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Kirloskar Oil Engines Ltd. Versus Dy. Commissioner of Income Tax, TDS-II, Pune

TDS on provisions made at the end of the year - The assessee claimed that in number of cases, the exact payees and the amounts payable to them could not be identified before closure of books and in the absence of any identified payees, the provisions of TDS were not applicable - Held that:- adhoc provision so made was reversed in the succeeding year in which actual expenses were booked under specific heads and TDS compliance was also made - We find no merit in the orders of authorities below tha .....

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above said balance amounts and the Assessing Officer is directed to work out the demand under section 201(1) of the Act and also charge interest under section 201(1A) of the Act. - Decided partly in favour of assesse. - ITA No Nos.229 & 230/PN/2014 - Dated:- 30-4-2015 - Sushma Chowla, JM And R. K. Panda, AM,JJ. For the Appellant : Shri C H Naniwadekar For the Respondent : Shri Rajesh Damor ORDER Per Sushma Chowla, JM. Both the appeals filed by the assessee are against the consolidated order of .....

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prejudice to each other. Non Payment of TDS on year end provision ₹ 32,52,781/- 1.0 The learned CIT(A) erred on facts and in law in treating the assessee as "assessee in default" within the meaning of section 201(1) & 201(1A) of the Income Tax Act. 2.0 The learned CIT(A) erred on the facts and in law in confirming that the provisions of section 194C, 194H, 194J, 194I & 195 of the income tax act are applicable to provision made for various expenses in the year ending 31.03 .....

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failed to consider the case law cited in appeal proceedings 3.0 The learned CIT(A) erred in ignoring the facts that TDS has been deducted in subsequent financial year and TDS compliance was made at that point of time. The CIT(A) also ignored that TDS provisions were not applicable in few cases, provisions has been reversed subsequently and the identity of the payee at the time of making provision was not available. The learned CIT(A) failed to consider the submission made in appeal proceedings. .....

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engine valves, castings and trading in components of prime movers, coke and oils, generation and sale of electricity. A TDS Survey under section 133A of the Act was carried out at the premises of the assessee on 23.11.2007. During the course of Survey, statement of Shri A.S. Deshpande, Senior Manager (Finance) was recorded. The Survey party was of the view that the assessee had deducted tax at source under section 194C of the Act in cases where it should have been done under section 194J of the .....

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commission to the Executive Director of ₹ 7.60 crores, but had not deducted tax at source on payment of ₹ 43,65,000/- made to Non-executive Directors. In reply, the plea of the assessee before the Assessing Officer was that the commission payable to Nonexecutive Directors was not subjected to TDS either under section 194H or 194J of the Act. The Assessing Officer rejecting the explanation of the assessee, was of the view that commission included any payment for services rendered and .....

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in the Audit Report that the assessee had not deducted tax at source on certain payments, for which full details of expenses and date of credit / payment was not there in the Audit Report. The Assessing Officer show caused the assessee that in the absence of such details, it was not possible to correctly quantify the TDS deductibility, but not deducted and the interest to be charged under section 201(1A) of the Act. The assessee was asked to furnish the details in respect thereof. Though, there .....

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default for nondeduction of tax at source at ₹ 21,97,825/- and charged interest under section 201(1A) of the Act at ₹ 10,54,956/-. Similarly the assessee failed to furnish the details in respect of the deduction of tax at source in relation to assessment year 2008-09 and consequently, the assessee was held to be in default. The Assessing Officer raised the demand under section 201(1) of the Act at ₹ 14,66,299/- for non-deduction of tax and ₹ 21,834/- for short deduction o .....

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isions of expenses at the year end were being made due to the fact that considering huge transactions, all bills were not received and in number of cases, the amounts for the works/ service done, were not measured and had to be estimated. The assessee further claimed that provision was made on the basis of work completed upto end of the financial year. However, next year, the entire provision was monitored for the bills received and where no such provision was required, then for excess and / or .....

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lopment Bank of India Vs. ITO (2007) 107 ITD 45 (Mumbai). Further, submissions were made before the CIT(A), which are reproduced under para 5.2 at pages 7 to 14 of the appellate order, which are being referred to but are not being reproduced for the sake of brevity. The CIT(A) observed that the main plea of the assessee was that the provisions of section 194C, 194H, 194I and 194J, 195, etc. were not applicable where the assessee had already disallowed the provisions under section 40(a)(ia) or 40 .....

