• Feb
  • 15
  • 2012

TDS on Provision for Expenses for which no invoice been received

Posted In Income Tax | | 24 Comments » Print Friendly and PDF

Manish Kumar Agarwal, FCA

One of the most disputed arguments between assessee and income tax department is that whether payments made towards specified expenditure attracts disqualification u/s 40(a) (ia) and applicability of this section to provisions made at the year end and its implications.  Following are the views expressed by the author in this respect.

01. The assessee must prepare his books of accounts following the mercantile system of accounting. The same is also followed under section 145 of the Income tax act, 1961.

02. As per mercantile system of accounting, assessee had to made provision for the expenses which were incurred during the year, but their invoices were yet to be received. All this expenditure were allowable expenditure, even though made on the estimated basis. Refer Calcutta Co. Ltd v CIT 37 ITR 1 SC, 1959.

03. Further, as per AS 29, provision is the estimation of liability probability of which outflow will be ‘more likely than not’. It means here we are confirmed that whether provision made by us outflow will be there, however the amount will be still unidentifiable. Hence, in this case we can’t made credit to the party against whom we made the provision.

04.  Now a days, Income tax department are verifying that TDS had been deducted on this provisional entries made on the year end and disallowing the same under section 40(a)(ia) of the Income tax act, 1961.

05. The assessee generally follows the following method of accounting for year end.

(a)   At the yearend it is the common practice of a company or other individual to provide provisions for various expenses like Telephone, Electricity, Travel Claims, Conveyance reimbursements, Commission on sales to employees. Commission on sales to C&F Agent, Lunch Expenses, Rent of Office premises and guesthouse, AMC charges payable etc……

(b)   Entries for Provision for expenses are passed at the yearend based on previous month expenditure or on some other relevant basis.

(c)    The above provisions are reversed 1st day of the subsequent year.

(d)  The assessee generally books expenditure only at the time of payment of the expenditure.

06.  The assessee generally does not know the exact amount of expenditure and sometime also don’t know the exact details of the vendor.

07. The Provision of section 40(a)(ia)  requires that Tax has to be deducted at source when amount is paid or credited to the account of the Payee whichever is earlier. When the amount is credited to suspense account or any account by whatever name it is called, then it is treated as amount is credited to the account of the payee and tax has to be deducted at source. Hence Tax has to be deducted at source even on provisions made in the books of accounts to which TDS provisions are applicable.

08. Further, as per Notification No. 41/2010 dated 31 May 2010, the due date for the payment of TDS deducted in the month of March becomes April 30th and hence following are the advices from the author in respect of provision entries made on closure date of financials.

(a)    Please note that failure to deduct TDS attract (i) disallowance of expenditure u/s. 40(a)(ia) on which TDS not made while computing income under normal provisions; (ii) Levy of interest under section 201 (IA) at the rate of One and Half Percent or part of the month for the period of delay in deduction and/or deposit of TDS (iii) levy of Penalty under section 271C for failure to deduct TDS.

(b)   Further, please note that the expenditure relating to work/services availed during the period from April 1st 2010 to Mach 31st 2011 should only be accounted in FY 2010-11 and in the event any of such expenditure are accounted in the accounts of the immediately succeeding year then the same will qualify as  ‘prior period expenses’ requiring reporting in annual accounts as well as in the Tax Audit Report. The amount of prior period expenses will not be allowed as deduction under Income tax Act in the succeeding year(s).

(c)    In view of the above, Finance and Accounts team of each sector/company is advised to instruct each and every department in their respective company to obtain bills for the work/services rendered during the period from April 1st 2010 to March 31st 2011 from the vendor before April 20th and also to provide a complete details of the expenditure under the respective expenses heads based on the service/work order and the work done by the party and for which invoice/bill is not yet raised so that necessary provision with party name and amount can be made in the accounts and TDS thereon can be discharged before the due date of April 30th. Please make sure that to the extent possible, no ad-hoc provision for expenses is to be made at the yearend since it will be difficult to make compliance of TDS provisions with respect to such ad-hoc provision as the amount is not ascertain/accurate, party may not be known, etc. etc.

