By PRADIP KAPASI I GAUTAM NAYAK I BHADRESH DOSHI Chartered Accountants
Issue for Consideration
Many
of the provisions casting obligation to deduct tax at source (‘TDS’) under
Chapter XVII-B require tax deduction at
the time of credit of the specified income or sum to the account of the payee
or at the time of payment, whichever is earlier.
Each
of the relevant provisions of TDS, by way of a deeming fiction, under an
Explanation, provide that when the
income or sum is credited to any account by any name in the books of account of
the person liable to pay it, such crediting shall be deemed to be credit of
such income or sum to the account of the payee and the provisions of the
relevant section shall apply accordingly.
A
question often arises as to whether tax is required to be deducted at the time
of making provision, in the books of account,
for several expenses at the end of the accounting year under the
mercantile system of accounting. While
a view has been taken in some cases that
tax is not required to be deducted at source where the payee is not
identifiable, there has arisen one more controversy even in respect of ad-hoc or
interim provisions made, in respect of liability payable to identified payees
in future. The issue that has arisen is, whether crediting the amount to the
provision account, in such cases, be
deemed to be credit to the account of the concerned payee attracting the
liability to TDS. The incidental issue also arises as to whether the reversal
of such provision in the subsequent period has any bearing in determining
applicability of TDS. Conflicting decisions have been rendered by the Bangalore
bench of Tribunal on this subject.
IBM
INDIA (P) LTD.’S CASE
The
issue first came up before the Bangalore bench of the Tribunal in the case of IBM
India (P) Ltd vs. ITO 154 ITD 497.
In this case, pertaining to assessment years 2005-06 to
2009-10, the assessee, a wholly owned
subsidiary of a U.S. based company, was following the mercantile system of
accounting. As a part of the global group accounting policy, the assessee had
to quantify its expenses every quarter, within 3 days of the end of each
quarter. The assessee made a provision in the books of account for expenses, on
such quantification, in respect of which
service/work had been provided/performed by the vendors in the relevant quarter but for which the invoices had not been
furnished or in respect of which the payments had not fallen due, recognising
the liability incurred. On the basis of scientific methodology, the assessee
estimated such expenses and created a provision for such expenses every quarter
within 3 days of the end of the quarter. At the time of creation of provision,
in this manner, it was not possible for the assessee to identify parties, or if
parties were identified, to arrive at the exact sum on which TDS was to be
deducted.
The
expenses were debited to the profit and loss account and the provisions were
credited to a provision account, and not to the vendor accounts, as those had
not fallen due for payment. In the subsequent financial year, the provision
entries were reversed and on receipt of invoices in respect of the respective
expenses, the same were recorded as liabilities due to the respective parties,
at which point of time taxes were deducted
at source. The provision so made was disallowed by the assessee itself
in terms of section 40(a)(i) and 40(a)(ia) while filing its return of income.
According
to the Assessing Officer, in respect of the provision so created by the
assessee in the books of account, tax was deductible at source and the assessee
by not deducting the tax has been in default and was liable to deposit the tax
and also for interest and penalty. In response to the show cause notice issued
u/s. 201(1) & 201(1A), the assessee submitted that invoices were not
received in respect of the underlying expenses, and therefore there was neither
accrual of expenditure nor was the payee identified, as the amount was not
credited to the account of the payee, but to a suspense account. There was no
accrual of expenditure in accordance with the mercantile system of accounting,
and therefore there was no obligation on its part to deduct tax at source. The
assessee took a stand that, though the
relevant provisions of law in Chapter XVII-B, did provide for the situation
where an amount was credited to a
“Suspense Account”, there should be a legal liability to pay, and the
payee should be known, and only then the obligation to deduct tax at source
arose. The Assessee also submitted that the provision entries were reversed in
the subsequent financial year(s) and necessary taxes were withheld at source at
the time of actual payment (when legal liability to pay arose and the identity
of the party was known).
