Section 194H – Provisions of section 194H apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account.

The assessee-company was carrying on the business of manufacturing, purchase and sale of excavators, loaders, cranes, dumpers and spare parts etc. For the relevant assessment year, the assessee filed its return of income declaring income of Rs. 282,44,84,066/-. In the course of the assessment proceedings, the Assessing Officer (AO) observed that the assessee has debited a sum of Rs. 14,84,26,424 as sales commission, out of which a sum of Rs. 6,46,11,000/- relates to the provision made towards commission. The assessee was asked to explain as to how the provision has been made and on what basis it is worked out and as to why no TDS was made from this amount. The assessee explained that the provision was made on the basis of sales made during the year from different sales offices of the company and on the basis of communication received from these offices regarding commission payable on such sales. As to why no TDS was made from this amount, it was clarified that no TDS was made from the provision but as and when the commission payments were made in the subsequent year, TDS was made and remitted to the Government account.

The AO disallowed a sum of Rs. 6,46,11,000 u/s. 40(a) (ia) since according to him the provisions of section 194H were applicable and the assessee failed to comply with the same. Aggrieved, the assessee filed an appeal to CIT(A) who relying on the decision of the jurisdictional High Court in the case of ACIT vs. Motor Industries Co. (249 ITR 141) held that the amount credited by the assessee is only a provision and not actual payment of commission to the party and till the amounts are credited to the respective party’s account, it cannot be said that the same have become finally quantified and hence, the provisions of section 194H are not attracted. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

 The amount credited by the assessee is to the provision account and not to the respective agent’s accounts. Therefore, it is clear that the assessee has not made any payment to the agents. The provisions of section 194H would apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account. As rightly pointed out by the learned counsel for assessee, the agents would get vested right to receive the commission only when they fulfill the obligations under the agreement for commission. We find that the CIT(A) has properly appreciated the issue before deleting the addition made by the AO. In view of the same, we do not see any reason to interfere with the finding of the CIT(A) on this issue. This ground of appeal of the revenue was dismissed.