Tax Deducted at Source (TDS) on Year End Provisions

Under the Income Tax Act, 1961, a person is required to deduct tax at source at the prescribed rate if the certain payments or credit exceeds specified threshold limits in a financial year. Certain provisions require deduction of tax where any income 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 the credit of such income to the account of the payee and the respective TDS provisions shall apply accordingly.

If the payee is identifiable and the amount payable to him is ascertainable, then the assessee would be required to deduct tax at source in respect of such provision.

Year end provisions as on 31st March and disallowance under section 40(a)(ia) and TDS compliance thereon is one of the important issues detected on account of surveys carried out in several cases. It has been found that some companies make provision of expenses as on 31st March. 30% of this expenditure is disallowed and added back under section 40(a)(ia), thus 70% of the expenses is claimed without making TDS.

It has been found that the parties in respect of which provisions are made are identifiable and even amounts are certain. Therefore, there appears to be a very big racket and results into deferment of TDS as the expenditure is booked in next year and legitimate TDS is delayed by several months. To plug this practice, action is required to be taken under section 201 of the Income Tax Act, 1961.

Court rulings

Various courts have dealt with this issue and have given rulings based on the specific facts of the case.  Few of these are as below:

Tax is required to be deducted on year-end provisions made by assessee which are ascertained liabilities

TDS provisions are triggered for amount credited to ‘Provision for expenses account’ also, in view of specific provisions available in all TDS sections. When tax deductor cannot ascertain payee who is beneficiary of credit of tax deduction at source for year end provisions, mechanism of Chapter XVII-B cannot be put into service and if payee is identifiable and amount payable to him is ascertainable, then assessee would be required to deduct tax at source in respect of such provision. [In favour of revenue] (Related Assessment year : 2012-13) – [Biocon Ltd. v. DCIT, LTU (2023] 152 taxmann.com 55 : 102 ITR(T) 485 (ITAT Bangalore)]

No TDS liability on year-end provisions, reversed in subsequent Assessment year, absent payee-identification

Delhi ITAT allows Assessee’s appeal, holds that Assessee cannot be held as assessee-in-default for failure to deduct tax on year-end provisions, made in accordance with AS-29 and reversed on first day of immediately succeeding year; For Assessment year 2013-14, Assessee-company made year-end provision for expenses of Rs. 86.12 Lac without deducting tax at source on the premise that payees of the expenses were not identifiable, and the invoice of those expenses were received in the subsequent Assessment year; Revenue initiated TDS proceedings and treated Assessee as ‘assessee-in-default’ due to non-deduction of tax at source; CIT(A) dismissed Assessee’s appeal; ITAT observes that it is an undisputed fact that as and when the invoices were received by the Assessee in the succeeding year, the same were processed for payment wherein tax at source was duly deducted and remitted, within prescribed time and this practice was consistently followed by Assessee on year-to-year basis; Relies on jurisdictional High Court ruling in UCO Bank v. Union of India (2014) 369 ITR 335 : 272 CTR 339 : 51 taxmann.com 253 : (2015) 228 Taxman 141 (Del.)  and DCIT v. Ericcson Communications Ltd. (2015) 378 ITR 395 : 234 Taxman 895 : 61 taxmann.com 117 : 284 CTR 230 (Del.) wherein it was held that no liability to deduct tax at source arose where the payee is not ascertainable, observes that in absence of an ascertainable amount and identifiable payee, the machinery provision of recovering tax deducted at source falls flat because in either way, it does not aid the charge of tax under Section 4 but takes a form of separate levy independent of other provision; Accordingly, holds that Assessee could not be treated as an ‘assessee in default’ for 'mere book entries' passed within meaning of Section 201(1) and consequently interest under Section 201(1A) is liable to be deleted; On the issue of short deduction of tax at source on certain expenditure of Rs. 14.41 Lac, ITAT notes Assessee’s contention that no short deduction of tax at source was made as the TDS was based on the certificates issued under Section 197 by the Revenue and remits back to Revenue with direction to Assessee to produce the certificates obtained under Section 197 to justify the TDS. [In favour of assessee] (Related Assessment years : 2013-14 & 2014-15) – [HT Mobile Solutions Ltd. v. JCIT(OSD) [TS-275-ITAT-2023(DEL)] – Date of Judgement : 22.05.2023 (ITAT Delhi)]

