2016 (11) TMI 668 - AT - Income Tax

Addition u/s 40a (ia) - non deduction of tds on commission expense - non-crystallization and liability being unascertained entry in the book - Held that - Section 40a(ia) provides that as and when the assessee makes the payment of relevant TDS, the expenditure will be allowed in the year of payment. Besides, the ld. CIT(A) has given clear findings that the provision was made on whims and fancies of the assessee without any proper basis and even the genuineness of the expenditure; therefore, the ld. CIT(A) has disallowed the expenditure. In this case, the simple question is non-crystallization and liability being unascertained entry in the books at the whims and fancies of the assessee, which cannot be an allowable expenditure and having made book entries claiming the expenditure it was legal obligation of the assessee to deduct the TDS and failure thereof will render the expenditure disallowable in clear terms of Section 40a(ia). The provision of commission payment claim by the assessee is totally unascertainable, uncrystallized and fanciful. It does not assume the character of ascertained mercantile liability. Even in case of mercantile liability, Section 40a(ia) clearly mandates that the expenditure cannot be allowed in the absence of corresponding TDS payment in Government treasury. - Decided against assessee

Summary

Issues:
- Interpretation of provision of section 40a(ia) regarding TDS on commission expense
- Application of mercantile system of accounting in claiming commission expense

Analysis:

Issue 1: Interpretation of provision of section 40a(ia) regarding TDS on commission expense

The primary issue in this case revolved around the applicability of section 40a(ia) concerning the deduction of TDS on a commission expense of ?26 lacs. The Assessing Officer (AO) contended that TDS should have been deducted from the commission amount as it exceeded the threshold specified in Section 194H. The AO observed that the accounting practice of debiting the commission expenses at the year-end and then reversing the entry in the subsequent year indicated an attempt to defer income tax liability. The AO invoked Section 40a(ia) to disallow the expenses. The assessee argued that since the payees were unknown, TDS could not be deducted, citing precedents where TDS was not required for provisions where payees were unidentifiable. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the provision made for commission payable was contingent and not an allowable deduction. The Commissioner emphasized that the liability had not crystallized, making the provision non-deductible under any accounting method.

Issue 2: Application of mercantile system of accounting in claiming commission expense

The assessee claimed to follow the Mercantile System of Accounting and argued that the provision for commission was made on an estimate basis, aligning with the mercantile accounting principle. The assessee contended that as the exact details of payees were unknown, TDS deduction was not feasible. The assessee relied on past judgments and a CBDT clarification to support their position. However, the Commissioner found the provision to be unascertainable and not quantifiable, leading to disallowance of the expenditure. The Commissioner highlighted discrepancies in the assessee's submissions regarding commission payments made in subsequent years, indicating a lack of proper basis for the provisions. The Commissioner concluded that the provision of ?26 lacs towards commission was an inadmissible deduction. The Tribunal upheld the Commissioner's decision, emphasizing that the provision did not represent an ascertained mercantile liability and therefore could not be allowed without corresponding TDS payment, as mandated by Section 40a(ia).

In conclusion, the Tribunal dismissed the assessee's appeal, affirming the Commissioner's decision to disallow the provision for commission payable as a deductible expense due to non-compliance with TDS requirements under section 40a(ia) and the unascertainable nature of the liability.