constitutes income in the hands of such payee. 4. That the CIT(A) erred on facts and in law in holding that the appellant was required to deduct tax at source without appreciating that the appellant merely created a provision for estimated expenses while closing the books of accounts for the relevant year and in absence of a claim made or invoices received from the vendor, liability to make payment did not accrued on the appellant and therefore tax was not required to be deducted from such estimated year end provisions. 5. That the CIT(A) erred on facts and in law in not appreciating that the appellant was not aware of the exact amo....
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.... grounds of appeal at or before the time of hearing." 2. The assessee is a company engaged in the business of manufacture and sale of contractors, trailers, bus chasis, road machinery and construction equipments. For the AY 2014-15 the assessee created provision for expenses headwise on estimated basis for the purpose of closing the books of account for the year end. The break-up of the provision created is as follows:- Contractors - 194C - Rs. 9,73,15,961 Rent - 194I - Rs. 2,02,94,286 Professional charges 194J - Rs.31,48,42,587 Commission - 194H - Rs. 2,40,16,353 Payments to non-residents - 195 Rs. 36,83,938 3. The aforesaid sum was duly disallowed by the assessee u/s.40(a)(ia) in the return of income filed for AY 2014-15. The ITO, TDS, LTU [AO] issued a notice for proceedings u/s. 201(1) of the Income-tax Act, 1961 [the Act] calling for various details with regard to the disallowance made by the assessee u/s. 40(a)(ia) in the return. The assessee duly furnished the details called and submitted that the amount disallowed u/s. 40(a)(ia) represents provision for services received during th....
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....o pay such sum agreed, shall be deemed to be credited to the account of the payee, thereby TDS shall apply accordingly. (iii) The assessee has made provisions on estimate basis on a preexisting contract with known parties and identified services and therefore it cannot be said that the assessee could not identify the parties at the time of creating the provision. (iv) The assessee was unable to provide the details of provision created and entries relating to reversal of the same. 5. In view of the above reasons, the CIT(Appeals) concluded that the provision created based on estimated expenditure towards various items to identified payees is liable for tax deduction at source and since the assessee failed to comply with the provisions, the assessee should be treated as 'assessee in default' u/s. 201(1) of the Act. With regard to levy of interest u/s. 201(1A) of the Act, the CIT(Appeals) relied on the decision of the ITAT Bangalore in the case of IBM India P. Ltd. v. ITO(TDS), LTU [2015] 59 taxmann.com 107. 6. Aggrieved by the order of the CIT(Appeals), the assessee is in appeal before the Tribunal. 7. The ld. AR submitted before us the break-up of the prov....
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....hom payment was made on receipt of Invoice in subsequent year after deduction of TDS 19,51,22,127 2,88,784 There is no dispute raised by the assessing officer with respect to this amount. 64-67 Total 46,01,53,125 8. The ld AR also submitted that the issue is covered by the decision of the Tribunal in assessee's own case for AYs 2012-13 & 2013-14 in ITA Nos.1195/B/2014 & 474/B/2016 dated 25.3.2022 wherein the coordinate Bench of the Tribunal has dealt with a similar issue and remitted the issue back to the AO for verification of the evidence. The ld AR further submitted that in the decision of assessee's own case, Hon'ble Tribunal has followed the decision of the coordinate bench of the Tribunal in the case of Biocon Ltd. v. DCIT in ITA No.1248/Bang/2014 dated 21.3.2022 wherein the Hon'ble Tribunal has laid down certain principles with regard to applicability of section 201(1) and interest u/s. 201(1A) under various scenarios. 9. The ld. DR submitted that the assessee has itself admitted that it is liable to deduct tax at source and on that basis the assessee has disallowed the impugned provisions for expenses u/s. 40(a)(ia). The....
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....a present obligation as a result of past event. (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation." Hence, while finalising the accounts as at the year end, it is a usual accounting practice to ascertain the obligations that have arisen as a result of past events, which may involve probable cash outflow. All those obligations are recognised as expenses and provided for. Making a provision will be an easy task, if the assessee is aware of the quantum of liability. For example, audit fee might have been fixed in the AGM and hence it is easy to provide for the same as at the year end. On the contrary, if the assessee has received services of an advocate and he has not sent his bill by the year end, then the assessee shall be constrained to make an estimate of the amount that may be charged by an advocate and provide for it in the books of account as at the year end. 6.1 The accounting practice followed in this regard is that the Concerned expenses account shall be debited and "Provision for expenses" account sh....