The
Assessing Officer rejected the assessee’s arguments on the grounds that:
1. The
assessee did not explain as to how the expenses had been quantified;
2. When
no invoices were received, the booking of such expenses in the accounts and
claiming them as expenditure of the previous year was erroneous; and
3. The
procedure followed by the assessee, of reversing the entries and recording the liability
in its books of account when invoices were received, was contrary to the
accounting policy, because once expenditure was booked in the profit and loss
account, it could not be reversed;
4. There
was no clarification as to whether tax
was deducted on the whole of the provisional entries, so as to allow the
amount that was disallowed u/s.
40(a)(ia), in the year in which tax was
deducted and paid ;
5. The
procedure followed by the assessee might
have led to the allowing of the expenditure one year prior to the
incurring of the actual expenses;
6. The
details of the TDS made on such provisions made at the end of the year was also
provided by the assessee on sample basis, contending that the number of entries
were huge and hence could not be provided in full within a limited period;
giving rise to non-verification of deductions claimed.
The Assessing Officer treated the assessee
as an assessee in default for the taxes
not deducted at source, in respect of provision for expenses made in the books
of account, and also levied consequential interest.
The orders passed u/s. 201(1) and 201(1A)
were upheld by the CIT (A) for the following reasons:
1. Under
mercantile system of accounting, accrual of liability for any expenditure was
not dependent on receipt of invoice from the person to whom payment for
expenditure had to be made. The accounting practice followed by the assessee
was contrary to the mercantile system of accounting.
2. The
claim of the assessee that it created provision in the books of account on an
estimated basis in some cases, on a historical basis in one set of cases and by using some sort of arithmetical or
geometric progression in other cases, was not acceptable. The assessee had not
established its plea with concrete evidence. The assessee had full knowledge of
what was due to its vendors, sub-contractors, commission agents etc. Therefore,
there was no necessity to create provisions.
3. The
argument regarding chargeability to tax in the hands of the payee or the time
at which the payee recognised income in respect of the payment received from
the assessee was irrelevant.
Before the Tribunal, the assessee
contended that:
1. When
payee was not identified there could be
no charge u/s. 4(1) and therefore there could
be no obligation to deduct tax at source;
2. The
returns of TDS to be filed under the Income Tax Rules, 1962 contemplated
furnishing of names of payees.
3. Judicial
decisions recognise that there could be no TDS obligation in the absence of
payee.
4. If there was no income chargeable to tax in
the hands of the payee, there could be
no TDS obligation. TDS obligations arose only when there was
“Income”. TDS obligations did not arise on the basis of mere payment,
without there being income and corresponding liability of the person receiving
payment from the assessee to pay tax.
5. The
Assessee relied on CBDT Circular No. 3/2010 dated 2.3.2010, issued in the
context of the provisions of section 194A of the Act dealing with TDS
obligation of banks at the time of provision of monthly interest liability
under the Core Banking Solution software, where the CBDT had clarified that TDS
was not applicable at the time of such monthly provisioning.
6. Reliance
was also placed by the assessee on the Delhi High Court decision in the case of
UCO Bank vs. Union of India [2014] 369 ITR 335, where the Delhi High
Court had held that no tax was deductible on deposits kept by the Registrar
General of the High Court, since the ultimate payee was not known.
The Revenue argued that:
1. The
assessee on its own had disallowed the expenditure in question u/s. 40(a)(i)
& 40(a)(ia). Such disallowance arose only when there existed a liability to
deduct tax at source in terms of Chapter-XVII-B of the Act. The assessee having
on its own disallowed expenditure u/s. 40(a)(i) & 40(a)(ia), could not
later on turn around and say that there
was no obligation to deduct tax at source.
2. The
assessee did not account for expenditure on accrual basis but on receipt of
invoice which could not be the point of time at which accrual of
expenditure could be said to have
happened. The system of accounting followed by the assessee was not in tune
with the mercantile system of accounting.
3. When
the assessee credited suspense account for payments due to various persons,
such credit itself was treated as credit to the account of the payee by a
deeming fiction in the various provisions of Income tax Act. The assessee could
not therefore say that the payee was not identified. Even in such a situation,
the assessee had to comply with the TDS provisions.
