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2016 (5) TMI 1222 - AT - Income TaxTDS liability on provisions made as at the end of the accounting year - Held that - The undisputed fact is that the provisions, made at the end of the accounting year are reversed in the beginning of the next year. No payees are identified. The exact amount of liability also cannot be quantified. The provisions are made merely on for Management Information System. In our considered opinion, liability to deduct tax at source does not arise. Assessee-company is not liable to deduct tax at source as no income has accrued in the hands of the payee. - Decided in favor of assessee
Issues Involved:
1. Legality of the order passed by the Commissioner of Income-tax (Appeals) [CIT(A)]. 2. Assessee's default status for not deducting and remitting tax on provision for expenses. 3. Nature of the provision for expenses and its impact on TDS liability. 4. Contingent nature of the provision for expenses and withholding tax obligations. Detailed Analysis: 1. Legality of the Order Passed by CIT(A): The assessee contended that the order passed by the CIT(A) was contrary to the facts, bad in law, and liable to be quashed. The tribunal examined the grounds of appeal and found that the CIT(A) had upheld the TDS Officer's decision without adequately considering the nature of the provisions made by the assessee. 2. Assessee's Default Status for Not Deducting and Remitting Tax: The CIT(A) upheld the TDS Officer's action, confirming that the assessee was an "Assessee in Default" for not deducting TDS on provisions for expenses created in the financial statement as of March 31 and reversed in the subsequent month. The tribunal, however, found that the provisions were made for Management Information System purposes and reversed at the beginning of the next year, indicating no actual liability or identifiable payees at the time of provision creation. 3. Nature of the Provision for Expenses and Its Impact on TDS Liability: The tribunal noted that the provisions were made on an ad hoc basis, no payees were identifiable, and the liability had not crystallized in the hands of the assessee. It referenced the Supreme Court's decision in M/s GE India Technology Centre P. Ltd. Vs. CIT, which held that TDS liability arises only when there is an accrual of income in the hands of the payee. The tribunal concluded that mere entries in the books of accounts do not establish the accrual of income, and thus, the liability to deduct TDS does not arise. 4. Contingent Nature of the Provision for Expenses and Withholding Tax Obligations: The tribunal agreed with the assessee's argument that the provisions were contingent in nature. It cited the Karnataka High Court's decision in Karnataka Power Transmission Corporation Ltd. vs. DCIT, which held that if no income is attributable to the payee, there is no liability to deduct tax at source. The tribunal concluded that since the provisions were reversed and no income accrued to the payees, the assessee was not liable to deduct TDS. Conclusion: The tribunal allowed the appeal filed by the assessee, holding that the assessee-company was not liable to deduct tax at source as no income had accrued in the hands of the payee. Consequently, the assessee-company could not be treated as an "assessee in default" for not deducting tax at source. The appeal was allowed, and the order was pronounced in the open court on May 25, 2016.
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