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TMI Blog2022 (8) TMI 1169X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 amount of expense or the name/ details of payees since invoices determining actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the month only for the purpose of accounts closing as of 31.3.2014. The assessee submitted that the tax is not deducted on these provisions made on estimate basis as they cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision created from the TDS point of view and made submissions as to why tax is not deductible against each line item of the said break-up details the extract of which is as given below - S. No. Particulars Amount Interest u/s 201(1A) Remarks Page No. of PB 1. Provision created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-14 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 ld DR therefore submitted that the assessee cannot now deny the tax deduction liability on the provisions. With regard to interest u/s. 201(1A), the ld. DR relied on the decision in the case of IBM India P. Ltd. (supra). 10. We have considered the rival submissions and perused the material on record. The coordinate Bench of the Tribunal in the case of Biocon Ltd. (supra) has considered ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash 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 shall be credited. The "book rule" of accounting practice is to debit 'Provision for Expenses' account with the payment made in the succeeding year. Since the expenses are provided for on estimated basis, four possible situations shall arise in the succeeding year, when payment is made. We explain the same by way of illustrations:- Let us assume that provision for expenses is made for Rs.1000/- towards a particular expense as on 31.3.2012 and the above said amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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- 04-2012. Thereafter the expenses shall be booked as and when the invoice is accounted/payment is made in the succeeding year. This modern days practice is followed only for convenient sake only. It can be noticed that the impact on the 'profit and loss' of the year in which provision for expenses was created and also on the 'profit and loss' of the succeeding year would be the same as discussed in the preceding paragraph, if the actual payment is made before the closure of the succeeding year. There will be a difficu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 provisions shall apply even to "Provision for expenses" created at the yearend was examined by the co-ordinate bench in the case of IBM India Private Ltd vs. The ITO (TDS) (ITA Nos. 749 to 752/Bang/2012 dated 14.05.2015) and the said question was decided as under:- "29. Sec. 194C applies when payment is made to contractor. The point of time at which tax had to be deducted at source is at the time of credit to the Account of contractor or payment in cash or cheque, whoever is earlier. Sub-section (2) of Sec. 194-C lays down that where any sum referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 sum to other parties. The claim of the assessee is that it is maintaining its books of account on accrual basis of accounting and therefore the amount is required to be provided for. When the expenditure incurred by the assessee, the corresponding liability definitely arises for payment of such expenditure. The amount of expenditure incurred can be determined only if, there is a recipient identified of the sum, there is a methodology available for working out the amount payable by the assessee to the recipient, there is a corresponding liability arising out of the existing contract or cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 mode, whichever is earlier, deduct income tax thereon at the rates in force." Explanation:- For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "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 payee and the provisions of this section shall apply accordingly." A plain reading of above provision clearly shows that the person responsible to pay the interest is liable to deduct tax at sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deduction. Sec. 200(1) appears in Chapter XVII-B of the Act and it provides that any person deducting any sum in accordance with the foregoing provisions of this Chapter i.e., Chapter-XVII-B shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Sec.201(1) of the Act is triggered when if any such person referred to in section 200 does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven 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, and where the assessee has also failed to pay such tax directly, then, such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default within the meaning of sub-section (1) of section 201, in respect of such tax. In view of the above said explanation given under sec.191 of the Act, the provisions of sec.201 are triggered when the assessee is "deemed to be an assessee in default". Further this explanation makes it very clear that this liability is "without prejudice to any other consequences which he may incur". The assessee can escape from the disallowance to be made u/s 40(a)(i)/40(a)(ia), if he is not treated as an "assessee in default". In our considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 deducted tax at source at the time of accounting the invoices/bills or at the time of making payment in the succeeding year. It was further held that the assessee would be liable to pay interest u/s 201(1A) of the Act, in view of the delay in deduction/remittance of TDS amount. Following the above said decision, we also hold so. 9.1 The Ld A.R expressed the view that there are certain practical difficulties involved in complying with the provisions of TDS. He prayed that the Tribunal may clarify the law on the practical difficulties. We shall address them one by one. The first difficulty pointed out by him is that the payees are not identifiable in respect of certain expenses, even though the same has been included in the yearend provisions. