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TMI Blog2022 (4) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... Act for not deducting tax at source from those expenses. The details of expenses which did not suffer TDS was given by the tax auditor in the Tax Audit report and the same has been extracted by Ld CIT(A) as under:- Nature of Expenses Sec. under which TDS to be made Total Amount TDS Amount Contractors 194C 7,25,74,287 14,51,486 Others 195 15,55,589 1,64,270 Professional 194J 7,03,72,227 70,37,223 Rent 194I 36,000 360 Commission 194H 8,23,90,844 82,39,084 Total 22,69,28,947 1,68,92,423 3. Since there was failure on the part of the assessee to deduct tax at source from the above said expenses, the AO initiated proceedings u/s 201(1) & 201(1A) of the Act. Before the assessing officer, the assessee filed a copy of tax audit report in Form 3CD and did not furnish any other details that were called for by the AO. Hence the AO considered the assessee as an "assessee in default" in terms of sec. 190. As per the information available with the AO, the amount tax deductible at source was Rs. 1,68,91,563/- and accordingly, he raised demand of Rs. 1,68,91,563/- u/s 201(1). He also charged interest of Rs. 40,53,975/- u/s 201(1A) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries Co. (249 ITR 141) and submitted that the TDS provisions would apply only when the payees have an enforceable right to receive payments from the service recipients. Accordingly, it was argued that there is no requirement of deducting tax at source from year-end provisions, since it may or may not result in "sums chargeable to tax" in the hands of recipient. 4.3 The decision rendered by Ld CIT(A) on applicability of TDS provisions upon yearend provisions and the liability of the assessee to be treated as 'assessee in default' u/s 201(1) is summarised below:- (a) The tax auditors have confirmed that there is liability to deduct TDS from the year end provisions and the assessee has also accepted the same by making disallowance u/s 40(a)(i) and 40(a)(ia) of the Act. (b) As per Sub-sec. (2) of sec. 194C, Explanation (ii) to sec. 194I, Explanation (c) to Sec. 194J, Explanation (iv) to Sec. 194H and Explanation 1 to sec. 195, even if the sums referred to under these provisions are credited to any other 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined the claim of the assessee and accordingly, gave following directions to the AO:- (a) In those cases, where TDS has already been deducted, the demand u/s 201(1) will lead to a double demand for the same amount. (Even though, the Ld CIT(A) did not direct the AO to delete the demand raised u/s 201(1), the same can be understood). (b) However, where the amount of provision created was higher than the invoiced amount, then the balance would not have suffered tax. Hence the default for non-deduction of tax at source is to be limited only to the surplus amount over and above the invoiced amount. (c) Since the liability for tax deduction at the time of making provision has been affirmed, the levy of interest u/s 201(1A) will naturally follow. (d) The Ld CIT(A) noticed that the AO has levied interest upto the date of the order. Hence he directed the assessing officer to re-compute interest upto the date on which the tax was deducted/paid. 5. Still aggrieved, the assessee has filed this appeal before us. The assessee's contentions are that (a) The assessee is not liable to deduct tax at source from the "yearend provisions" (b) The Provision for expenses included the commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 "book rule" of accounting practice is to debit 'Provision for Expenses' account with the payment made in the succeeding year. Since the expenses are provided for on estimated basis, four possible situations shall arise in the succeeding year, when payment is made. We explain the same by way of illustrations:- Let us assume that provision for expenses is made for Rs. 1000/- towards a particular expense as on 31.3.2012 and the above said amount was determined on estimated basis. (a) Situation I:- In the subsequent year, the assessee receives bill for Rs. 1000/-. Accordingly, when the payment is made "Provision for expenses" account shall be debited with Rs. 1000/-. In this situation, the Provision for expenses a/c will show NIL balance after the payment. There will not be any impact on the Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount. 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 created and also on the 'profit and loss' of the succeeding year would be the same as discussed in the preceding paragraph, if the actual payment is made before the closure of the succeeding year. There will be a difficulty/risk in this modern days practice if the actual payment is not made before the closure of accounting year of the succeeding year against an acknowledged liability. In that kind of situation, the assessee should provide for the same again as at the year end of the succeeding year, which may sometimes lead to tax complications. 6.3 An argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 co-ordinate 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 which tax had to be deducted at source is at the time of credit to the Account of contractor or payment in cash or cheque, whoever is earlier. Sub-section (2) of Sec. 194-C lays down that 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 provision such as Sec. 194(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determined only if, there is a recipient identified of the sum, there is a methodology available for working out the amount payable by the assessee to the recipient, there is a corresponding liability arising out of the existing contract or customs by the assessee with the recipient. If generally these ingredients are not satisfied assessee cannot be said to have incurred the expenditure. In absence of one of one of these criteria, if provision is made, it is not an ascertained liability but an unascertained liability, which does not satisfied the concept of accrual of expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 crediting shall be deemed to be credit of such income to the account of payee and the provisions of this section shall apply accordingly." A plain reading of above provision clearly shows that the person responsible to pay the interest is liable to deduct tax at source at the time of credit or payment, whichever is earlier. It is pertinent to note that the section uses the term "any income by