Year-end provisions Provision created by assessee for liability towards Vendors not liable to TDS as the no income had accrued to anyone while making the provision in the books of account

Karnataka High Court sets aside proceedings under section 201/201(1A) for non-deduction tax at source on amount set aside as provision in the books of account, holding that such amount did not accrue as income of payee; Assessee, a subsidiary of Toyota Motor Corpn. Japan, made provisions at the end of every Financial year for marketing, overseas and general expenses for completed works/ contracts awaiting vendor bills to ascertain profits/ loss; Upon receipt of vendor bills, the Provisions for Expenditure A/c is debited with corresponding credit to respective Vendors' A/c after fulfilling withholding obligations;   For Assessment year 2012-13, assessee disallowed the unutilized year end provision while filing its RoI and subsequently upon receipt of vendor bills, reversed balance un-utilized provision of Rs. 8.71 Cr., which was disallowed by Revenue and proceedings under section 201/ 201(1A) initiated for non-deduction of TDS under section 195, 194C, 194J, 194H, and 194I, which was also upheld by CIT(A) and ITAT; High Court finds force in assessee’s contention  that tax liability cannot be fastened merely on account of book entry in the absence of income, notes that the language in Sections 194C/J/H/I mandates deduction of tax at source by a person who makes the payment; Relies on Supreme Court ruling in CIT v. Shoorji Vallabh Das (1962) 46 ITR 144 (SC) where it was held that there can be no levy of tax in the absence of income; Notes that in the current case, provision and reversal of provision took place in the same year and holds, “the authorities … ought to have appreciated that in the absence of any income accruing to anyone under the Act, the liability to deduct TDS on the assessee could not have been fastened and consequently, the proceeding under section 201/ 201(1A) could not have been initiated”. [In favour of assessee] – [Toyota Kirloskar Motor (P) Ltd. v. ITO(TDS) [TS-249-HC-2021(KAR)] – Date of Judgement : 24.03.2021 (Karn.)]

Once, the assessee has claimed expenses by debiting into profit and loss account, it needs to deduct TDS on such expenditure, even if not credited to respective parties account; Upholds Section 40(a)(ia) disallowance for failure to deduct TDS on ad-hoc year-end provisions

During the relevant Assessment year 2009-10, the assessee made ad-hoc year-end provision of expenses of Rs. 56,97,54,762/- in the absence of receipt of the invoices. Since, the assessee had not deducted tax in Assessment year 2009-10 on such year-end provision, the Assessing Officer has disallowed the same under section 40(a)(ia) of the Act. Upon appeal, CIT(A) confirmed the disallowance. Aggrieved assessee filed an appeal before the Mumbai ITAT.