The above is the personal thought of the author and is ready to accept any kind of suggestion or feedback. Please mail me at mr_manish_ca@yahoo.com

Note- Article was first Published on 31.08.2011


24 Responses to “TDS on Provision for Expenses for which no invoice been received”

  1. Balakrishna Gurrapu says:

    ear Sir,
    If the company providing the Monthly Provisional Entries for MIS-Profit Loss Monthly & Subsequently reversing the same in the next month, will this attracts the TDS Liablity for the month

    Request to send your reply on balagurrapu@gmail.com

    Balakrishna
    8422086200

  2. sagar says:

    No accepting the solution you provided as TDS is to be deducted on the income of the recepient.

  3. Akshay says:

    Dear Sir,

    If the company providing the Monthly Provisional Entries & Subsequently reversing the same in the next month, will this attracts the TDS Liablity for the month

    Regards

  4. jagadish says:

    My Query is

    Provision of TDS entry is not Considered in the Same Assesement Year( as a Assets of advance Tax ) , and same TDS amount we can considered in the next Assesement Year, if we Considered in the Next Financial Year, Company Tax Liability will reduce,

    Pls Help me on this Issue

  5. jagadish says:

    My Query is

    Provision of TDS entry is not Considered in the Same Assesement Year, and same TDS amount we can considered in the next Assesement Year

  6. shekhar says:

    TDS applicable on provisional Exp-

  7. vinay says:

    I hava a query

    I want to know what is the impact if we pay Jan and FEb months TDS in April-2013

  8. santosh kumar says:

    QUERY:

    We are a US based company and Head Office (in US) wants us to follow the below procedure for passing the closing entries, please let us know whether is it allowed under Indian income tax…. if any apprehensions please let us know…..

    1) Closing entries to be passed as on 31st March 2013
    2) The same entries has to be reversed on 01st of April 2013
    3)Again same entries has to be re passed as on 02nd of April 2013.

    Request you to reply me at an earliest….
    You can call me or e mail me at below address

    Santoshkumarb1980@gmail.com

  9. Hyder says:

    Dear All,

    can u plz tell me in form 26as transaction date is 08-march-2012 and date of booking is 15-may-2012, so can we put as advance received in FY 2011-12, and show invoice in FY 2012-13.

    Thank you.

  10. Hyder says:

    Dear Parvinder Uppal,

    u can call to that client and ask for the details dude.

  11. jennifer says:

    If they say tds is deducted on provision entry ok . What will be the entry and the subsequent reversal entry as on 1st day of april.

  12. ajay says:

    My problem is im into visa facilation service
    Two componets visa fees and visa service charge

    Now suppose visa fees is 5000 service chharge is 500 my invoice would be 5000+500 + { service tax on 500) now if tds on total invoice amount im dead becoz its more than what earn and will deposite service taxfrom my pocket and get later on the tds return is there any ther way where tds is not applicable on visa fees only to visa service charge

  13. Avneesh Saran says:

    Need your help.

    I have a query:

    If my vendor raises invoice to me for certain work he has done. And as per the procedure I book his invoice and deduct the TDS on the invoice amount (and it’s reflected in 26AS). And later I discovered that the work he has done is not upto the mark and I withheld his payment.

    Now my question is that “Is the deduction of TDS acknowledgment/acceptance of my liability or debt OR in other words merely deducting TDS is the acceptance of my liability of making the payment to the vendor. Or even After deducting the TDS and booking the Invoice I can deny making the payment as work is not correctly done. 

    Please advice what is the recourse available to me ?

    legal position, related sections , laws and judgments, recourse available to me ?

    Is there a way out wherein I can claim the TDS deducted back from the Income tax department. In my case invoice is raised by the vendor !!