4. The
method of accounting followed by the Assessee resulted in postponement of time
at which tax had to be remitted to the credit of the Government. It could be seen from the fact that the
assessee, in some cases, was liable to charge of interest u/s. 201(1A) for
about 84 months. The question whether the Assessee was indulging in a
deliberate exercise in this regard was irrelevant. The fact that the revenue
was put to loss by reason of the system of accounting followed by the assessee
and the fact that otherwise the money should have reached the coffers of the
revenue much earlier, was sufficient to uphold the levy of interest u/s.
201(1A) of the Act.
5. When
the Assessee argued that the payees were not identified, it was not open to the
assessee to also contend that there was no accrual of income in the hands of
the payee or that the payment was not chargeable to tax in the hands of the
payee in India.
6. The
CBDT circular No. 3/2010 was in the context of banks crediting interest on
fixed deposits of customers. The decisions rendered by the judicial forums
based on those circulars were not
relevant, as they were relevant only in the case of Banks and could not be
pressed into service in other cases, such as the case of the Assessee.
The Tribunal deleted the demand for
payment of taxes raised u/s. 201(1) as the tax that was deducted subsequently when the actual liability was
booked, was paid. However, it upheld the applicability of the provisions of TDS
at the time of making provision and the obligation to deduct tax thereon and
accordingly, levy of interest u/s.
201(1A) on account of delay on the part
of the assessee in complying with the TDS provisions. On the facts of the case,
the Tribunal noted that the assessee was fully aware of the payee, but
postponed credit to its account for want of receipt of invoice. Proceeding on
the basis that payees were known to the assessee, regarding applicability of
TDS on provision, the Tribunal held as under:
1. Once
the assessee had offered disallowance in respect of provision u/s. 40(a)(i) and
40(a)(ia), it was not possible to argue that there was no liability to deduct
tax at source on the same provision. The disability u/s. 40(a)(i) &
40(a)(ia), and the liability u/s. 201(1) could not be different and they arose
out of the same default;
2. The
liability to deduct tax at source existed when the amount in question was
credited to a “Suspense Account” or any other account by whatever
name called, which would also include a “Provision” created in the
books of account;
3. Since
the assessee had not established with concrete evidence that provision was made
on an estimated basis, it had full knowledge of amounts payable to vendors,
sub-contractors, commission agents, etc., and there was no necessity to
create a provision;
4. The
statutory provisions clearly envisaged collection at source de hors the
charge u/s. 4(1).
5. The
argument that TDS provisions operated on income and not on payment, in the
facts and circumstances of the case, was
erroneous. Section 194C & 194J used the expression “sum” and not
“income”. Further, section 194H & 194-I did not use the expression
“chargeable to tax”.
6. The
Tribunal further held the decision of the Bangalore bench in the case of DCIT
vs. Telco Construction Equipment Co. Ltd. ITA No. 478/Bang/2012 to be sub
silentio, and, therefore, not binding. The Delhi High Court decision in the
case of UCO Bank (supra) was also
distinguished on the ground that the assessee was fully aware of the payee in
the case before the Tribunal.
The Tribunal therefore confirmed the levy
of interest u/s. 201(1A).
BOSCH
LTD.’S CASE
The issue again came up before the
Bangalore bench of the Tribunal in the case of Bosch Ltd vs. ITO
TS-116-ITAT-2016.
This was a case relating to assessment
year 2012-13. The facts of this case were almost identical to the facts of
IBM’s case. The assessee was a company engaged in the business of manufacture
and sale of injection equipments, auto electric items, portable electric power tools, etc.
In respect of expenses amounting to Rs.1,96,84,115, a provision was created by
the company in its books and the same was disallowed under the provisions of section
40(a)(i)(ia) in computation of total income filed for the assessment year
2012-13. Out of Rs.1,96,84,115, no invoices were received for an amount of
Rs.1,79,36,713 and the said amount was
reversed in the beginning of the next accounting year. The assessee contended
that no tax was required to be deducted in respect of such amount for which no
invoices were received.