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....fit and Loss account of the succeeding year by way of income of Rs.1000/-. Thus, the effect of making provision in a year is that the "Profit and Loss account" of the year in which the said provision is made will absorb the relevant expenses to the extent so provided for, i.e., those expenses will not get shifted to the next year when the payment is actually made. The profit and loss account of succeeding year will not be affected by the amount of provision made, if the actual payment made is equal to or in excess of the provision amount. However, if there is no requirement of making any payment or if the payment made is less than the amount provided for, then the Profit and Loss account of the succeeding year shall be affected to the extent of the amount transferred from "Provision for expenses a/c" to the credit of Profit and loss account. 6.2 However, in the present days, the above said "book rule" practice is not followed. The modern days accounting practice is to reverse the provision for expenses so created as at the yearend immediately on the first day of succeeding year. For example, yearend provisions created as on 31.3.2012 shall be reversed on 01- 04-20....
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.... 7.1 We noticed earlier that the Ld CIT(A) has referred to the provisions of Sub-sec. (2) of sec. 194C, Explanation (ii) to sec. 194I, Explanation (c) to Sec. 194J, Explanation (iv) to Sec. 194H and Explanation 1 to sec. 195, which states that even if the sums referred to under these provisions are credited to any account, whether called 'Suspense Account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such account to the account of the payee and the provisions of TDS shall apply accordingly. For the sake of convenience, we extract below provisions of sec.194C(2):- "Where any sum referred to in sub-section (1) is credited to any account whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly." Similar clause is available in all other provisions requiring deduction of tax at source. 7.2 The question as to whether the above said clause available in various TDS pr....
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....ounts. Therefore it is not possible for the Assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered." 7.3 We notice that the Delhi bench of Tribunal has also considered the question of applicability of TDS provisions on yearend provisions in the case of Interglobe Aviation Ltd vs.ACIT (ITA No.5347/Del/2012 dated 07-01-2020), wherein it was held as under:- "19. We have carefully considered the rival contentions and perused the orders of the lower authorities. Assessee has made provision for Airport expenses of Rs 32314535/, Airport Handling expenses Rs. 14115000/-, Crew Accommodation expense Rs 694000/-, IT Communication charges Rs 7021580/- and provision for other expenses Rs 74335080/-. Admittedly assessee has not deducted tax and source on the above sum stating that it is yearend provision and the payees are not identified. It is not the case of the assessee that these are we are not ascertained liabilities. According to the provisions of the income tax act the tax is required to be deducted as and when assessee becomes responsible for payment of above s....
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....) of the Act and hence there is no requirement to raise any demand u/s 201(1)/201(1A) of the Act, i.e., disallowance made u/s 40(a)(i)/40(a)(ia) would exonerate the assessee from the liability u/s 201 of the Act. In this regard, he placed his reliance on the decision rendered by co-ordinate bench in the case of Robert Bosch Engineering and Business Solutions P Ltd (ITA Nos.1689 & 1690/Bang/2017 dated 31.1.2022). 8.1 We notice that the very same contention was urged before Cochin bench of Tribunal in the case of Agreenco Fibre Foam (P) Ltd vs. The ITO (TDS)(ITA No.165/Coch/2012 dated 16th August 2013) and it was rejected with the following observations:- "5.2 The liability to deduct tax at source on the interest payments is prescribed u/s 194A of the Act. Sub-section (1) of sec. 194A reads as under:- 194A. (1) Any person, not being an individual or a Hindu Undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mo....
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.... it does not provide for absolute disallowance. The objective of sec. 40(a)(ia) appears to be to compel the assessee to deduct tax at source in order to claim the relevant expenditure as deduction." 8.2 The co-ordinate Bangalore bench of Tribunal has also examined similar argument raised before it in the case of IBM India Private Ltd (ITA Nos.749 to 752/Bang/2012 dated 14.05.2015) and it was rejected with the following observations:- "27. We have carefully considered rival submissions. Provisions of Sec.40 of the Act start with a non-obstante clause and provides that, "Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession." Sec.40(a)(i) and 40(a)(ia) of the Act lists of certain items of expenditure and categories payees as "Residents" "Non Residents". In respect of the items of such expenditure there if there is an obligation to deduct tax at source under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid during the previous year, then the expenditure cannot be claimed as a deductio....
