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TMI Blog2022 (4) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... TD 45). 5. The ld.CIT(A) did not accept the contentions of the assessee that provision made is only on ad hoc basis and therefore TDS provisions are not attracted, as the liability was already created for services already received by vendors in terms of contract with identified parties and the liability was also recognized in the books of account. The ld.CIT(A) also placed reliance on the decision of the Cochin Bench in the case of Agreenco Fibre Foam Pvt. Ltd. vs. ITO (35 taxmann.com 155) to uphold the order of the AO. However, ld.CIT(A) directed the AO to reduce the amount of tax on TDS on the amounts on which subsequently TDS was deducted. 6. The assessee preferred an appeal before the Tribunal against the order of the CIT(A). The coordinate Bench of the Tribunal in these cases (ITA No.1195/B/2014 & 474/B/2016) for the assessment year 2012-13 & 2013-14 upheld the order of the CIT. 7. Aggrieved by the order of the Tribunal, the assessee filed an appeal before the Karnataka High Court where the following substantial question of law was raised "Whether the order of the Tribunal is perverse in law as it failed to appreciate that the provisions were created on head-wise expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and tax is not deducted on the provisions as they are estimated on adhoc basis. These provisions are reversed in April and the invoices are accounted as and when they are received. It was submitted that as the provisions are created on adhoc basis without reference to the vendor it was not possible for the company to provide vendor-wise details. The AO proceeded to treat the assessee as being assessee in default u/s.201(1) and also charged interest u/s.201(1A) for the delayed remittance of tax up to the date of the assessment order. The CIT(A) confirmed the order of the AO placing reliance on the decision of the Hon'ble ITAT Cochin Bench in the case of Agreenco Fibre Foam Pvt Ltd (Supra). 11. Before us the Ld AR reiterated the submissions made before the AO and CIT(A). The Ld AR also placed reliance on the following decisions in support of the claim (i) M/s. Toyota Kirloskar Motors (P) Ltd vs ITO (ITA No.245/2018) (ii) Karnataka Power Transmission Corporation Ltd vs DCIT (TDS) 383 ITR 59 (Kar) (iv) M/s Bosch Limited vs ITO - ITAT Bangalore (ITA No.1583/Bang/2014) (v) TE Connectivity India Pvt. Ltd., vs ITO LTU (TDS) (ITA No.3/Bang/2015) 12. The Ld DR supported the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise has a present obligation as a result of past event. (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation." Hence, while finalising the accounts as at the year end, it is a usual accounting practice to ascertain the obligations that have arisen as a result of past events, which may involve probable cash outflow. All those obligations are recognised as expenses and provided for. Making a provision will be an easy task, if the assessee is aware of the quantum of liability. For example, audit fee might have been fixed in the AGM and hence it is easy to provide for the same as at the year end. On the contrary, if the assessee has received services of an advocate and he has not sent his bill by the year end, then the assessee shall be constrained to make an estimate of the amount that may be charged by an advocate and provide for it in the books of account as at the year end. 6.1 The accounting practice followed in this regard is that the Concerned expenses account shall be debited and "Provision for expenses" account shall be credited. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impact on the not get shifted to the next year when the payment is actually made. The profit and loss account of succeeding year will not be affected by the amount of provision made, if the actual payment made is equal to or in excess of the provision amount. However, if there is no requirement of making any payment or if the payment made is less than the amount provided for, then the Profit and Loss account of the succeeding year shall be affected to the extent of the amount transferred from "Provision for expenses a/c" to the credit of Profit and loss account. 6.2 However, in the present days, the above said "book rule" practice is not followed. The modern days accounting practice is to reverse the provision for expenses so created as at the yearend immediately on the first day of succeeding year. For example, yearend provisions created as on 31.3.2012 shall be reversed on 01-04-2012. Thereafter the expenses shall be booked as and when the invoice is accounted/payment is made in the succeeding year. This modern days practice is followed only for convenient sake only. It can be noticed that the impact on the 'profit and loss' of the year in which provision for expenses was creat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, whether called 'Suspense Account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such account to the account of the payee and the provisions of TDS shall apply accordingly. For the sake of convenience, we extract below provisions of sec.194C(2):- "Where any sum referred to in sub-section (1) is credited to any account whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly." Similar clause is available in all other provisions requiring deduction of tax at source. 