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the High Court with UCO Bank. The High Court dealt with the question as to whether the bank is liable to deduct TDS on the interest income credited to the above said Fixed deposit. The bank's case was that the Registrar General was merely a custodian of the funds on behalf of the High Court and the Registrar General per se was neither an assessee nor he was beneficiary entitled to receive any interest on the fixed deposits. Under these facts, the Hon'ble Delhi High Court held that if TDS is deducted that would amount to recovery of tax without corresponding income being assessed in the hands of any assessee. In the absence of ascertainable assessee, the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax u/s 4 of the Act, but takes a form of a separate levy, ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the year, the assessee's liability for 'interest accrued but not due' because interest is payable only once annually on a date other than the date of closure of accounts but the assessee will have no means to find out as to who could be the recipients of 'interest due but not payable' in respect of 'regular return bonds' because while assessee's liability to pay interest @ 16 per cent is certain and is to be made as on 31st March, i.e., on the end of the relevant accounting year, the bonds in question being freely transferable, it cannot ascertain as to who will be the registered bondholder as on 15th May of that year. The assessee cannot be expected to have clairvoyance of knowing, as on 31st March, as to who will own the bonds on 15th May of that year. Therefore, in such a situation while the assessee certainly has the liability to pay the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 deductions at source the tax 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 is 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 TDS liability is a vicarious liability to pay tax on behalf of the person who is to be beneficiary of the payment or credit, with a corresponding right to recover such tax payable from the person to whom credit is afforded or payment is made. It would be thus seen that the whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. It is a sine qua non for a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 Section. 193, that since the credit is not to the account of Mr. X, the tax deduction liability cannot be invoked. The Explanation itself makes it clear that even when such a practice is adopted the credit will be deemed to be credit to the payee's account. In our considered view, fiction embodied in the Explanation is only applicable in situations in which tax deduction liability is sought to be escaped by crediting interest to some other account other than that of recipient of interest. In our considered view, 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, as evident from its letter dt. 5th July, 1996 addressed to the Tata Iron and Steel Co. Ltd. (Letter No. 275/126/96 IT (B)], which, inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 fail, if the payees are not identifiable. However, it is the responsibility of the assessee to prove that payees are not identifiable with credible reasons. Accordingly, if the assessee, in the present case, is able to prove that the payees could not be identified in respect of particular expenses, then the mechanism provided under Chapter XVII-B would fail and hence the AO is not entitled to demand tax u/s 201(1) and interest u/s 201(1A) in respect of those expenses. 10. The second practical difficulty expressed by Ld A.R is that the yearend provisions are made on estimated basis and hence there might be difference between the estimate so made and the actual payments finally made. Under these circumstances, the question that arises is how the provisions of sec.201 could be applied. In our view, the Ld A.R has raised a valid point. Since the yearend provisions are made on estimated basis, following five scenarios may emerge at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Hence the liability to deduct TDS shall arise on the amount of actual payment only. We derive support in this regard from the decision rendered by Mumbai bench of Tribunal in the case of Industrial Development Bank of India (supra), wherein it was held that "It is a 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." In this scenario, the principal tax liability upon the recipient will be on the amount of Rs.800/- only. Accordingly, the TDS liability will also on the above said amount actually paid and consequently, the interest u/s 201(1A) shall be leviable on Rs.800/-. 10.3 The third scenario is that no payment was required to be made in the succeeding year, since it was ascertained that there was no liability to pay the Amount. Accordingly, entire amount of provision was reversed in the succeeding year. In this scenario, there will no liability to deduct tax at source from the amount of provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... split the provisions made under various categories from TDS perspective such as :- i. Provision created for payments where parties are not identifiable ii. Provision was created but no invoices received from the vendors iii. Provision created for payments made for purchase of material iv. Provision created for parties where certificate for NIL deduction of tax was issued v. Provision created for parties covered under section 172 of the Act vi. Provision created for parties covered under section 194C(6) of the Act vii. Provision created for parties to whom payment was made on receipt of Invoice in subsequent year after deduction of TDS 13. The above break-up of provision for expenses needs to be examined factually based on evidences in order to decide the applicability of TDS provisions. We therefore remit this issue back to the AO for verification of each of the above line item of the break-up of details based on evidences and examine the issue factually for deciding the applicability of TDS provisions. The AO is directed to keep in mind the ratio laid down by the coordinate bench of the Tribunal in the case of Biocon Ltd. (supra) which is followed in assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X
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