The contention of the assessee was not
accepted by the Assessing Officer by holding that the system of accounting
followed by the assessee was faulty and did not enable any verification. He
held that since the assessee company was following mercantile system of
accounting, tax should have been deducted on the provisions made. Accordingly,
the Assessing Officer held that the
assessee to be an ‘assessee in default’ u/s. 201(1) of the IT Act and demanded
tax and interest thereon.
The CIT (A) confirmed the action of the
Assessing Officer by holding that suo-moto disallowance under the
provisions of section 40(a)(ia) did not absolve the assessee from its
responsibility of deducting tax at source. However, the CIT (A) directed the
Assessing Officer to exclude those
amounts in respect of which TDS had been made on the dates on which invoices
had been raised.
Before the Tribunal, the assessee
submitted that, as regards the expenses for which the service provider or
vendor had not raised any invoices nor were they acknowledged by the assessee
company, it made a provision for such expenses on a scientific basis and such
provision was debited to its P&L account, in conformity with the provisions
of Accounting Standard 29- Provisions, Contingent Liabilities and Contingent
Assets (AS 29) issued by the Institute of Chartered Accountants of India
(ICAI). Such provision, which was mandatory as per AS 29, was reversed in the
beginning of the next accounting year.
It was argued that:
a. No
income had accrued to the payees and a mere provision was made in the books of
account at the year end. The very fact that the provision was reversed in the
beginning of the next accounting year showed that no income had accrued to the
payee and therefore, there was no liability to deduct TDS on the basis of mere
provision.
b. The
payees as well as the exact amount payable to them were not identifiable and
therefore, there was no liability to deduct tax at source.
c. The
existence/accrual of income in the hands of payee was a pre-condition to fasten
the liability of TDS in the hands of the payer;
d. The
provisions of section 195 stipulated that the payer had to deduct tax at source
at an earlier point of time, either at the time of crediting to the payee’s
account or at the time of payment of income to the payee. The phrase “whichever
is earlier” would mean that both the events i.e crediting the amount to the
account of payee and payment to the assessee must necessarily occur. Therefore,
when there was no payment made the question of deducting TDS at the time of
crediting did not arise.
Reliance was also placed on the CBDT’s
Instruction No.1215 (F.No.385/61/78 IT(B) dated 08-11-1978.
On behalf of the revenue, it was argued
that on a plain reading of section 195, the liability to deduct tax at source
had arisen the moment the amount was credited in the books of account,
irrespective of fact whether the amount was paid or not. It was further submitted that the provision of
taxing statutes should be construed strictly so that there was no place for any
inference.
The Tribunal took a view that the liability
to deduct tax at source arose only when there was accrual of income in the
hands of the payee. It relied upon the decision of Supreme Court in the case of
GE India Technology Centre P. Ltd. vs. CIT 327 ITR 456. According to the
Tribunal, the fact that the provisions made at the year-end were reversed in
the beginning of the next accounting year showed that there was no income
accrued. The Tribunal observed that mere entries in the books of account did
not establish the accrual of income in the hands of the payee, as held by the
Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. 46
ITR 144.
The Tribunal
accordingly concluded that there was no liability in the hands of the assessee
company to deduct tax at source, merely on the provisions made at the year end.
This order of the
Tribunal has been followed by the Bangalore bench of the Tribunal in the case
of TE Connectivity India Pvt Ltd vs. ITO (ITA 3/Bang/2015 dated 25.5.2016).
OBSERVATIONS
The objective of inserting the Explanation has been stated
in Circular No. 3/2010 dated 2-3-2010. The relevant portion of this circular is
reproduced below:
Explanation to section 194A was introduced
with effect from 1-4-1987 by the Finance Act, 1987 to plug the loophole of
avoiding deduction of tax at source by crediting interest in the books of
account under accounting heads ‘interest payable account’ or ‘suspense account’
instead of to the depositor’s/payee’s account. (emphasis added)
It is gathered from the above that, the Explanation applies
where the interest (or any other amount
to which other provisions of TDS applies) is otherwise required to be credited
to the payee’s account and in order to avoid deduction of tax at source, it has
been credited to some other account, and not to the payee’s account.
