Deduction of tax at source – Condition precedent – Mere entries in accounts – No accrual of income and no liability to deduct tax at source

Deduction of tax at source – Condition precedent – Mere entries in accounts – No accrual of income and no liability to deduct tax at source

The assessee is a joint venture and is a subsidiary of Toyota Motor Corporation, Japan. It is engaged in manufacturing and sale of passenger cars and multi-utility vehicles. The assessee follows the mercantile system of accounting and as per its accounting policies, at the end of the financial year, i. e., 31st March of every year, the assessee makes provision for marketing expenses, overseas expenses and general expenses on an estimated basis in respect of works contracts services which are in the process of completion but the vendor is yet to submit the bills to ascertain the closest amount of profits / loss. The aforesaid provision is made in conformity with Accounting Standard 29. Subsequently, as and when invoices are received from the vendors the invoice amount is debited to the provisions already made with corresponding credit at the respective vendor’s account. The assessee also deducts tax at source as required under the provisions of the Act and remits the same along with interest to the Government.

For the A.Y. 2012-13, the assessee had made a provision towards marketing, overseas and general expenses to the extent of Rs. 1114,718,613. However, at the time of filing of the return of income the provision which remained unutilised as per the books of accounts as on 30th April, 2012 and on 31st October, 2012 in respect of overseas and domestic payments, respectively, for an amount of Rs. 9,27,41,239 was not claimed as deduction u/s 40(a)(i) and (ia) and the same was offered to tax. Subsequent to filing of the return, the assessee received invoices from the vendors for the A.Y. 2012-13 and the amount mentioned in the invoices was debited to the provision already made with a corresponding credit to the respective vendors’ account. The amount indicated in the invoices for a sum of Rs. 5,589,454 was utilised against the provision and the deduction of tax at source along with interest was also discharged at the time of credit of the invoice amount to the account of the vendor. Subsequently, the amount which remained unutilised, i.e., a sum of Rs. 8,71,32,988 in the provision account after completion of negotiation / finalisation of services, was reversed in the books of accounts of the assessee. The assessee received a communication on 30th July, 2013 asking it to furnish details of computation of income, audit report in Form 3CD for the year ending 31st March, 2012 reflecting the details of disallowances made u/s 40(a)(i) and (ia). The assessee thereupon furnished the information vide communication dated 12th August, 2013.

The A.O. initiated the proceedings u/s 201 and also u/s 201(1A) and treated the assessee as assessee-in-default in respect of the amount made in the provision, which was reversed / unutilised for a sum of Rs. 8,71,32,988 and the amount of deduction of tax at source and interest on the aforesaid amount u/s 201(1A) was computed at Rs. 14,18,327 and Rs. 25,195 was levied for late remittance of tax deducted at source. Thus, a total sum of Rs. 17,10,879 was determined as payable by the assessee.

The Commissioner (Appeals) affirmed the order passed by the A.O. The Tribunal dismissed the appeal preferred by the assessee.

In appeal before the High Court, the assessee raised the following question of law:

‘Whether in the facts and circumstances of the present case, the Income-tax Appellate Tribunal was right in law in affirming the order of the Commissioner of Income-tax (Appeals) in treating the appellant as “assessee-in-default” u/s 201(1) for non-deduction of tax at source from the amount of Rs. 8,74,32,988 when such amount had not accrued to the payee or any person at all?’

The Karnataka High Court allowed the appeal and held as under:

‘i) In the instant case, the provisions were created during the course of the year and reversal of entry was also made in the same accounting year. The A.O. erred in law in holding that the assessee should have deducted tax as per the rate applicable along with interest. The authorities under the Act ought to have appreciated that in the absence of any income accruing to anyone, the liability to deduct tax at source on the assessee could not have been fastened and, consequently, the proceeding u/s 201 and u/s 201(1A) could not have been initiated.

ii) For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the Revenue.

iii) In the result, the impugned orders dated 31st October, 2017, 20th June, 2014 and 11th March, 2014 passed by the Tribunal, the Commissioner of Income-tax (Appeals) and the A.O., respectively, are hereby quashed. In the result, the appeal is allowed.’