2016 (7) TMI 735 - AT - Income Tax

TDS liability - penal action under section 201(1) and interest under 201(1A) - Held that - The assessee expenses were debited on the accrual basis on monthly estimate in a common basket and not to the account of specific party/payees. As pleaded that the provisioning of expenses did not result in any constructive credit to a specific Payee and the purpose was to manage reporting on monthly results for monitoring and tax was deducted on receipt of bills/invoices from the parties after rendering of services and only after due approval of services, the credit was given to the payee account and TDS was accordingly deducted and deposited in the government account. The system was regularly followed by the assessee and the Department has also accepted this practice in assessment year 2010-11. The contention of the Revenue that assessee followed cash system of accounting in respect of the expenses in reference is not correct as the expenses have been accounted for as and when ascertained and TDS was also deducted at that point of time. Moreover, we find that the Department itself in the assessment year 2010-11 has accepted the accounting followed in respect of the expenses and no penal action under section 201(1) and interest under 201(1A) of the Act was considered. The learned Commissioner of Income Tax(Appeal) has followed the finding of the Tribunal in the case of Pfizer Ltd Vs. ITO(TDS) (2012 (11) TMI 164 - ITAT MUMBAI) wherein the Tribunal has held that since the payee was not identifiable in the case at the time of making the provision, no TDS was required to be made and further the entire provision had been written back the next year and the actual amounts paid/credited were subjected to TDS as per the detailed statement filed before the authorities, on which there was no dispute - Decided against revenue.

Summary

Issues Involved:
1. Deletion of order under section 201(1) and 201(1A) of the Income Tax Act.
2. Applicability of TDS provisions on accrual-based expenses in a SAP environment.
3. Consistency in the method of accounting followed by the assessee.
4. Identification of payees at the time of making provisions for expenses.

Issue-wise Detailed Analysis:

1. Deletion of Order under Section 201(1) and 201(1A):
The Revenue challenged the deletion of the order under section 201(1) and 201(1A) of the Income Tax Act by the Commissioner of Income-tax (Appeals). The Assessing Officer (AO) had declared the assessee in default for a sum of ?23,03,672/- for short deduction of TDS and interest of ?11,05,762/- under section 201(1A). The Commissioner of Income-tax (Appeals) deleted these orders, leading to the Revenue's appeal.

2. Applicability of TDS Provisions on Accrual-based Expenses:
The assessee argued that provisions for expenses were made without identifying the actual payee and that tax was deducted and deposited upon actual receipt of bills/invoices. The Commissioner of Income-tax (Appeals) accepted this argument, noting that the assessee operated in an automated ERP (SAP) environment and followed a consistent accrual system of accounting. The expenses were recognized monthly on a best estimate basis and credited to a common basket, not to specific payee accounts.

3. Consistency in the Method of Accounting:
The assessee maintained that there was no change in the method of accounting regularly followed. Expenses were debited on accrual, and tax was deducted on actual booking of expenses. The Commissioner of Income-tax (Appeals) noted that this system was consistently followed by the assessee and accepted by the Department in the assessment year 2010-11.

4. Identification of Payees at the Time of Making Provisions:
The Commissioner of Income-tax (Appeals) and the Tribunal found that the payees were not identifiable at the time of making provisions for expenses. The Tribunal referred to the decision in the case of Pfizer Ltd. vs. ITO (TDS), where it was held that no TDS was required if the payee was not identifiable at the time of making the provision. The Tribunal also noted that the entire provision was written back the next year, and actual amounts paid/credited were subjected to TDS.

Conclusion:
The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), finding no infirmity in the order. The appeal of the Revenue was dismissed, confirming that tax was not deductible on provisions made without identifying the payee. The consistent method of accounting followed by the assessee and accepted by the Department in subsequent years was a significant factor in this decision.

Result:
The appeal of the Revenue was dismissed, and the decision was pronounced in the open court on 10th June 2016.