2022 (4) TMI 29 - AT - Income Tax

Deductibility of tax at source on year-end provisions - No TDS remitted to the Government account - assessee submitted before the AO that provisions were made on ad hoc basis for the services received during the month of March and these provisions were reversed in the subsequent month i.e. in the month of April. Therefore tax was not deducted at source - As per DR even the amounts credited to the provision account instead of the party account by the assessee are clearly within the liability for the tax deduction under the provisions of the Act - HELD THAT - As relying on M/s.Toyota Kirloskar Motor Pvt. Ltd 2021 (4) TMI 276 - KARNATAKA HIGH COURT that the demand u/s 201(1) shall not be raised when the assessee subsequently deducts tax at source at the time of payment. We also notice that the Tribunal has visualised various other possibilities also and dealt with them in accordance with law. Following the above said decision we set aside the orders passed by Ld CIT(A) and restore all the issues to the file of the assessing officer for re-examining the issue in the light of principles - Appeal of the assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Whether the assessee is liable to deduct tax at source on year-end provisions made without identifying the payees.
2. Whether the disallowance under Section 40(a)(i) and 40(a)(ia) of the Income Tax Act exonerates the assessee from liability under Section 201(1) and interest under Section 201(1A).
3. Practical difficulties in complying with TDS provisions for year-end provisions and their implications.

Issue-Wise Detailed Analysis:

1. Liability to Deduct Tax at Source on Year-End Provisions:
The assessee, a company engaged in manufacturing and sale of various equipment, created year-end provisions for expenses on an ad hoc basis without identifying specific payees and did not deduct tax at source on these provisions. The TDS officer (AO) treated the assessee as 'assessee in default' under Section 201(1) for non-deduction of tax and raised a demand along with interest under Section 201(1A). The CIT(A) upheld this view, rejecting the assessee's argument that the provisions were contingent liabilities and the identity of the recipients was unknown.

The Tribunal, following the Karnataka High Court's direction, re-examined whether the liability to deduct tax at source arises when year-end provisions are made without identifying payees. It was noted that under Sections 194C, 194I, 194J, and 194H, TDS provisions apply even if the amounts are credited to a 'suspense account' or any other account by any name. The Tribunal cited the Bangalore bench's decision in Biocon Ltd vs. DCIT, which held that TDS provisions are triggered for amounts credited to 'Provision for expenses account' due to specific provisions in TDS sections.

2. Disallowance Under Section 40(a)(i) and 40(a)(ia):
The assessee argued that since it had disallowed the year-end provisions under Section 40(a)(i) and 40(a)(ia) in its return, there should be no demand under Section 201(1). The Tribunal rejected this argument, citing the Cochin bench's decision in Agreenco Fibre Foam (P) Ltd vs. ITO and the Bangalore bench's decision in IBM India Private Ltd vs. ITO, which clarified that disallowance under Section 40(a)(i) and 40(a)(ia) does not absolve the assessee from liability under Section 201. The Tribunal emphasized that disallowance and demand under Section 201 are independent consequences of non-deduction of tax.

3. Practical Difficulties and Implications:
The Tribunal addressed practical difficulties in complying with TDS provisions for year-end provisions. It acknowledged scenarios where actual payments might differ from provisions and provided guidance on handling such situations:
- If actual payment exceeds the provision, interest under Section 201(1A) is payable on the provision amount.
- If actual payment is less than the provision, interest is payable on the actual payment amount.
- If no payment is required, there is no TDS liability.
- If payment is delayed but TDS is deducted later, interest is payable.
- If payment and TDS are both delayed, demand under Section 201(1) and interest under Section 201(1A) apply.

The Tribunal restored the matter to the AO to recompute the liability under Section 201(1) and interest under Section 201(1A) based on these principles. It also directed the AO to examine the applicability of Section 195 for non-resident commission payments.

Conclusion:
The Tribunal set aside the CIT(A)'s orders and remanded the issues to the AO for fresh examination in light of the principles discussed, ensuring compliance with TDS provisions and addressing practical difficulties. The appeal was allowed for statistical purposes.