A provision for an expense, by its very
nature, can not, in accountancy, be credited to any particular payee’s account;
it is rather to be credited to the Provision Account. The sum which cannot be
credited to the payee’s account as per the accounting principles cannot be
brought within the purview of Explanation so as to deem to have been credited to the payee’s
account. The possibility to have credited a sum to the payee’s account should
first exist in order to invoke the Explanation. There is a stronger case for
non application of the Explanation in cases where the payee is not known in
comparision to the cases where the payee
is known. Mere non-receipt of an invoice by the assessee cannot result in
claiming that the amount has not accrued to the service provider, particularly
when the contractual terms are also known to the assessee. The TDS provisions
in the later circumstances may be construed to have been avoided or defeated by crediting an expenditure to a provision account, instead of to the
payee’s account.
One view that the Explanation is intended
to apply only when the liability to pay that amount has become due is on
account of the language of the Explanation itself. The relevant provision of
section 194C [earlier it was present in the form of an Explanation II to s/s.
(2) but re-enacted as s/s. (2) with effect from 1-10-2009] is reproduced below:
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. (emphasis
added)
The words used in the Explanation are
“person liable to pay such income” in contrast to the “person responsible for
paying” as used in the main provision. Therefore, as per this view, the person
should have become liable to pay the income on which tax is required to be withheld
in order to get covered by the Explanation.
This view perhaps has a better appeal in cases of section 195 which
bases the obligation on ‘chargeability’ in the hands of the payee.
However, this view may not hold water, when one appreciates that the term
“liable to pay such income” merely qualifies the person who is required to
deduct tax, and not the point of time of deduction of tax.
As far as disallowance u/s. 40(a)(ia) is
concerned, offering disallowance u/s. 40(a)(ia) cannot absolve the assessee
from his liability u/s. 201(1). Both the provisions, one for disallowance u/s.
40(a)(i) or 40(a)(ia) and the other for treatment of the assessee as an assessee in default can
co-exist. The Second Proviso to section 40(a)(ia) envisages such a possibility whereby
the assessee can be proceeded against under the provisions of section 201,
apart from disallowing the relevant expenditure on account of his default in
complying with the TDS provisions.
But then, the incidental issue would be as
to whether the provision created in the books of account, for which a view is
taken that tax is not deductible on it, can be subjected to the disallowance provisions of section
40(a)(i) or 40(a)(ia) or not. These provisions of section 40(a) apply to any sum payable
and on which tax is deductible at source under Chapter XVII-B. It is not the
case that the tax is not deductible at all from the provisions for expenses. It
is only the point of time at which tax is required to be deducted that is in
dispute. Therefore, it would be difficult to take a view that the claim based on such provisions cannot be
disallowed u/s. 40(a)(i) or 40(a)(ia) merely because tax is not deductible at
present but in future. Otherwise, it would result into granting of deduction in
the year of making provision and making disallowance provision otiose in the
subsequent year in the absence of any claim for its deduction. However,
difficulties would certainly arise in a case where the provision is made for
liability towards unidentified payees. In such case, neither payee is known nor
his residential status is known.
One may however take notice of the
decision of the Mumbai Tribunal in the case of Pranik Shipping &
Services Ltd. vs. ACIT [2012] 135 ITD 233 wherein a view was taken that the
provision of section 40(a) would not apply in cases where the expenditure in
question was claimed in the return of income but was neither credited to the
account of payee nor provided for in the books.
If one looks at the plain reading of the
tax deduction sections, they require tax deduction at source on payment of any
income of specified nature (except in case of section 194C, which requires
payment of any sum). The chargeability to tax of such income is not a
prerequisite, except in case of section 195, which specifically requires such
sum to be chargeable to tax. Therefore, one can distinguish the provisions of
section 195 from the other tax deduction provisions, which do not specify that
such amounts have to be chargeable to tax. The reliance by the Tribunal on GE
Technology Centre’s decision (supra) in Bosch’s case, in relation to
section 195, may be a good law and may be debatable for provisions other
than section 195.
The assessees are advised, in the interest of
mitigating litigation to deduct tax at source
in cases where the services are rendered and the payee is known, even
while making the provisions for expenses on an estimated basis or otherwise.
