TMI Blog2022 (4) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in the light of principles - Appeal of the assessee is treated as allowed for statistical purposes. - ITA No.1195/Bang/2014 And ITA No.474/Bang/2016 - - - Dated:- 25-3-2022 - Shri George George K, Judicial Member And Ms. Padmavathy S, Accountant Member For the Assessee : Shri S Parthasarthy, Advocate For the Revenue : Smt. Priyadarshini Besaganni, JCIT(DR) ORDER PER PADMAVATHY S, ACCOUNTANT MEMBER This common appeals are arising out of the direction given by the Karnataka High Court in the case of the assessee, where the Hon ble High Court vide order dated 15/11/2021 (ITA No.369/2018) has restored the case to the Tribunal for the assessment year 2012-13 2013-14. Brief facts of the case 2. The assessee is a company incorporated under the provisions of the Companies Act 1956 which is engaged in the business of manufacturing and sale of tractors, trailers, bus chassis, road machinery and construction equipment. The assessee created provisions for expenses, head wise on adhoc basis for the purpose of closing the books of accounts for the year end. Though these provisions were identifiable head wise, these were made without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1035368 437563631 40880302 12666717 4. Being aggrieved by the above order, an appeal was preferred before the ld.CIT(A), LTU, contending that the provisions made were in the nature of contingent liability as the identity of the recipients was not known and in the absence of income in the hands of the recipient, the question of tax deduction at source does not arise. Reliance in this regard was placed in support of this on the decision of the coordinate bench in the case of IDBI vs. ITO (107 ITD 45). 5. The ld.CIT(A) did not accept the contentions of the assessee that provision made is only on ad hoc basis and therefore TDS provisions are not attracted, as the liability was already created for services already received by vendors in terms of contract with identified parties and the liability was also recognized in the books of account. The ld.CIT(A) also placed reliance on the decision of the Cochin Bench in the case of Agreenco Fibre Foam Pvt. Ltd. vs. ITO (35 taxmann.com 155) to uphold the order of the AO. However, ld.CIT(A) directed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Karnataka high court these appeals have now been restored back before the Tribunal for fresh adjudication. Hence we are required to analyse and decide, as per the directions of the Hon ble high court that when the assessee has made the year end provision without identifying the payees whether the liability to tax at source under Chapter XVII-B of the Act arises. Consequently the demand u/s.201(1) and interest charged for delay in the remittance us/.201(1A) will be adjudicated. 10. The assessee before the AO submitted that the assessee creates provisions on adhoc basis for the services received during the month of March for the purpose of closing the books and tax is not deducted on the provisions as they are estimated on adhoc basis. These provisions are reversed in April and the invoices are accounted as and when they are received. It was submitted that as the provisions are created on adhoc basis without reference to the vendor it was not possible for the company to provide vendor-wise details. The AO proceeded to treat the assessee as being assessee in default u/s.201(1) and also charged interest u/s.201(1A) for the delayed remittance of tax up to the date of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re following mercantile system of accounting are required to account for all known expenses and losses, even if the bills/invoices have not been received. This is done by making provision for various expenses at the year end. It will ensure that the financial statements reflect true profits of the fiscal period. Accounting Standard 29 issued by the Institute of Chartered Accountants of India (ICAI) titled as Provisions, Contingent Liabilities and Contingent Assets deals with this aspect. As per AS- 29, A Provision is a liability which can be measured only by using a substantial degree of estimation . It further states as under:- A Provision should be recognised when:- (a) an enterprise has 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 tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for expenses account shall be debited with ₹ 750/-, which will leave a credit balance of ₹ 250/- in the Provision for Expenses account. This remaining credit balance will be transferred to the Profit and Loss account. Accordingly, the Provision for expenses account will show NIL balance and there will be an impact on the Profit and Loss account of the succeeding year by way of income of ₹ 250/-. (d) Situation IV:- The assessee finds that it is not liable to pay the provision amount. Accordingly, the entire amount of ₹ 1000/- outstanding to the credit of Provision for expenses account shall be transferred to the Profit and Loss account. Accordingly, the Provision for expenses a/c will show NIL balance and there will be an impact on the 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service providers. 7. We shall now advert to the Income tax Act. Chapter VII of the Act deals with provisions relating to tax deduction at source. The contention of the assessee is that the yearend provisions are made on estimated basis and further it is credited to Provision for expenses account and not to the credit of vendors/service providers account. Accordingly, it was contended that the TDS provisions will not apply to yearend provisions. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier. For this purpose, credit to any suspense account or any other account, by whatever name called, shall be deemed to be a credit of such income to the account of the payee. 