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TMI Blog2015 (6) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 2.0 The learned CIT(A) erred on the facts and in law in confirming that the provisions of section 194C, 194H, 194J, 194I & 195 of the income tax act are applicable to provision made for various expenses in the year ending 31.03.2007 (AY 2007-08), without appreciating the fact that appellant has disallowed the expenses as per Provisions of section 40(a)(ia) and 40(a) of the income Tax Act in the computation of income. The AO had accepted the disallowances in assessment order made u/s 143(3) of the Income tax Act. The learned CIT(A) ignored the facts that once the amount is disallowed u/s 40(a)(ia) and 40(a) of the income Tax Act, the same cannot be liable for TDS u/s 194C, 194H, 194J, 194I & 195. The learned CIT(A) failed to consider the case law cited in appeal proceedings 3.0 The learned CIT(A) erred in ignoring the facts that TDS has been deducted in subsequent financial year and TDS compliance was made at that point of time. The CIT(A) also ignored that TDS provisions were not applicable in few cases, provisions has been reversed subsequently and the identity of the payee at the time of making provision was not available. The learned CIT(A) failed to consider the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act was charged at Rs. 1,18,588/-. 6. Further, the Assessing Officer noted that the Auditor had pointed out in the Audit Report that the assessee had not deducted tax at source on certain payments, for which full details of expenses and date of credit / payment was not there in the Audit Report. The Assessing Officer show caused the assessee that in the absence of such details, it was not possible to correctly quantify the TDS deductibility, but not deducted and the interest to be charged under section 201(1A) of the Act. The assessee was asked to furnish the details in respect thereof. Though, there was some explanation filed by the assessee before the Assessing Officer, but complete details were not furnished and even though the Assessing Officer asked the assessee to furnish proper details, but no compliance was made to the same. In view thereof, the Assessing Officer held the assessee to be in default in respect of non-deduction of tax at source out of several heads of expenses as tabulated at page 5 of the assessment order. The Assessing Officer consequently held the assessee to be in default for nondeduction of tax at source at Rs. 21,97,825/- and charged interest under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. The CIT(A) noted that there were conflicting views on the issue and reliance was placed on the ratio laid down by Cochin Bench of the Tribunal in Agreenco Fibre Foam (P) Ltd. Vs. ITO (TDS) (2013) 37 CCH 033 (Cochin Trib) order dated 16.08.2013. In view thereof, the CIT(A) held that the Assessing Officer was justified in initiating the action under sections 201(1) and 201(1A) of the Act and the liability of Rs. 52,76,643/- was determined on account of non-deduction of tax at source under section 201(1) of the Act and interest charged under section 201(1A) of the Act for the financial year, was confirmed. 8. The assessee is in appeal against the order of CIT(A). 9. The learned Authorized Representative for the assessee pointed out that the assessee was a listed company and was following mercantile system of accounting, under which, it makes certain provisions for expenses, sometimes on party basis and sometimes expenditure-wise. The bills in respect of such provisions are received in the next year and necessary entries were then made to the respective accounts. The plea of the learned Authorized Representative for the assessee before us was that on such provision being ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A of the Act , but the payees were not identified. The learned Authorized Representative for the assessee fairly pointed out that in the case of assessee, the payees were not identified at the close of the year but the provision for the same was being made since the assessee was following mercantile system of accounting. 10. The learned Departmental Representative for the Revenue placing reliance on the orders of authorities below pointed out that even if the figures declared by the assessee at pages 15 and 42 are reconciled, there is still a difference which has not been reconciled by the assessee. 11. In rejoinder, the learned Authorized Representative for the assessee pointed out that in case there was any difference which has not been reconciled by the assessee, then the assessee is prepared to pay tax on such amounts along with interest. 12. We have heard the rival contentions and perused the record. The issue arising in the present appeal is whether where the assessee had made provision for various expenses for the year ending 31.03.2007 and had disallowed the said expenditure in the computation of income, in view of the provisions of section 40(a)(ia) of the Act, then ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance under section 40(a)(i) of the Act for assessment year 2007-08, which reads as under:- "Statement showing disallowance u/s 40(a)(i) & TDS payment Business Unit Provision on which TDS not deducted Total 194I 194C 194J 194H 195 Large Engines 19142089 3928710 19919233 2841278 45831310 Small Engines 80000 1020000 214000 1314000 ACD Pune 1039137 225940 1265077 Medium Engines 272864 272864 Valve EOU 36452 36452 Fuel Oil 201324 92966 294290 Power 175000 175000 80000 21711866 4636616 19919233 2841278 49188993 Less: As per TAT 126877 Amount disallowed 80000 21584989 4636616 19919233 2841278 49062116 TDS required to be deducted (As per TAR) 17952 483499 260114 1117469 318791 2197825 Bills passed subsequently & TDS deducted 12819106 1350504 13795063 2841278 30805951 Provision reversed & Excess / Short Provision 6595845 2578206 61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen can the provisions of section 201(1) of the Act be attracted and for such default in non-payment of demand so raised, can interest be charged under section 201(1A) of the Act. 17. We find that similar issue of liability of the assessee to deduct tax at source in respect of payments to persons whose identity was not known when the provision for such expenditure was made by the assessee, it was held that there was no requirement to deduct tax at source in respect of such provision. The said proposition was laid down by the Mumbai Bench of Tribunal in IDBI Vs. ITO (supra), which has been applied by another Mumbai Bench of Tribunal in Pfizer Ltd. Vs. ITO (supra) and it was held as under:- "8. We have considered the issue. There is no dispute with reference to the fact that assessee made provision for expenses to an extent of Rs. 10,01,98,459/- on about 23 items in the books of account. There is also no dispute to the fact that entire provision so made was disallowed in the computation under the head 'tax deductible but not deducted on provisions as on 31st March, 2007' in the computation of income. Therefore, the entire provision so made was disallowed under section 