Mumbai ITAT rules in favour of Revenue, upholds Section 40(a)(ia) disallowance on ad-hoc year-end provisions of Rs. 56.97 Cr made by Tata Sky Ltd (assessee-company) for Assessment year 2009-10; Notes that the assessee had not deducted tax on such year-end provision, ITAT opines that Once, the assessee has claimed these expenses by debiting into profit and loss account, it needs to deduct TDS on such expenditure, even if not credited to respective parties account.”; Holds that since assessee failed to deduct TDS the expenses claimed are liable to be disallowed in terms of chapter XVII-B of the Act which requires that TDS needs to be deducted either at the time of payment or at the time of credit to the party account; Rejects assessee’s submission that in the subsequent year, provisions have been either reversed or paid subject to deduction of TDS, states that such reversal/payment does not alter the legal position in so far as disallowance of expenses under section 40(a)(ia) is concerned; As regards assessee’s reliance on  catena of rulings including Gujarat High Court decision in case of PCIT v. Sanghi Infrastructure Ltd. (2018) 257 Taxman 371 (Guj.) and Mumbai ITAT decision in Mahindra & Mahindra Ltd. v. DCIT in ITA No.8597/Mum/2010’s case, ITAT states that all those cases are contrary to the provisions of chapter XVII-B r.w.s. 40(a)(ia) of the Act, and hence are not followed.”. Separately, deletes disallowance under section 40(a)(ia) for non-deduction of TDS under section 194H on discount given to the customers, opines that one-month free subscription (accounted as discount in books of account) upon subscription by customers for 6 months cannot be regarded as ‘commission’ subject to provisions of section 194H; Relies on co-ordinate bench decision in case of assessee's own case. [In favour of revenue] – [Tata Sky Ltd. v. ACIT [TS-468-ITAT-2020(Mum)] – Date of Judgement : 10.09.2020 (ITAT Mumbai)]

TDS deductible on year-end provisions for ‘ascertained’[ liabilities; Rejects ‘unidentified payees’ plea

Delhi ITAT upholds CIT(A)’s order in treating the assessee (engaged in airlines business) as ‘assessee-in-default’ under section 201(1) for failure to deduct tax at source on year-end provisions for AYs 2010-11 and 2011-12, holds that the liabilities of the assessee for which provisions were created were ascertained;  Finds that, during the year, assessee made provision for airport expenses, airport handling expenses, crew accommodation expense, IT communication charges and other expenses on which assessee has not deducted tax at source stating that they are year end provisions and the payees are not identified; Elucidates that a provision is not an ascertained liability if the recipient of the sum is not identified, there is no methodology available for working out the amount payable, or there is no corresponding liability arising out of an existing contract; However, in the present case, ITAT notes that assessee has not made ad-hoc provisions and has made provisions under the specified heads, on certain basis thereby ascertaining the amount and thus opines that it cannot be said that the payee is not identified”; Rejects assessee’s submission that the provisions are reversed as and when the bills for services are received and tax is deducted at that particular time, holds that There may be reasons for receiving the bills by the service providers after certain time lag but that does not absolve the assessee from the liability of deduction of tax at source”; Separately, upholds CIT(A)’s decision that TDS under section 194C is deductible on security service charges paid  to the owner of the airport in respect of aviation security force deployed at the airport and not that under section 194J as held by the Assessing Officer; Observes that the services provided to the assessee are not any specialized services but only standard facilities, which are available to all the airlines and hence, do not fall within the provisions of technical services as provided under section 194J, relies on Supreme Court decision in Kotak Securities; Rejects assessee’s claim for exemption from deducting tax under section 196 (providing that no tax is deductible on certain payments to Government, RBI etc.), notes that assessee does not pay the sum to CISF but it is paid to the owners and operators of the airport. [In favour of revenue] (Related Assessment year : 2010-11 & 2011-12) – [Inter Globe Aviation Ltd. v. ACIT [TS-8-ITAT-2020(DEL)] – Date of Judgement : 07.01.2020 (ITAT Delhi)]

TDS applicable on year-end provisions, upholds Section 40(a)(ia) disallowance on ‘commission payable’

The assessee, Hardik Jigishbhai Desai was following Mercantile system of accounting. Assessee had created a provision for commission payable” for over Rs 26 lakhs , however no TDS was deducted on same. This provision for commission payable was created on 31.03.2009 and was reversed on 1^st day of Financial year i.e on 01.04.2009, which shows that the liability had no crystallized in this year. Assessee while filing return for Assessment year 2009-10 claimed deduction for such contingent liability. Assessee claimed that making a provision on estimate basis on the sales effected by assessee, becomes an ascertained liability and thus was allowable as business expenditure. However during assessment Assessing Officer denied the deduction on the ground that assessee had debited the commission expenses to profit and loss account which had resulted in reduction of his profit and hence TDS should have been made from such expenses. Assessing Officer further observed that as per the provisions of Section 194H, TDS should be made from the commission amount 'likely to be credited' if the amount exceeded Rs. 2,500/- and as the amount of commission debited by the appellant was Rs.26,00,000/- which was in excess of the amount stipulated in Section 194H, the assessee should have done TDS on this commission amount. 

