TMI Blog2022 (4) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... time of accounting of invoices/payments. Accordingly, the year-end 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. We noticed earlier that the year-end 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. - ITA No.1248/Bang/2014 (Assessment Year : 2012-13) - - - Dated:- 21-3-2022 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER Appellant by : Shri Padamchand Khincha, A.R. Respondent by : Shri Sumer Singh Meena, D.R. ORDER PER B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01(1). He also charged interest of ₹ 40,53,975/- u/s 201(1A) of the Act. 4. Before Ld CIT(A), the assessee submitted that the expenses aggregating to ₹ 22,69,28,947/- are provisions made at the yearend at the time of finalisation of accounts for known expenses and losses (hereinafter called yearend provisions ). It was admitted that tax was not deducted at source from these expenses. It was submitted that the tax auditor has furnished the above said details in his tax audit report and accordingly, the assessee has voluntarily disallowed the expenses u/s 40(a)(i) and 40(a)(ia) of the Act.It is pertinent to note that the above said provisions of the Act mandate disallowance of expenses, if there was failure to deduct tax at source from them. It was submitted that the yearend provisions are required to be made as per Accounting Standards, in order to account of expenses incurred during the current year, for which bill/invoices were not received by the end of the year. The accounting standard mandates accounting of expenses by way of provisions at the yearend, in respect of expenses for which only service/work has been provided/performed by the vendors, but invoices hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. Hence, even if the amounts are credited to the Provision account instead of the concerned Party s account, the liability to deduct tax at source shall arise. (c) With regard to the contention that the identity of recipients was not known, the Ld CIT(A) held that the assessee s estimate of expenses is based upon pre-existing contracts entered with known parties for identified services. Hence the assessee cannot wriggle out his responsibility by holding that the provisions were made without any basis and towards unidentified parties for unascertained transactions. (d) The Ld CIT(A) asked the assessee to furnish details in respect of professional services (liable to TDS u/s 194J) and Contract payments (liable to TDS u/s 194C) and noticed that the parties are identifiable. Accordingly, the Ld CIT(A) held that non-deduction of TDS is therefore not justified. (e) The Ld CIT(A) also held that suo-motu disallowance made u/s 40(a)(ia) of the Act is not contemplated as mitigating condition in sec. 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o deduct tax at source from the yearend provisions (b) The Provision for expenses included the commission expenses payable to non-resident commission agents and they are not liable to tax in India in their hands. Hence the provisions of sec.195 are not applicable. 6. We heard the parties and perused the record. Before addressing the issues contested before us, we feel it necessary to discuss about the accounting practice relating to making yearend provisions, its impact on profits and the legal effects. The accounts of a business concern can follow either cash system of accounting or mercantile system of accounting . Under mercantile system of accounting, revenue cost matching principle is followed, i.e., all the expenses incurred to earn the corresponding revenue should be accounted for. The accounting principle of Prudence also requires for accounting for all known expenses and losses at the time of finalising accounts at the yearend. Accordingly, the assessee s, who are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this situation, the Provision for expenses a/c will show NIL balance after the payment. There will not be any impact on the Profit and Loss account of the succeeding year. (b) Situation II:- In the subsequent year, the assessee receives bill for ₹ 1,200/-, meaning thereby, the provision created was short by ₹ 200/-. When the payment is made, the Provision for expenses account shall be debited with ₹ 1000/- and the concerned expenses account shall be debited with remaining amount of₹ 200/-. In this situation also, the Provision for expenses a/c will show NIL balance after the payment. There will be impact on the Profit and Loss account of the succeeding year by way of increase in expenses by ₹ 200/-. (c) Situation III:- In the subsequent year, the assessee receives bill for ₹ 750/- only, meaning thereby, the provision created was in excess by ₹ 250/-. When the payment is made, the Provision 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity. In that kind of situation, the assessee should provide for the same again as at the year end of the succeeding year, which may sometimes lead to tax complications. 6.3 An argument was advanced that there will be no liability to deduct tax at source on the yearend provisions made as on 31.3.2012, since the same is reversed on 01.04.2012. From the discussions made in the preceding paragraphs with regard to the impact of the accounting entries relating to Provision for expenses, it would be clear that this argument is fallacious and devoid of merits. We also noticed that, it is only for the sake of convenience, the modern days practice of reversing the yearend Provision for expenses as at the beginning of succeeding year is followed. We have also seen that the effect/impact on the Net profit/loss of the preceding year in which provision was initially created or the effect/impact on net profit/loss of succeeding year would remain the same under book rule method of accounting practice and modern days accounting practice. The net result of making provision for expenses is that the expenses pertaining to a particular year shall be claimed in that year only even in the absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision such as Sec. 194(2) exists in Sec. 194H Explanation (ii) of the Act which applies when the payment made is in the nature of commission or brokerage, in sec. 194J Explanation(c) when payment made is Fees for Technical Service and Sec. 195 Expln.