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t source under section 201(1) of the Act and interest charged under section 201(1A) of the Act for the financial year, was confirmed. 8. The assessee is in appeal against the order of CIT(A). 9. The learned Authorized Representative for the assessee pointed out that the assessee was a listed company and was following mercantile system of accounting, under which, it makes certain provisions for expenses, sometimes on party basis and sometimes expenditure-wise. The bills in respect of such provisi .....

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tax at source out of commission paid to Non-executive Directors, where the Assessing Officer had held the assessee to be in default, the CIT(A) had allowed the claim and no appeal has been filed by the Revenue against the said relief granted by the CIT(A). Vis-à-vis the second issue raised by the Assessing Officer, the learned Authorized Representative for the assessee pointed out that the non-deduction of tax at source has been reported by the Auditor in the Audit Report and the learned .....

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see pointed out that in the subsequent assessment years, the bills for ₹ 3,08,05,951/- were passed and entries to that effect were made and also tax was deducted at source, the balance provision of ₹ 1,52,98,221/- was reversed in the books of account. The learned Authorized Representative for the assessee drew our attention to the decision of Cochin Bench of the Tribunal in Agreenco Fibre Foam (P) Ltd. Vs. ITO (TDS) (supra), which has been relied upon by the CIT(A) and pointed out th .....

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y the learned Authorized Representative for the assessee that the provisions of section 194H of the Act were paramatria to section 194A of the Act , but the payees were not identified. The learned Authorized Representative for the assessee fairly pointed out that in the case of assessee, the payees were not identified at the close of the year but the provision for the same was being made since the assessee was following mercantile system of accounting. 10. The learned Departmental Representative .....

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heard the rival contentions and perused the record. The issue arising in the present appeal is whether where the assessee had made provision for various expenses for the year ending 31.03.2007 and had disallowed the said expenditure in the computation of income, in view of the provisions of section 40(a)(ia) of the Act, then can the assessee be held to have defaulted in nondeduction of tax at source out of amount of such expenditure due. The explanation of the assessee in this regard was that i .....

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rious sites, which had to be estimated and provision was based on work completed upto the end of year, though the bills may not have been raised by the contractors. Next year, the entire provision was monitored by the assessee against the bills received and the part of the provision no longer required, excess and short provision and related payment of TDS, etc. was looked into and appropriate entries were passed in the books of account. The assessee claims that the respective party accounts were .....

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amount disallowed, as per tax audit report was ₹ 4,90,62,115/-, which was added by the assessee in its computation of income. The claim of the assessee was that similar entries were being passed from year to year and were being accepted in the hands of the assessee. The Assessing Officer while completing assessment for the year under consideration had accepted the disallowance or allowances as mentioned in the tax audit report, which in turn was added in the computation of income. The amou .....

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089 3928710 19919233 2841278 45831310 Small Engines 80000 1020000 214000 1314000 ACD Pune 1039137 225940 1265077 Medium Engines 272864 272864 Valve EOU 36452 36452 Fuel Oil 201324 92966 294290 Power 175000 175000 80000 21711866 4636616 19919233 2841278 49188993 Less: As per TAT 126877 Amount disallowed 80000 21584989 4636616 19919233 2841278 49062116 TDS required to be deducted (As per TAR) 17952 483499 260114 1117469 318791 2197825 Bills passed subsequently & TDS deducted 12819106 1350504 1 .....

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charges - 194C 6,66,01,978 1 15,09,099 2 10,60,499 Various Various 1,97,99,995 1 - 2 4,48,600 19139031 2. Proff. Charges - 194J 33,74,607 3,44,750 1,15,215 Various Various 22,63,971 2,29,535 15,00,000 169950 3. Rent - 194I 18,96,499 4,17,774 2,993 Various Various 18,52,599 4,14,781 7,77,853 89667 11,18,646 4. Commission - 194H 36,25,000 3,73,375 36,25,000 3,73,375 9,27,517 104406 2697483 Total 7,54,98,084 26,44,998 11,78,707 2,75,41,565 14,66,292 32,05,371 3,64,024 2,29,55,161 15. The perusal o .....