40(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that the assessee did not deduct tax in terms of provision so made though in terms of the provisions of section 193, particularly read with Explanation thereto, it was required to deduct tax at source from the credit to 'interest payable account' and deposit the same with the Government. The Assessing Officer was of view that the assessee knew the identity of all the bondholders as on 31-3-1994 because it was maintaining a register of bondholders, and, therefore, it could not be said that the assessee did not know the names of the persons to whom interest was to be credited. The Assessing Officer, therefore held that the assessee did not comply with provisions of section 193 and imposed penalty under section 201 upon the assessee on account of non-deduction of tax at source in respect of interest liability credited to 'interest payable account* He also imposed the penalty under section 221 upon the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order". It was held that "the liability of tax deduction at source is in the nature of a vicarious or substitutionary liability, which presupposes existence of a principal or primary liability. Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductions at source, the tad deductor has to furnish to the person to whose account such credit is given or to whom such payment is made or the cheque or warrant it issued which presupposes that at the stage of tax deduction the tax deductor knows the name of person to whom the credit is to be given, though whether by way of credit to the account of such person or by way of credit to some other account. This again shows that tax deduction at source liability is a vicarious liability to pay tax on behalf of the person who is to be beneficiary of the payment or credit, with a corresponding right to recover such tax payable from the person to whom credit is afforded or payment is made. Thus, the whole scheme of tax deduction at source proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. It is a sine qua non for a vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income because the tax is on the income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 221 upon assessee. A Coordinate Bench of the Mumbai Tribunal in the case of ITO v. Titagarh Steel Ltd (2001) 79 ITD 532, dealing with the consequences of nondeduction or short deduction of tax at source, had held that post 1-4-1989, penalty for nondeduction of tax at source or short deduction of tax at source can only be imposed under section 271C. The CBDT itself had in Circular No.551, dated 23-1-1990 accepted that until section 271C was inserted in the Act, 'no penalty was provided for failure to deduct tax at source'. It was not only merely a question of mentioning a wrong section, which could perhaps be covered by recourse to section 292B, it was also important to bear in mind that the impugned penalty was levied by an Officer of the rank of the Income Tax Officer, whereas penalty under section 271C could only have been levied by an Office of the rank of the Deputy (now Joint) Commissioner. The ITO was, from this point of view, not competent to impose the impugned penalty. Further, in the instant case, even according to the revenue, the default was on account of deduction of tax at source. Such a default could not be visited with penalty under section 221. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and reasons stated above assessee's grounds are allowed." 18. The CIT(A) on the other hand has relied on the ratio laid down by the Cochin Bench of the Tribunal in Agreenco Fibre Foam (P) Ltd. Vs. ITO (supra), wherein a contrary view had been taken by the Tribunal. While considering the decision of Tribunal in Pfizer Ltd. Vs. ITO (supra), it was observed by the Cochin Bench of Tribunal that the assessee in Pfizer Ltd. Vs. ITO (supra) was having branches at multifarious locations and innumerable transactions and hence, it was following the practice of making provision for expenses at the end of the year. The obvious reason for which was that it did not receive all the bills by the time the accounts were finalized. The adhoc provision so made was reversed in the succeeding year in which actual expenses were booked under specific heads and TDS compliance was also made at that time. The Cochin Bench of Tribunal considered the liability to deduct tax at source in relation to the assessee before before them on the interest payment prescribed under section 194A and observed that the said section used the term 'any income by way of interest' and it held that the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen that the objective of provisions of sec. 201 is only to compensate the Government for the failure of an assessee to deduct or pay the TDS amount. Thus, it can be seen that the provisions of sec. 40(a)(ia) and sec. 201 operate on different objectives. We have already noticed that the provisions of sec. 40(a)(ia) do not override the provisions of sec.201 of the Act. Accordingly, it was held that the assessee was liable to deduct tax at source on interest payments, even if it has not claimed the same as deduction while computing its total income, in which case the revenue was entitled to initiate proceedings u/s 201 for such failure." 19. We find that the facts of the present case before us are similar to the facts before the Mumbai Bench of Tribunal in Pfizer Ltd. Vs. ITO (supra), where the assessee had not received the complete information in respect of the payees because of innumerable transactions and adhoc provision was made in the books of account at the close of the year; subsequently, the said adhoc provision was reversed in the succeeding year and the expenditure on actual basis was booked in the books of account on the receipt of the complete information and compliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made in assessment year 2007-08 of Rs. 4.91 crores, the assessee in the succeeding had passed bills totaling Rs. 3.08 crores, on which tax was deducted at source and had reversed entries to the extent of Rs. 1.53 crores i.e. totaling Rs. 4.60 crores. The balance of approximately Rs. 30 lakhs has not been explained by the assessee and the learned Authorized Representative for the assessee fairly conceded that the said difference could not be reconciled and in view of the said default, the assessee was prepared to pay the tax deductible on such provision. Similarly, in assessment year 2008-09 as against the provision of Rs. 2.75 crores, the assessee had passed bills totaling Rs. 32 lakhs and had reversed entries to the extent of Rs. 2.29 crores and has failed to reconcile the balance of Rs. 14 lakhs, hence the assessee is in default for non-deduction of tax in respect of the above said balance amounts and the Assessing Officer is directed to work out the demand under section 201(1) of the Act and also charge interest under section 201(1A) of the Act. The grounds of appeal raised by the assessee in both the appeals are thus, partly allowed. 20. In the result, both the appeals of t ..... 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