2016 (4) TMI 164 - AT - Income Tax

TDS liability - the provisions were made at the year end is reversed in the beginning of the next accounting year - Held that - it cannot be said that income had accrued in the hands of the payee. - there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end. Hence, the assessee company cannot be treated as assessee in default for not deducting tax at source - Decided in favour of assessee

Issues Involved:
1. Legality of the CIT(A)'s order.
2. Justification of the AO's addition of Rs. 95,48,855.
3. Liability of the assessee to deduct tax at source u/s 201(1).
4. Interpretation of the term 'credit' in sections 195, 194C, 194J.
5. Double disadvantage principle under sections 40(a)(i) or 40(a)(ia) and 201(1).

Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The assessee challenged the order of the CIT(A), LTU, Bangalore, arguing that it was "bad in law to the extent challenged thereon." The Tribunal examined the grounds raised and the legal basis for the CIT(A)'s conclusions.

2. Justification of the AO's Addition of Rs. 95,48,855:
The AO had made an addition of Rs. 95,48,855, which the assessee contested. The Tribunal analyzed whether the AO was justified in making this addition based on the facts and circumstances of the case. The Tribunal noted that the assessee company made suo-mottu disallowances under sections 40(a)(i) and 40(a)(ia) for the assessment year 2012-13, where no TDS was made. The Tribunal considered the details provided by the assessee and the AO's reasoning for the addition.

3. Liability of the Assessee to Deduct Tax at Source u/s 201(1):
The CIT(A) upheld the action of the ITO(TDS) in treating the assessee as in default u/s 201(1). The Tribunal examined whether the assessee had a liability to deduct tax at source from amounts credited to the provision account, even for items subsequently written back. The Tribunal referred to the Supreme Court's judgment in M/s GE India Technology Centre P. Ltd. Vs. CIT, emphasizing that "the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee." Since the provisions were reversed at the beginning of the next accounting year, indicating no income accrued to the payee, the Tribunal concluded that there was no liability to deduct TDS.

4. Interpretation of the Term 'Credit' in Sections 195, 194C, 194J:
The assessee argued that the term 'credit' in sections 195, 194C, 194J refers to constructive credit and that voluntary disallowance of certain items ab initio effaces the obligation to deduct TDS. The Tribunal considered this argument and the relevant legal provisions. It concluded that mere entries in the books of accounts do not establish the accrual of income in the hands of the payee, as supported by the Supreme Court's ruling in CIT Vs M/s Shoorji Vallabhdas & Co.

5. Double Disadvantage Principle under Sections 40(a)(i) or 40(a)(ia) and 201(1):
The assessee contended that it should not be subjected to double disadvantage for a single failure, arguing that if it voluntarily disallows items under sections 40(a)(i) or 40(a)(ia) and pays tax, it should not be liable to pay tax again under section 201(1). The Tribunal agreed with this principle, noting that the suo-mottu disallowance under section 40(a)(ia) does not absolve the responsibility of deducting tax at source but also recognized that the income did not accrue to the payee, thus negating the need for TDS.

Conclusion:
The Tribunal concluded that the assessee company had no liability to deduct TDS on provisions made at the year-end, as no income accrued to the payee. Therefore, the assessee could not be treated as 'assessee in default' for not deducting tax at source. The appeal filed by the assessee company was allowed, and the order was pronounced in open Court on 1st March 2016.

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