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assessee was required to deduct the TDS to the extent of ₹ 21,97,825/- as against which, the assessee had deducted TDS of ₹ 16,13,197/- and deposited in the treasury. Similarly, for assessment year 2008-09, the amount of expenditure which was held to be inadmissible was to the tune of ₹ 2.75 crores, on which TDS to the extent of ₹ 14,66,292/- was due to be deducted. In the subsequent year bills of ₹ 32,05,371/- were passed, on which tax was deducted at source at &# .....

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similar issue of liability of the assessee to deduct tax at source in respect of payments to persons whose identity was not known when the provision for such expenditure was made by the assessee, it was held that there was no requirement to deduct tax at source in respect of such provision. The said proposition was laid down by the Mumbai Bench of Tribunal in IDBI Vs. ITO (supra), which has been applied by another Mumbai Bench of Tribunal in Pfizer Ltd. Vs. ITO (supra) and it was held as under: .....

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ction 40(a)(i)/(ia) while filing the return of income by the itself. 9. As explained the general entries passed by Pfizer Ltd, in the books of account are as under: "Annexure-1 Journal Entries passed by Pfizer in the books of account: a) At the time of making the year end provision Particulars Debit ( .) Credit( .) Expense a/c Dr. XXX To provision for expenses a/c XXX b) At the time of reversal on first day of the next financial year Particulars Debit ( .) Credit ( .) Provision for expenses .....

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e, the provisions of TDS are not applicable as was held by the ITAT in the case of IDBI vs. I.T.O 107 ITD 45(Mum). In that the case the facts are as under: "The assessee, a financial institution, was following financial years as its accounting year. It issued 'regular return bonds'. The terms and conditions for payment of interest on these bonds provided that the assessee was liable to pay interest at the rate of 16 per cent annually in respect of regular return bondholders, that th .....

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year as on 31.3.1994 made a provision for 'interest accrued but not due" in respect of regular return bonds and claimed deduction of the same in computation of business income. The assessee further credited the said provision to the interest payable account and reflected the same in the balance sheet. The assessee did not deduct tax at source in respect of the provision so made. The Assessing Officer noticed that the assessee did not deduct tax in terms of provision so made though in t .....

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e credited. The Assessing Officer, therefore held that the assessee did not comply with provisions of section 193 and imposed penalty under section 201 upon the assessee on account of non-deduction of tax at source in respect of interest liability credited to 'interest payable account· He also imposed the penalty under section 221 upon the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order". It was held that "the liability of tax deduction at source is .....

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s levied under section 115-0, a section outside the Chapter providing for collection and recovery mechanism and set out under a separate chapter 'Determination of tax in certain special cases - special provision relating to tax on distributed profits of domestic companies: A plain reading of section 190 and section 191, which are first two sections under the Chapter XVII, and of sections 199, 202 and 203(1), would show this underlying feature of the tax deduction at source mechanism. Section .....

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her 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 assessee directly. This provision, thus, shows that tax deduction 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 do .....

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ys down that for all tax deductions at source, the tad deductor has to furnish to the person to whose account such credit is given or to whom such payment is made or the cheque or warrant it issued which presupposes that at the stage of tax deduction the tax deductor knows the name of person to whom the credit is to be given, though whether by way of credit to the account of such person or by way of credit to some other account. This again shows that tax deduction at source liability is a vicari .....

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principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income because the tax is on the income and in the hands of the person who earns that income. Therefore, tax deduction at source mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained. It is indeed correct that Explanation to section 193 lays d .....

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ity of the payee can be ascertained. Therefore, the Explanation to section 193 cannot be invoked in a case where the person who is to receive the interest cannot be identified at the stage at which the provision for interest accrued but not due is made. This position is also accepted by the CBDT in its letter dated 5- 7-1996 addressed to the Tata Iron & Steel Co. Ltd (Letter No.257/126 IT(B). In the instant case, the regular return bonds being transferable on simple endorsement and delivery .....