-1 when payment is made to non-resident. The reason for introduction of provisions such as Sec. 194(2) of the Act has been explained in CBDT circular No.550 dated 1.1.1990 as follows:- 26.3 Under the existing provisions of section 193 of the Income-tax Act, tax has to be deducted at source by the person responsible for making any payment in the nature of interest on securities at the time of payment. The liability to deduct tax at source was being postponed by making a provision for such payment. In order to prevent the postponement of liability to deduct tax and payment to the credit of the Central Government, the Finance Act has provided that tax will be deducted at source either at the time of credit to the account of the payee or at the time of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have incurred the expenditure. In absence of one of one of these criteria, if provision is made, it is not an ascertained liability but an unascertained liability, which does not satisfied the concept of accrual of expenditure. There may be reasons for receiving the bills by the service providers after certain time lag but that does not absolve the assessee from the liability of deduction of tax at source. In the present case the provision is made under the specified head, provision is also made to on certain basis thereby ascertaining the amount. It is not the case of the assessee that it has made an ad hoc provision. Thus it cannot be said that the payee is not identified. Therefore, according to us, the tax is required to be deducted on the year-end provisions made by the assessee which are ascertained liabilities. No doubt, the learned CIT(A) has given the benefit of the assessee if tax is deducted by the assessee subsequently. Therefore we do not find any infirmity in the order of the learned CIT(A) in holding that assessee has failed to deducted tax at source on year-end provisions. Thus the order of the learned CIT(A) is upheld to that extent. 7.4 Following the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion uses the term any income by way of interest . The interest payment may constitute expenditure in the hands of the person making the payment, while it may constitute income in the hands of the payee/recipient. Since the section uses the term any income by way of interest , in our view, it should be viewed from the angle of the recipient/payee and not from the angle of the person making the payment. Accordingly, the accounting/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 of the Act. So long as the interest amount constitutes income in the hands of recipient, the payer shall be liable to deduct tax at source on the interest amount so paid. Accordingly, even if the payer has disallowed the expenditure u/s 40(a)(ia) of the Act or did not claim the same as expenditure at all, he shall still be liable to deduct tax at source u/s 194A of the Act on the interest amount so paid, if the said payment is liable for tax deduction at source. We notice that the Mumbai bench of Tribunal, in the case of Pfizer Ltd (supra) did not consider the express provisions contained in sec. 194A of the Act. Further we notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40(a)(i) 40(a)(ia) of the Act, cannot in proceedings u/s 201(1) of the Act, be heard to say that there was no default under Chapter XVII-B of the Act is therefore correct. The disability u/s 40(a)(i) 40(a)(ia) of the Act and the liability u/s 201(1) of the Act cannot be different and they arise out of the same default. Once there is disallowance u/s 40(a)(i) 40(a)(ia) of the Act, it is not possible to argue that there was no liability under Chapter XVII-B of the Act and therefore the provisions of Sec.201(1) of the Act will not be attracted. 8.3 It can be noticed that the co-ordinate benches have, in the case of Agreenco Fibre Foam (P) Ltd (supra) and also in the case of IBM India P Ltd (supra), expressed the view that the disallowance u/s 40(a)(i) and 40(a)(ia) and the demand raised u/s 201 are two different consequences. In this connection, we may advert to various provisions of the Act. We may notice that the Income tax Act provides for different types of consequences for the failure to deduct tax at source or failure to remit the tax so deducted either in full or in part. The consequences provided under the Act are (a) disallowance of expenses should be made u/s 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disallowance u/s 40(a)(i)/40(a)(ia), he will not be exonerated from the liability u/s 201 of the Act. 8.5 Another pertinent point to be noted is that the disallowance required to be made u/s 40(a)(i)/40(a)(ia); penalty to be levied u/s 271C/271CA are the direct liabilities, i.e., liabilities which are directly imposed upon the assessee due to his failure. On the contrary, the demand raised u/s 201(1)/201(1A) is vicarious liability imposed upon an assessee. The tax is deducted at source from the amount payable to the payee, i.e., it is not paid in discharge of assessee s own liability. The role of an assessee is that of Pipe line role, i.e., TDS is deducted from the amount payable to a vendor and remitted to the credit of the Government on behalf of the vendor. For example, if an assessee is liable to pay interest amount of ₹ 10,000/- to a person named Mr. A and the said payment is liable for tax deduction at source @ 10%, then the assessee shall pay ₹ 9000/- to Mr.A and deposit ₹ 1000/- to the credit of Government as TDS on behalf of Mr.A. Thus the TDS amount is actually a form of recovery of tax from the payee Mr.A and it belongs to him only. Hence Mr.A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision for expenses have been created by the assessee for the liability towards (a) Contract expenses covered by sec. 194C (b) Professional fees covered by sec. 194J (c) Rent expenses covered by sec. 194I (d) Commission expenses covered by sec.194H (e) Payments to non-residents covered by sec. 195 The Ld CIT(A) rejected this submission of the assessee with the following observations:- 4.2 With regard to the appellant s claim that the identity of the recipients was not known and, hence, it could not have deducted tax on the provisioned amounts, I find that the facts and probability largely belie this claim. It is commonsensical to expect that the appellant s creation of the provision for the services received by the year end to obtain a correct view of its profit at year end was not based on any arbitrary or whimsical estimate. It is clear from the provisioned expenses that the estimate has followed from preexisting contracts with known parties for identified services and, hence, the accounting of amounts liable to be paid to these