way of interest". The interest payment may constitute expenditure in the hands of the person making the payment, while it may constitute income in the hands of the payee/recipient. Since the section uses the term "an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 person referred to in section 200 does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. The contention of the learned DR that the assessee having admitted its default u/s 40(a)(i) & 40(a)(ia) of the Act, cannot in proceedings u/s 201(1) of the Act, be heard to say that there was no default under Chapter XVII-B of the Act is therefore correct. The disability u/s 40(a)(i) & 40(a)(ia) of the Act and the liability u/s 201(1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 assessee in default". Further this explanation makes it very clear that this liability is "without prejudice to any other consequences which he may incur". The assessee can escape from the disallowance to be made u/s 40(a)(i)/40(a)(ia), if he is not treated as an "assessee in default". In our considered view, the converse is not true, i.e., if the assessee makes disallowance u/s 40(a)(i)/40(a)(ia), he will not be exonerated from the liability u/s 201 of the Act. 8.5 Another pertinent point to be noted is that the disallowance required to be made u/s 40(a)(i)/40(a)(ia); penalty to be levied u/s 271C/271CA are the direct liabilities, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 complying with the provisions of TDS. He prayed that the Tribunal may clarify the law on the practical difficulties. We shall address them one by one. The first difficulty pointed out by him is that the payees are not identifiable in respect of certain expenses, even though the same has been included in the yearend provisions. We have noticed earlier that the provision for expenses have been created by the assessee for the liability towards (a) Contract expenses covered by sec. 194C (b) Professional fees covered by sec. 194J (c) Rent expenses covered by sec. 194I (d) Commission expenses covered by sec.194H (e) Payments to non-residents covered by sec. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deducted that would amount to recovery of tax without corresponding income being assessed in the hands of any assessee. In the absence of ascertainable assessee, the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax u/s 4 of the Act, but takes a form of a separate levy, independent of other provisions of the Act, which is not permissible. Therefore, it can be seen that the decision of the Hon‟ble Delhi High Court has been rendered in the peculiar facts prevailing in that case. (b) The next decision is of Hon‟ble Karnataka High Court in the case of Karnataka Power Transmission Corporation Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see'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 transferable, it cannot ascertain as to who will be the registered bondholder as on 15th May of that year. The assessee cannot be expected to have clairvoyance of knowing, as on 31st March, as to who will own the bonds on 15th May of that year. Therefore, in such a situation while the assessee certainly has the liability to pay the interest for the period till the end of the relevant accounting year, the assessee certainly does not know for sure as to who will be entitled to receive this interest...... In our humble understanding, conceptually, liability of TDS is in the nature of a vicarious or substitutionary liability which presupposes existence of a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ductor 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 payment or credit, with a corresponding right to recover such tax payable from the person to whom credit is afforded or payment is made. It would be thus seen that the whole scheme of TDS 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 on the income and in the hands of the person who earns that income. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 Section. 193 cannot be invoked in a case where the person who is to receive the interest cannot be identified at the stage at which the provision for interest accrued but not due is made. This position is also accepted by the CBDT, as evident from its letter dt. 5th July, 1996 addressed to the Tata Iron and Steel Co. Ltd. (Letter No. 275/126/96 IT (B)], which, inter alia, states as follows: I am directed to refer to your letter ref. 3A 13-21/1460 dt. 23rd May, 1996, on the above subject, and to say that difference between the issue price of Rs. 5,000 and face value of Rs. 25,500 is in the nature of interest subject to provisions of Sections 193/193A. Although the company would be making prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity 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 made on estimated basis and hence there might be difference between the estimate so made and the actual payments finally made. Under these circumstances, the question that arises is how the provisions of sec.201 could be applied. In our view, the Ld A.R has raised a valid point. Since the yearend provisions are made on estimated basis, following five scenarios may emerge at the time of making actual payments in the succeeding year:- (a) The actual payment made in the succeeding year is more than the provision amount. (b) The actual payment made in the succeeding year is less than the provision amount (c) No payment is required to be made, since it was ascertained that there is no liability t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision 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 Rs. 800/- only. Accordingly, the TDS liability will also on the above said amount actually paid and consequently, the interest u/s 201(1A) shall be leviable on Rs. 800/- . 10.3 The third scenario is that no payment was required to be made in the succeeding year, since it was ascertained that there was no liability to pay the Amount. Accordingly, entire amount of provision was reversed in the succeeding year. In this scenario, there will no liability to deduct tax at source from the amount of provision created as on 31.3.2012, as it was found that the said amount is not payable at all to anyone. Hence this provision amount cannot be linked to any payee, in which case, there will not be any liability to deduct tax at source from the provision amount. Hence, in our view, the provisions of sec.201 will not be applicable i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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