The Assessing Officer further observed that the accounting practice of the assessee of debiting the amount of  Rs 26 lakhs at the end of the year and crediting the same amount back on the first day of the next F.Y by passing reverse entry shows that the assessee diverted his income which should have been taxed in the year under consideration. The Assessing Officer thus invoked the provisions of Section 40(a)(ia) for disallowing the commission expenses. On appeal CIT(A) upheld Assessing Officer’s order and denied expense allowance invoking section 40(a)(ia). Aggrieved assessee, filed an appeal before Ahmedabad ITAT.

Ahmedabad ITAT upholds Section 40(a)(ia) disallowance for Assessment year 2009-10 on year end provisions of commission expense as no TDS deducted by assessee-individual; Rejects assessee’s stand that since it was following mercantile system of accounting, deduction for 'provision  for commission payable' should be allowed; Firstly, ITAT holds that the provision claim by assessee was totally un-ascertainable, uncrystallized and fanciful, hence it does not assume the character of ascertained liability; Further, ITAT holds that  Even in case of mercantile liability, Section 40(a)(ia) clearly mandates that the expenditure cannot be allowed in the absence of corresponding TDS payment in Government treasury..”; Further rejects assessee’s stand that since the practice followed by him was accepted by Department in past year, making a  provision on estimate basis was an allowable business expenditure, also rejects assessee’s stand that he was not in a position to pay TDS as the exact names, amount of commission and TDS payable to each party was not known. [In favour of revenue] – [Hardik Jignishbhai Desai v. DCIT [TS-603-ITAT-2016(Ahd)] – Date of Judgement : 14.10.2016 (ITAT Ahmedabad)]

Liability to withheld TDS arises on quarterly expense provisions entries (through credit in suspense account as per global group accounting policy) through suspense attracts TDS de hors income-charge under section 4(1)

ITAT dismisses assessee's appeal challenging the levy of interest under section 201(1A), holds liability to deduct tax at source (‘TDS’) arises on quarterly expense provisions entries through credit in suspense account as per global group accounting policy; Rejects assessee's argument that invoice for underlying expenses not received at the time of making provision, and there was no accrual of expenditure nor identification of payee ; ITAT also rejects assessee’s stand that there was no charge in the hands of the payee under section 4(1), holds statutory provisions dealing with collection and recovery of tax under Chapter XVII of the Act envisage TDS collection de hors charge under section 4(1) of the Act”, further notes Section 194C, 194J, 194H and 194I do not use the expression 'chargeable to tax'; Moreover, affirms Revenue's stand that assessee having admitted its default under section 40(a)(i) & 40(a)(ia) of the Act, cannot in proceedings under section 201(1)/(1A) of the Act, argue no default under chapter XVII-B of the Act; Distinguishes assessee's reliance on Bangalore ITAT ruling in Telco Construction Equipment Co. Ltd., Pune ITAT ruling in Yeota Merchants Co-op. Bank Ltd., Karnataka High Court ruling in Bharati Airtel Ltd. and Delhi High Court ruling in UCO Bank.  [In favour of Both, Partially] – [IBM India (P) Ltd. v. ITO(TDS) [TS-305-ITAT-2015(Bang)] – Date of Judgement : 14.05.2015 (ITAT Bangalore)]

TDS inapplicable on year-end expense-provisions, reversed subsequently on the first day of the next accounting year as income accrual to the payee is a must