7.2 The question as to whether the above said clause available in various TDS provisions shall apply even to "Provision for expenses" created at the yearend was examined by the coordinate bench in the case of IBM India Private Ltd vs. The ITO (TDS) (ITA Nos. 749 to 752/Bang/2012 dated 14.05.2015) and the said question was decided as under:- "29. Sec. 194C applies when payment is made to contractor. The point of time at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interglobe Aviation Ltd vs.ACIT (ITA No.5347/Del/2012 dated 07-01-2020), wherein it was held as under:- "19. We have carefully considered the rival contentions and perused the orders of the lower authorities. Assessee has made provision for Airport expenses of ₹ 32314535/-, Airport Handling expenses ₹ 14115000/-, Crew Accommodation expense ₹ 694000/-, IT Communication charges ₹ 7021580/- and provision for other expenses ₹ 74335080/-. Admittedly assessee has not deducted tax and source on the above sum stating that it is yearend provision and the payees are not identified. It is not the case of the assessee that these are we are not ascertained liabilities. According to the provisions of the income tax act the tax is required to be deducted as and when assessee becomes responsible for payment of above sum to other parties. The claim of the assessee is that it is maintaining its books of account on accrual basis of accounting and therefore the amount is required to be provided for. When the expenditure incurred by the assessee, the corresponding liability definitely arises for payment of such expenditure. The amount of expenditure incurred can be dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA Nos.1689 & 1690/Bang/2017 dated 31.1.2022). 8.1 We notice that the very same contention was urged before Cochin bench of Tribunal in the case of Agreenco Fibre Foam (P) Ltd vs. The ITO (TDS)(ITA No.165/Coch/2012 dated 16th August 2013) and it was rejected with the following observations:- "5.2 The liability to deduct tax at source on the interest payments is prescribed u/s 194A of the Act. Sub-section (1) of sec. 194A reads as under:- 194A. (1) Any person, not being an individual or a Hindu Undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force." Explanation:- For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... os.749 to 752/Bang/2012 dated 14.05.2015) and it was rejected with the following observations:- "27. We have carefully considered rival submissions. Provisions of Sec.40 of the Act start with a non-obstante clause and provides that, "Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession." Sec.40(a)(i) and 40(a)(ia) of the Act lists of certain items of expenditure and categories payees as "Residents" "Non Residents". In respect of the items of such expenditure there if there is an obligation to deduct tax at source under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid during the previous year, then the expenditure cannot be claimed as a deduction. Sec. 200(1) appears in Chapter XVII-B of the Act and it provides that any person deducting any sum in accordance with the foregoing provisions of this Chapter i.e., Chapter-XVII-B shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Sec.201(1) of the Act is triggered when if any such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sec.40(a)(i)/40(a)(ia) shall apply. Thus the proviso given under sec.40(a)(i)/40(a)(ia) itself makes it very clear that liability u/s 201 is independent of the above said disallowances. 8.4 Our view that each of the consequences is independent of each other is also supported by the Explanation given under Sec. 191, which reads as under:- Explanation.-For the removal of doubts, it is hereby declared that if any person including the principal officer of a company,- (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act, and where the assessee has also failed to pay such tax directly, then, such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default within the meaning of sub-section (1) of section 201, in respect of such tax. In view of the above said explanation given under sec.191 of the Act, the provisions of sec.201 are triggered when the assessee is "deemed to be an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Development Bank of India vs. ITO (2007)(107 ITD 45), which are going to discuss infra. 8.6 In view of the foregoing discussions on legal provisions, following the decisions rendered by the co-ordinate benches of Tribunal in the case of IBM India Pvt Ltd (supra) and Agreenco Fibre foam P Ltd (supra), we hold that the disallowance made u/s 40(a)(i)/40(a)(ia) will not absolve the assessee from the liability u/s 201 of the Act, when an assessee is deemed to be an assessee in default. 9 The Ld A.R submitted that the assessee has deducted tax at source when the payments are actually made in the succeeding year. The co-ordinate bench in the case of IBM India P Ltd (supra) has held that the demand raised u/s 201(1) is liable to be cancelled, if the assessee has deducted tax at source at the time of accounting the invoices/bills or at the time of making payment in the succeeding year. It was further held that the assessee would be liable to pay interest u/s 201(1A) of the Act, in view of the delay in deduction/remittance of TDS amount. Following the above said decision, we also hold so. 9.1 The Ld A.R expressed the view that there are certain practical difficulties involved in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax deductor cannot ascertain the payee who is the beneficiary of credit of tax deduction at source, the mechanism of Chapter XVII-B cannot be put into service. It was further held that if the payee is identifiable and the amount payable to him is ascertainable, then the assessee would be required to deduct tax at source in respect of such provision. We shall discuss some more decisions:- (a) The first decision is that of Honourable Delhi High Court in case of UCO Bank (369 ITR 335). The facts prevailing in this case are that the Court had directed one of the parties to the suit to deposit certain sums in the High Court. The amount was invested in Fixed deposit by the Registrar General of the High Court with UCO Bank. The High Court dealt with the question as to whether the bank is liable to deduct TDS on the interest income credited to the above said Fixed deposit. The bank's case was that the Registrar General was merely a custodian of the funds on behalf of the High Court and the Registrar General