  14. Avneesh Saran says:

    Need your help.

    I have a query:

    If my vendor raises invoice to me for certain work he has done. And as per the procedure I book his invoice and deduct the TDS on the invoice amount (and it’s reflected in 26AS). And later I discovered that the work he has done is not upto the mark and I withheld his payment.

    Now my question is that “Is the deduction of TDS acknowledgment/acceptance of my liability or debt OR in other words merely deducting TDS is the acceptance of my liability of making the payment to the vendor. Or even After deducting the TDS and booking the Invoice I can deny making the payment as work is not correctly done. 

    Please advice what is the recourse available to me ?

    legal position, related sections , laws and judgments, recourse available to me ?

    Is there a way out wherein I can claim the TDS deducted back from the Income tax department.

  15. B S MANJUNATH says:

    Can I get a response for my querry sent on 15th Feb 2012 on the topic…..
    I reproduce my querry ………

    B S MANJUNATH wrote on 15 February, 2012, 12:08
    Similar problem arises for provision for Audit fee. The Audit is conducted after the year end, after 3 or 4 months & bill is given thereafter. However, provison for expenses is made & P & L is debited with expense.
    TDS has to be made at the time of payment & Auditor will take TDS credit for the next year only, as he books the Income on cash basis in the subsequent year after Audit.
    How to resolve TDS issue ??

  16. sunil says:

    Is there any recent case law in favour of the assessee under this provision?

  17. Partho Bose says:

    HI Vasudeva Prasada :
    Your Question was:

    How about TDS on purchase of promotional gifts on which Company’s branding is printed..? Whether it attracts TDS..?

    Answer: NO, TDS would not attract if you purchase promotional gifts on which company’s branding is printed subject to vendor has NOT taken any material from company.

  18. B S MANJUNATH says:

    Similar problem arises for provision for Audit fee. The Audit is conducted after the year end, after 3 or 4 months & bill is given thereafter. However, provison for expenses is made & P & L is debited with expense.
    TDS has to be made at the time of payment & Auditor will take TDS credit for the next year only, as he books the Income on cash basis in the subsequent year after Audit.
    How to resolve TDS issue ??

  19. Indrajit Sharma says:

    I am fully agreed with Parvinder.
    I think Income department is not aware with the such kind of things.

  20. RAJAGOPALAN says:

    sir,

    In most of the cases, the provisions are normally for recurring expenses for which no party can be identified. For deducting Depositing TDS, the PAN number of party is must which is absent at the time of making provisions. Already in case of Debentures/Bonds interest provisions wherein holders cannot be identified, CBDT has relaxed the requirement of TDS. Further the provisions are being regulated at the time of actual payments and the normally, the TDS thereon is deducted before filing returns but may be in the next financial year.

    further it is an ascertained liability but not yet quantified. So the expenses are allowable if followed mercantile accounting and in order to avoid hardship, CBDT may clarify the same for the benefit of all.

  21. Amit says:

    i agree with Mr. Parvinder Uppal

  22. Pinal Nandola says:

    Hi Prasada

    If material provided by you then Yes otherwise No.

  23. Parvinder Uppal says:

    I think we all togather approch to Income tax department for changing such confusing wrong law.
    1. If we not recd. bills on time, we have to make provisions.
    2. If we make provisions, we have to deducted TDS.
    3. If we deduct TDS, We have to deposit the same.
    4. If we deduct and deposit TDS, we have to file the TDS return.
    5. How can we file TDS return for without name and pan no???
    6. If we not deduct and deposit TDS, Expenditure will be disallow.

    I think either this law was made intentialy to give pain to all assessee or it was happen by mistake due to non awarness of all aspects..

    Thanks

  24. Vasudeva Prasada says:

    Dear Sir

    How about TDS on purchase of promotional gifts on which Company’s branding is printed..? Whether it attracts TDS..?

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