Whether any liability u/s 201(1) arises when assessee had deducted TDS at time when provision for expenses made in one FY was subsequently reversed and expenses were booked in subsequent FY - NO: ITAT

THE issue before the Bench is - Whether any liability u/s 201(1) arises when the assessee has deducted tax at source at the time when the provision for expenses made in one financial year was subsequently reversed and the expenses were booked in the subsequent financial year. NO is the answer.

Facts of the case

The assessee a wholly owned subsidiary of IBM World Trade Corporation, US ("IBM WTC") follows the mercantile system of Accounting. As per the global group accounting policy, each of the entity of IBM group worldwide has to quantify its expenses every quarter, within 3 days of the end of every quarter. The assessee had made provision for liabilities for certain expenses in respect of which only service/work has been provided/performed by the vendors, but for which the invoices have not been furnished or in respect of which the payments have not fallen due for payment to the vendors. In the subsequent financial years, 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 in time TDS were withheld. These provisions were made on scientific basis and expenses were in the nature of ascertained liability. The payments made by the assessee in the nature of fees for professional services, commission, brokerage, rent, royalty were disallowed by the AO u/s 40(a)(ia) of the Income Tax Act because no TDS was deducted by the assessee at the time of making provision for liabilities. The assessee was held as assessee in default u/s 201(1) and interest was levied u/s 201(1A).

In reply to the show cause notices issued by the Department, the stand of the assessee was that 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 source. The assessee took a stand that though under the relevant provisions of law in Chapter XVII-B of the act there was obligation to deduct tax at source even when the amount is credited to a "Suspense Account", there should be legal liability to pay and the payee should be known and only then the obligation to deduct tax at source arises. The Assessee relied on CBDT Circular No.3/2010 dated 2.3.2010 and submitted that withholding tax provisions of the Act would not apply automatically on any expense being accounted. The obligation to withhold taxes arises only on the amount payable is exactly identified along with the payee to whom such amount is payable. According to the AO, the procedure followed by the assessee was contrary to the accounting policy because once expenditure is booked in the profit and loss account, it cannot be reversed. According to the AO, the reversal entry as well as the booking of expenses based on invoices done in subsequent year is routed through the profit and loss A/c. This shows that the reversals were taken as income and the expenses booked on receipt of invoices are included in current expenses of that year.The AO rejected all contentions and passed the final assessment order making all disallowances.

Before the CIT(A) the assessee submitted the entire chronology of events i.e., creation of the provision of liabilities, reversing of provision, booking of actual expenditure and deduction of TDS. The assessee also produced elaborate documents like TDS report, reconciliation statement, etc for all the expenses incurred to substantiate its contentions, but it was rejected. The CIT(A) was of the opinion that the procedure followed by the assessee was contrary to the mercantile system of accounting.

Aggrieved, the assessee has filed this appeal.

Having heard the parties, the Tribunal held that,

++ the AO has addressed a letter to the DR in which the AO after verification has found that the Assessee had deducted tax at source at the time when the provision made in one financial year is subsequently reversed and the expense booked in the subsequent financial year. In view of this, the demand on account of tax u/s.201(1) of the Act, will no longer survive. However the appeals will survive with regard to the liability of the Assessee to interest u/s.201(1A) of the Act. Therefore the appeals in so far as it relates to challenge to order u/s.201(1) of the Act have to be allowed;

++ after considering the provisions of Section 40, 200, and 201(1), the contention of the 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 and Sec.201(1) of the Act cannot be different and they arise out of the same default. Once there is a disallowance u/s.40(a)(i) & 40(a)(ia) of the Act, it is not possible to argue that there was no liability under chapter XVII-B of the Act and therefore the provisions of Sec.201(1) of the Act will not be attracted;

++ it is clear from the statutory provisions of section 194-C, 194-J and 195 that the liability to tax at source exists when the amount in question is credited to a "suspense Account" or any other account by whatever name called, which will also include a "Provision" created in the books of accounts. Therefore it is not possible for the Assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered. The CIT(A) has rightly held that under the mercantile system of accounting accrual of liability for any expenditure is not dependent of receipt of invoice from the person to whom payment for expenditure has to be made and that accounting practice followed by the Assessee was contrary to the mercantile system of accounting. The conclusion of the CIT(A) that the Assessee has full knowledge of what is due to its Vendors, subcontractors, commission agents etc. Therefore there was no necessity to create provision in our view is justified in the facts and circumstances of the present case;(para 30 and 31 );

++ the appeals that relate to challenge of levy of interest u/s.201(1A) of the Act are dismissed. The appeals, in so far as it relates to holding the Assessee as an "Assessee in default" u/s. 201(1) of the Act are however allowed.