per se was neither an assessee nor he was beneficiary entitled to receive any interest on the fixed deposits. Under these facts, the Hon'ble Delhi High Court held that if TDS is deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent annually in respect of regular return bondholders. (b) The interest is payable on 9th June of each calendar year, except in the year of maturity, when interest is payable on maturity. (c) The interest, except at the time of maturity, is paid to the person whose name is registered in the records of the assessee-company as on 15th May of each calendar year. (d) The bonds are transferable by endorsement and delivery, and the assessee does not, in any way, control such transfer of ownership. Let us now appreciate the impact of the above terms and condition so far the issue in appeal before us is concerned. As on 31st March of the year, the assessee's liability for 'interest accrued but not due' because interest is payable only once annually on a date other than the date of closure of accounts but the assessee will have no means to find out as to who could be the recipients of 'interest due but not payable' in respect of 'regular return bonds' because while assessee's liability to pay interest @ 16 per cent is certain and is to be made as on 31st March, i.e., on the end of the relevant accounting year, the bonds in question being freely trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability and the principal liability is of the person who is taxable in respect of such income. Section 199 makes it even more clear by laying down that the credit for taxes deducted at source can only be given to the person from whose income the taxes are so deducted. Therefore, when tax deductor cannot ascertain beneficiaries of a credit, the tax deduction mechanism cannot be put into service. Section 202 lays down that TDS provisions are without any prejudice to any other mode of recovery from the assessee, which again points out to the tax deduction liability being vicarious liability in nature. Section 203(1) then lays down that for all tax deductions at source the tax 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 is 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 TDS liability is a vicarious liability to pay tax on behalf of the person who is to be beneficiary of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced w.e.f. 1st June, 1989, was apparently to take care of a situation in which instead of crediting the account of the payee, some other proxy account was credited, to avoid the TDS liability being invoked. For example, if at the end of the accounting year, the assessee is to make a provision for interest of ₹ 10,000 payable to Mr. X, but he creates the provision by way of credit to 'interest payable account'. In such a situation 'interest payable account' is de facto a proxy account for Mr. X, either fully or to the extent of the amount payable to Mr. X. However, it could have been argued, in the absence of the Explanation to Section. 193, that since the credit is not to the account of Mr. X, the tax deduction liability cannot be invoked. The Explanation itself makes it clear that even when such a practice is adopted the credit will be deemed to be credit to the payee's account. In our considered view, fiction embodied in the Explanation is only applicable in situations in which tax deduction liability is sought to be escaped by crediting interest to some other account other than that of recipient of interest. In our considered view, Explanation to Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct tax at source, in respect of provision for 'interest accrued but not due', in respect of regular return bonds made on 31st March, 1994. When there was no obligation of deduct tax at source, there cannot be any question of levy of penalty or interest. The appellant, therefore, must succeed." It can be noticed that the decision, in all these cases has been rendered on the peculiar facts of the case. 9.3 We also notice that in all these decisions, the assessee therein has established the fact that the payees are not identifiable. Hence there should not be any dispute to the proposition that the TDS mechanism will fail, if the payees are not identifiable. However, it is the responsibility of the assessee to prove that payees are not identifiable with credible reasons. Accordingly, if the assessee, in the present case, is able to prove that the payees could not be identified in respect of particular expenses, then the mechanism provided under Chapter XVII-B would fail and hence the AO is not entitled to demand tax u/s 201(1) and interest u/s 201(1A) in respect of those expenses. 10. The second practical difficulty expressed by Ld A.R is that the yearend provisions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made. The TDS was deducted at the time of credit or at the time of making actual payment. Since yearend provision was made on 31.3.2012 in this case, the date on which TDS was deductible shall be 31.3.2012. The assessee shall be liable to pay interest from that date to the date of actual deduction/payment as per the provisions of sec.201(1A) of the Act on the amount of "actual payment" made. For example, the provision made as on 31.3.2012 was ₹ 1000/- and the actual payment made was ₹ 800/-. The assessee would be reversing the excess provision of ₹ 200/- in the succeeding year. Hence the liability to deduct TDS shall arise on the amount of actual payment only. We derive support in this regard from the decision rendered by Mumbai bench of Tribunal in the case of Industrial Development Bank of India (supra), wherein it was held that "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." In this scenario, the principal tax liability upon the recipient will be on the amount of ₹ 800/- only. Accordingly, the TDS liability will also on the above said amount actually pa ..... 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