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....0(a)(ia) (w.e.f AY 2013-14) and u/s 40(a)(i) (w.e.f 2020-21), the proviso inserted in those sections gives a relief, i.e., if the assessee is "not deemed to be an assessee in default u/s 201", then there is no requirement of making any disallowance u/s 40(a)(ia)/40(a)(i). The corollary is that if the assessee is deemed to be an assessee in default, the above said relief given under the proviso to sec.40(a)(i)/40(a)(ia) shall apply. Thus the proviso given under sec.40(a)(i)/40(a)(ia) itself makes it very clear that liability u/s 201 is independent of the above said disallowances. 8.4 Our view that each of the consequences is independent of each other is also supported by the Explanation given under Sec. 191, which reads as under:- Explanation.-For the removal of doubts, it is hereby declared that if any person including the principal officer of a company,- (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act,....
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....nt to the payee, i.e., the assessee is made liable for the tax belonging to the payee. In the above said example, the assessee would be liable to pay Rs.1000/- as per the provisions of sec.201(1) over and above the amount of Rs.10000/- payable/paid to Mr.A. Hence it is called vicarious liability. The concept of vicarious liability has been well explained by Mumbai bench of Tribunal in the case of Industrial Development Bank of India vs. ITO (2007)(107 ITD 45), which are going to discuss infra. 8.6 In view of the foregoing discussions on legal provisions, following the decisions rendered by the co-ordinate benches of Tribunal in the case of IBM India Pvt Ltd (supra) and Agreenco Fibre foam P Ltd (supra), we hold that the disallowance made u/s 40(a)(i)/40(a)(ia) will not absolve the assessee from the liability u/s 201 of the Act, when an assessee is deemed to be an assessee in default. 9 The Ld A.R submitted that the assessee has deducted tax at source when the payments are actually made in the succeeding year. The co-ordinate bench in the case of IBM India P Ltd (supra) has held that the demand raised u/s 201(1) is liable to be cancelled, if the assessee has deduct....
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....ty of the assessee to satisfy the assessing officer by preparing a list of expenses, for which payees could not be identified at the time of making provision and the reasons for the same. 9.2 We notice that there are certain judicial rulings holding that there will not be TDS liability, if the payee is not identifiable. We shall discuss about the same. In the case of Dishnet Wireless Ltd vs. DCIT (2015)(154 ITD 827)(Chennai Trib), the Chennai bench of Tribunal held that when the tax deductor cannot ascertain the payee who is the beneficiary of credit of tax deduction at source, the mechanism of Chapter XVII-B cannot be put into service. It was further held that if the payee is identifiable and the amount payable to him is ascertainable, then the assessee would be required to deduct tax at source in respect of such provision. We shall discuss some more decisions:- (a) The first decision is that of Honourable Delhi High Court in case of UCO Bank (369 ITR 335). The facts prevailing in this case are that the Court had directed one of the parties to the suit to deposit certain sums in the High Court. The amount was invested in Fixed deposit by the Registrar General of ....
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.... interest was payable on 9th of June every year. However, the assessee closed its accounting year on 31st March. Accordingly, it made provision of interest accrued upto 31st March, which however has not become due. This issue was adjudicated in a detailed manner. The discussions made by the Tribunal in lucid manner are extracted below:- 9. The above terms and conditions, so far as material for the purposes of our adjudication, can be summarized as follows: (a) The assessee is liable to pay interest @ 16 per cent annually in respect of regular return bondholders. (b) The interest is payable on 9th June of each calendar year, except in the year of maturity, when interest is payable on maturity. (c) The interest, except at the time of maturity, is paid to the person whose name is registered in the records of the assessee-company as on 15th May of each calendar year. (d) The bonds are transferable by endorsement and delivery, and the assessee does not, in any way, control such transfer of ownership. Let us now appreciate the impact of the above terms and condition so far the issue in appeal before us is concerned. As on 31st March o....