parties for services availed as per known terms of transaction is a specific exercise which carries with it the statutory res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other provisions of the Act, which is not permissible. Therefore, it can be seen that the decision of the Hon‟ble Delhi High Court has been rendered in the peculiar facts prevailing in that case. (b) The next decision is of Hon‟ble Karnataka High Court in the case of Karnataka Power Transmission Corporation Ltd (383 ITR 59). In this case, the assessee before Hon ble High Court of Karnataka made provision towards interest payable on delayed payments. However, subsequently assessee noticed that interest is not payable in view of understanding reached between the parties. Accordingly it reversed the provision entries in books of account. Under these set of facts, the Hon ble Karnataka High Court held that the interest which partakes the character of income alone is liable for deduction of tax at source u/s 194A of the Act. (c) The Mumbai bench of Tribunal, in the case of Industrial Development Bank of India vs. ITO (2007)(107 ITD 45) has examined the aspect of liability to deduct tax at source, when the payees could not be identified. The question before Mumbai bench of Tribunal was whether or not Section. 193 of the Act requires tax deducted at source in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability to pay the interest for the period till the end of the relevant accounting year, the assessee certainly does not know for sure as to who will be entitled to receive this interest In our humble understanding, conceptually, liability of TDS is in the nature of a vicarious or substitutionary liability which presupposes existence of a principal or primary liability. Chapter XVII-B is titled 'Collection and recovery of tax--Deduction of tax at source and this title also indicates that the nature of TDS obligations are obligations for collection and recovery of tax. Under the IT Act, tax is on the income and it is in the hands of the person who receives such income, except in the case of dividend distribution tax which is 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 featu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sine qua non for a vicarious tax deduction liability that there has to be a 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 on the income and in the hands of the person who earns that income. In this view of the matter, TDS mechanism cannot be put into practice until identity of the person in whose hands, it is includible as income can be ascertained. 18. It is indeed correct that Explanation to Section. 193 lays down that even when an income is credited to any account 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, but the fact that the credit to any account is to be deemed to be credit to the payee's account also presupposes that payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. To illustrate, in the example that we had taken in para 4 above as long as assessee knows the iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (B)], which, inter alia, states as follows: I am directed to refer to your letter ref. 3A 13-21/1460 dt. 23rd May, 1996, on the above subject, and to say that difference between the issue price of ₹ 5,000 and face value of ₹ 25,500 is in the nature of interest subject to provisions of Sections 193/193A. Although the company would be making provisions for interest on year to year basis in their books of account, there will be no deduction of tax at source in each such year as the payee is not known. (Emphasis, italicised in print, supplied by us now) We agree with the merits of the stand so taken by the CDBT. The deduction of tax at source can only be effected when payee is known. As far as the situation before us is concerned, the regular return bonds being transferable on simple endorsement and delivery and the relevant registration date being a date subsequent to the closure of books of account, the assessee could not have ascertained the payees at the point of time when the provision for interest accrued but not due was made. Accordingly, no tax was required to be deducted at source in respect of the provision for interest payable made by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed basis, following five scenarios may emerge at the time of making actual payments in the succeeding year:- (a) The actual payment made in the succeeding year is more than the provision amount. (b) The actual payment made in the succeeding year is less than the provision amount (c) No payment is required to be made, since it was ascertained that there is no liability to pay the Amount. Accordingly, entire amount of provision is reversed in the succeeding year. (d) Paymenthas not yet been made in the succeeding year, even though the liability is acknowledged. However, the TDS was deducted/paid in the succeeding year. (e) Payment has not yet been made in the succeeding year, even though the liability was acknowledged. However TDS was not deducted in the succeeding year. Under Scenario (a) and (b) above, if the assessee has deducted tax at source at the time of making payment, then the provisions of sec.201(1) will not be attracted as held by us in the preceding paragraphs. However, since there was delay in deduction and payment 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. In this scenario, there will no liability to deduct tax at source from the amount of provision created as on 31.3.2012, as it was found that the said amount is not payable at all to anyone. Hence this provision amount cannot be linked to any payee, in which case, there will not be any liability to deduct tax at source from the provision amount. Hence, in our view, the provisions of sec.201 will not be applicable in this scenario. 10.4 The fourth scenario is that the payment was not yet made in the succeeding year, even though the liability to pay was acknowledged. However, Tax was deducted at source and paid in the succeeding year. In this scenario, the interest u/s 201(1A) shall be payable as discussed in Scenario 1 above. 10.5 The fifth scenario is that the payment was not yet made in the succeeding year, even though the liability was acknowledged. TDS was also not deducted in the succeeding year. In this scenario, the assessee would be liable to pay demand u/s 201(1) of the Act equivalent to the TDS amount 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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