30. It is thus clear from the statutory provisions that the liability to tax at source exists when the amount in question is credited to a suspense Account or any other account by whatever name called, which will also include Provision created in the books of accounts. 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 ₹ 32314535/-, Airport Handling expenses ₹ 14115000/-, Crew Accommodation expense ₹ 694000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the co-ordinate benches, we hold that the TDS provisions are triggered for the amount credited to Provision for expenses account also, in view of specific provisions (extracted above) available in all TDS sections. Accordingly, the assessee is liable to deduct tax at source from the yearend provision for expenses. 8. One more contention raised by Ld A.R is that the assessee has voluntarily disallowed the amount of yearend provision u/s 40(a)(i)/40(a)(ia) 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the provisions of sec. 40(a)(ia) does not override the provisions of sec. 201 of the Act. We notice that provisions of sec. 40(a)(ia) do not provide for absolute disallowance as in the case of say, sec. 40A(3) of the Act. 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. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de u/s 40(a)(i)/40(a)(ia); (b) assessee shall be deemed to be an assessee in default and hence the demand u/s 201(1)/201(1A) could be raised upon the assessee. (b) penalty can be levied u/s 271C/271CA and (c) prosecution can be launched /s 276B of the Act. It is pertinent to note that each of the consequences mentioned above are independent of each other. However, in case of disallowance of expenses to be made u/s 40(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:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it belongs to him only. Hence Mr.A is entitled to claim set off of the TDS amount of ₹ 1000/- against the tax payable by him. If there is failure on the part of an assessee to deduct tax at source, the provisions of sec.191 introduces a deeming fiction as per which the said assessee is deemed to be an assessee in default. Accordingly, the TDS amount could be recovered from the assessee, even if he has not yet paid the amount or fully paid the amount 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 ₹ 1000/- as per the provisions of sec.201(1) over and above the amount of ₹ 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of transaction is a specific exercise which carries with it the statutory responsibility for deducting tax at source also. The appellant cannot wriggle out of this responsibility by holding that the provisions were made without any basis towards unidentified parties for unascertained liabilities. From the nature of expenses listed above, the view expressed by Ld CIT(A) appears to be quite reasonable. In our view, it is the responsibility 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Tribunal was whether or not Section. 193 of the Act requires tax deducted at source in respect of the provision for interest accrued but not due made by an assessee where the ultimate recipient of such interest accrued but not due cannot be ascertained at the point of time when the provision is made.In this case, the assessee issued 'Regular Return Bond-Series II , which carried interest rate of 16 per cent p.a. payable annually. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo sections under the Chapter XVII, and of Sections 199, 202 and 203(1) would show this underlying feature of the TDS mechanism . Section 190 makes it clear that the scheme of TDS is one of the methods of recovering the tax due from a person and it is notwithstanding the fact that the tax liability may only arise in a later assessment year. The tax liability is obviously in the hands of the person who earns the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertained. To illustrate, in the example that we had taken in para 4 above as long as assessee knows the identity of lenders, whether the assessee credits the interest accrued but not due in the account of the assessee or in some other account, tax would continue to be deductible under Section 193 by the virtue of deeming fiction set out in the Explanation to Section. 193. The liability to pay in such a case would crystallise 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax was required to be deducted at source in respect of the provision for interest payable made by the assessee which reflected provision for 'interest accrued but not due' in a situation where the ultimate recipient of such 'interest accrued but not due' could not have been ascertained at the point of time when the provision is made. In the present case, interest to such bondholders is to be paid as are registered 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of TDS amount, the assessee would be liable to pay interest u/s 201(1A) of the Act. We shall discuss the same in the ensuring paragraphs. 10.1 The first scenario is that the actual payment made is more 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 Provision created as on 31.3.2012. For example, the provision made as on 31.3.2012 was ₹ 1000/- and the actual payment made was ₹ 1200/-. The interest shall be payable on the provision amount of ₹ 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount deductible on the entire amount of provision. The assessee shall also be liable to pay interest u/s 201(1A) of the Act till the date of deduction/payment, which may cross the succeeding year. 10.6 We noticed earlier that the assessee has claimed to have deducted tax at source at the time of accounting of invoices/payments. Accordingly, the yearend provisions may fall under anyone of the categories discussed above. Accordingly, we restore this issue to the file of AO in order to enable him to recompute 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 discu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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