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....income and TDS mechanism provides for method to recover tax under such liability. Therefore, this TDS liability is, as we begun by taking note of, a sort of substitutionary liability. Section 191 further makes this position clear when it lays down that in a situation TDS mechanism is not provided for a particular type of income or when the taxes have not been deducted at source in accordance with the provisions of Chapter XVII, income-tax shall be payable by the assessee directly. This provision thus shows that TDS liability is a vicarious liability and the principal liability is of the person who is taxable in respect of such income. Section 199 makes it even more clear by laying down that the credit for taxes deducted at source can only be given to the person from whose income the taxes are so deducted. Therefore, when tax deductor cannot ascertain beneficiaries of a credit, the tax deduction mechanism cannot be put into service. Section 202 lays down that TDS provisions are without any prejudice to any other mode of recovery from the assessee, which again points out to the tax deduction liability being vicarious liability in nature. Section 203(1) then lays down that for all tax....
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....llise later, i.e., on due date of 31st December, and the corresponding credit to the lender's account will also be given on 31st December, but the assessee will still have tax deduction liability in respect of interest accrued but not due as on 31st March. However, on the facts of the present case, this Explanation cannot be put into practice because the payee is not known at the stage of provision for 'interest accrued but not due' being made. It is not difficult to visualize that Explanation to Section. 193, which was introduced w.e.f. 1st June, 1989, was apparently to take care of a situation in which instead of crediting the account of the payee, some other proxy account was credited, to avoid the TDS liability being invoked. For example, if at the end of the accounting year, the assessee is to make a provision for interest of Rs. 10,000 payable to Mr. X, but he creates the provision by way of credit to 'interest payable account'. In such a situation 'interest payable account' is de facto a proxy account for Mr. X, either fully or to the extent of the amount payable to Mr. X. However, it could have been argued, in the absence of the Explanation to Se....
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....tered with the assessee-company as on 15th May, 1994 but there could not have been any method of ascertaining, as at the time of making the provision for 'interest accrued but not due', i.e., on 31st March, 1994, as to who will be registered bondholders as on 15th May, 1994. It is also important to bear in mind that taxes were duly deducted at source at the time of payment, i.e., on 9th June, 1994 and that there is no loss of revenue as such. In the light of these discussions, we hold that the assessee did not have any liability to deduct tax at source, in respect of provision for 'interest accrued but not due', in respect of regular return bonds made on 31st March, 1994. When there was no obligation of deduct tax at source, there cannot be any question of levy of penalty or interest. The appellant, therefore, must succeed." It can be noticed that the decision, in all these cases has been rendered on the peculiar facts of the case. 9.3 We also notice that in all these decisions, the assessee therein has established the fact that the payees are not identifiable. Hence there should not be any dispute to the proposition that the TDS mechanism will fai....
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....ich TDS was deductible shall be 31.3.2012. The assessee shall be liable to pay interest from that date to the date of actual deduction/payment as per the provisions of sec.201(1A) of the Act on the amount of "Provision" created as on 31.3.2012. For example, the provision made as on 31.3.2012 was Rs.1000/- and the actual payment made was Rs.1200/-. The interest shall be payable on the provision amount of Rs.1000/-, since the provision amount alone was claimed as deduction during the year ending 31.3.2012. 10.2 The second scenario is that the actual payment made is less than the amount of provision made. The TDS was deducted at the time of credit or at the time of making actual payment. Since yearend provision was made on 31.3.2012 in this case, the date on which TDS was deductible shall be 31.3.2012. The assessee shall be liable to pay interest from that date to the date of actual deduction/payment as per the provisions of sec.201(1A) of the Act on the amount of "actual payment" made. For example, the provision made as on 31.3.2012 was Rs.1000/- and the actual payment made was Rs.800/-. The assessee would be reversing the excess provision of Rs.200/- in the succeeding year.....
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.... we restore this issue to the file of AO in order to enable him to re-compute the liability, if any, u/s 201(1) and interest u/s 201(1A) of the Act. 10.7 We noticed earlier that the yearend provisions made by the assessee included "Commission payable to non-residents", which is liable for deduction of tax at source u/s 195 of the Act. The provisions of sec.195 are triggered only if that payment is chargeable under the provisions of Income tax Act. We notice that the assessee has not furnished any detail to the AO/CIT(A) with regard to the applicability or otherwise of provisions of sec.195 to the above said payment. Hence we restore this issue also to the file of the AO for examining it afresh in accordance with law and in the light of discussions made supra." 11. We also notice that the above decision in the case of Biocon Ltd (supra) is followed by the Hon'ble Tribunal in the decision of assessee's own case for AYs 2012-13 & 2013-14. 12. The ld AR in the submissions made with the breakup of the provisions has split the provisions made under various categories from TDS perspective such as :- i. Provision created for payments where parties are not identifiab....