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crued but not due' could not have been ascertained at the point of time when the provision was made. Assessee had duly deducted the tax source at the time of payment i.e. on 9.6.1994 and there was no loss of revenue as such. Therefore, 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 31.3.1994. When there was no obligation to deduct tax at source, there could not be any question of .....

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ion 271C. The CBDT itself had in Circular No.551, dated 23-1-1990 accepted that until section 271C was inserted in the Act, 'no penalty was provided for failure to deduct tax at source'. It was not only merely a question of mentioning a wrong section, which could perhaps be covered by recourse to section 292B, it was also important to bear in mind that the impugned penalty was levied by an Officer of the rank of the Income Tax Officer, whereas penalty under section 271C could only have b .....

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ot identifiable in this case also at the time of making provisi on, no TDS need to be made on the above amount. Further the entire provision has been written back in the next year and the actual amounts paid/credited were subjected to TDS as per the detailed statements filed before the authorities on which there is no dispute. Therefore, assessee is following the provisions of TDS as and when the amounts are paid/credited to respective parties. 12. As already explained and evidenced from the com .....

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understand the logic of AO in considering the same as covered by the provisions of section 194C to 194J. Assessee as stated has already disallowed the entire amount in the computation of income as no TDS has been made. Once an amount was disallowed under section 40(a)(i)/(ia) on the basis of the audit report of the Chartered Accountant, the same amount cannot be subject to the provisions of TDS under section 201(1) on the reason that assessee should have deducted the tax. If the order of AO were .....

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e to be allowed as the entire amount has been disallowed under the provisions of section 40(a)(i)/(ia) in the computation of income on the reason that TDS was not made. For this reason alone assessee's grounds can to be allowed. Considering the facts and reasons stated above assessee's grounds are allowed." 18. The CIT(A) on the other hand has relied on the ratio laid down by the Cochin Bench of the Tribunal in Agreenco Fibre Foam (P) Ltd. Vs. ITO (supra), wherein a contrary view ha .....

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vision so made was reversed in the succeeding year in which actual expenses were booked under specific heads and TDS compliance was also made at that time. The Cochin Bench of Tribunal considered the liability to deduct tax at source in relation to the assessee before before them on the interest payment prescribed under section 194A and observed that the said section used the term 'any income by way of interest' and it held that the provisions of section 40(a)(ia) of the Act does not ove .....

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, while it may constitute income in the hands of the payee / recipient. Since the section uses the term "any income by way of interest", it was held, it should be viewed from the angle of the recipient/payee and not from the angle of the person making the payment. Accordingly, the tax treatment given by the payer in respect of interest paid by him may not be relevant at all for the purposes of sec. 194A. So long as the interest amount constitutes "income" in the hands of reci .....

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The amount disallowed u/s 40(a)(ia) in one year can be claimed as deduction in the year in which the TDS provisions are complied with. Thus, in our view, the provisions of sec. 40(a)(ia) provide only for deferment of the allowance and 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. 5.3 & 5.4 Section 201 provides for treating an assessee who had .....

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an assessee to deduct or pay the TDS amount. Thus, it can be seen that the provisions of sec. 40(a)(ia) and sec. 201 operate on different objectives. We have already noticed that the provisions of sec. 40(a)(ia) do not override the provisions of sec.201 of the Act. Accordingly, it was held that the assessee was liable to deduct tax at source on interest payments, even if it has not claimed the same as deduction while computing its total income, in which case the revenue was entitled to initiate .....

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basis was booked in the books of account on the receipt of the complete information and compliance was made to the TDS provisions. The liability of the assessee to deduct tax at source was under section 194C, 194J, 194H, 194I and 195 of the Act and except for the provisions of section 194H, the language used in all the sections was that tax had to be deducted out of the sum payable to residents. Section 194H talks of payment of any income by way of commission or brokerage. However, the explanati .....

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e name of respective payees and further, tax was deducted at source out of such payments. In the totality of the above said facts and circumstances, which are similar to the facts before the Mumbai Bench of Tribunal in Pfizer Ltd. Vs. ITO (supra), we hold that the proposition laid down in the said decision is squarely applicable to the facts of the present case in the absence of the identification of payees and provisions having been made in the books of account of the assessee at the close of t .....

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