Bangalore ITAT rules in assessee’s favour, holds that TDS liability does not arise on year-end provisions for expenses which got reversed on first day of next accounting year, provisions were made in accordance with AS-29 issued by ICAI and assessee had suo moto disallowed the same under section 40(a)(i) and 40(a)(ia) while computing taxable income; ITAT observes that liability to deduct tax at source (‘TAS’) arises only when there is accrual of income in the hands of the payee, places reliance on Supreme Court ruling in GE India Technology Centre (P) Ltd; Holds that ‘considering the fact that the provisions were made at the year end is reversed in the beginning of the next accounting year goes to show that there was no income accrued’; Observes that mere entries in the books of accounts does not establish the accrual of income in the hands of the payee, relies on Supreme Court ruling in Shoorji Vallabhdas & Co; Thus, ITAT holds that assessee cannot be treated as ‘assessee in default’ under section 201(1) for not deducting TAS on year-end provisions which got reversed in the following accounting year. [In favour of assessee] – [Bosch Ltd. v. ITO [TS-116-ITAT-2016(Bang)] – Date of Judgement : 01.03.2016 (ITAT Bangalore)]

Year end ad-hoc provisions created not subject to TDS as payee not identifiable; Once assessee suo-moto disallowance for ad-hoc provision ousts liability for failure to deduct tax

During survey proceedings for Assessment year 2007-08, the Assessing Officer noted that the assessee [Pfizer Ltd] had defaulted in not deducting tax on certain expenditure/ payments made by it. These payments included ‘provision made but tax not deducted under section 40 (a)(i) & 40(a)(ia)’, purchase of traded goods, purchase of packing material and clinical trial expenses ('other expenses').

The assessee explained that it was in the practice of making provision for expenses at the end of the year as it had multifarious locations and innumerable transactions. Since all the bills would not be received, without making specific entries into accounts of the parties, it made provision for expenses. Next year the entire provision of expenses was written back and the actual amounts paid to the respective parties were credited to their respective accounts and TDS as per the provisions were made. Assessee contended that making provision entries was not a constructive payment made to any payee and hence was not subject to TDS.

Based on the above, the assessee in its return for Assessment year 2007-08 had disallowed the entire provision made but not deducted tax on the same. The above contention of the assessee was not accepted by the Assessing Officer. The Assessing Officer had proceeded to raise a demand in respect of the tax and interest due under section 201(1)/ 201(1A).

The CIT(A) affirmed the Assessing Officer’s action of levying tax and interest under section 201(1) & 201(1A) with respect to ‘provision made but tax not deducted’ . But, CIT(A) deleted the levy of tax and interest with respect to other expenses as above mentioned. Hence, the assessee and the Revenue filed appeal before ITAT.

Mumbai Bench of ITAT observed that since the payee was not identifiable at the time when provision was made, TDS was not applicable on the same. Further, it noted that the entire provision had been written back in the next year and the actual amounts paid/credited were subjected to TDS provisions. Therefore, assessee followed the provisions of TDS as and when the amounts were paid/ credited to respective parties. ITAT also placed reliance on jurisdictional ITAT ruling in Industrial Development Bank of India v. ITO.

ITAT also noted that the assessee had suo-moto disallowed the expenses under section 40(a)(i)/(ia). ITAT observed that Once an amount was disallowed under section 40(a)(i)/(ia) on the basis of the audit report of the Chartered Accountant, the same amount cannot be subject to the provisions of TDS under section 201(1) on the reason that assessee should have deducted the tax. If the order of Assessing Officer were to be accepted then disallowance under section 40(a)(i) and 40(a)(ia) cannot be made and provisions to that extent may become otiose”. Thus, ITAT held that the assessee was not liable for levy of tax and interest under section 201(1) & 201(1A) on the provision made in respect of expenses for which the payees were not identifiable. - [In favour of assessee] – [Pfizer Ltd. v. ITO [TS-812-ITAT-2012(Mum)] – Date of Judgement : 31.10.2012 (ITAT Mumbai)]