No Escape from TDS on Identified Year-End Provisions; ITAT Grants Relief Where Tax Paid Before Return Due Date

ICICI Venture Funds Management Company Limited Vs DCIT (ITAT Bangalore)

No Escape from TDS on Identified Year-End Provisions; ITAT Grants Relief Where Tax Paid Before Return Due Date

The Bangalore ITAT held that where an assessee creates year-end provisions for identified professional fees payable to identified parties, the obligation to deduct tax at source arises at the time of making such provision itself. Merely because invoices are received in the subsequent year does not postpone the TDS liability. Accordingly, the Tribunal upheld the applicability of Section 194J and rejected the assessee’s contention that no TDS was required on year-end provisions of legal and professional expenses.

In the case of ICICI Venture Funds Management Co. Ltd., the Assessing Officer had disallowed ₹3.55 crore under Section 40(a)(ia) for failure to deduct tax on provisions made towards legal and professional fees. The Tribunal observed that the payees, nature of services and amounts payable were all identifiable and the liabilities had crystallized as on 31 March 2014. Therefore, the provisions could not be treated as contingent liabilities to escape TDS provisions.

At the same time, the Tribunal reiterated the statutory relief available under Section 40(a)(ia). It held that where TDS was deducted and deposited before the due date of filing the return under Section 139(1), no disallowance could survive in that year. Where tax was deducted and remitted in a subsequent year, the expenditure would be allowable in the year of such payment. The Tribunal accordingly directed verification of payments made to resident professionals including Amarchand Mangaldas, Darius Khambatta and AZB Partners, and granted consequential relief wherever TDS had been deposited within the prescribed timelines.

With regard to ₹1.42 crore paid to offshore lawyers, the Tribunal noted that neither the Assessing Officer nor the CIT(A) had properly examined the assessee’s claim that the income was not taxable in India under the applicable DTAA and therefore not subject to TDS under Section 195. This issue was restored to the Assessing Officer for fresh examination after verifying tax residency certificates and treaty eligibility.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal by ICICI Venture Funds Management Co. Ltd. (the assessee/appellant) relates to assessment year 2014–15 and is directed against the order dated 27 May 2025 passed by the National Faceless Appeal Centre, Delhi (the learned CIT(A)). By that order, the learned CIT(A) dismissed the assessee’s appeal against the assessment order dated 30 September 2016 passed under section 143(3) of the Income-tax Act, 1961 (the Act), by the Assistant Commissioner of Income-tax, Large Taxpayer Unit, Circle–1, Bangalore (the learned Assessing Officer/AO). In the assessment order, the AO disallowed ₹355 lakhs under section 40(a)(ia) of the Act for non-deduction of tax at source. The assessee is aggrieved by that disallowance.

2. The assessee has raised several grounds of appeal; however, issue in substance is that the learned CIT(A) erred in confirming the disallowance made by the learned Assessing Officer for non-deduction of tax at source. The assessee contends that, out of the disallowed amount, ₹1.18 crores had been paid and the related TDS remitted to the Central Government before the due date for filing the return of income under section 139(1) of the Act. It further submits that a provision of ₹0.21 crores was reversed in the immediately succeeding year, and that TDS on a further provision of ₹0.66 crores was deducted and remitted in subsequent years; accordingly, those amounts ought to have been allowed in the relevant subsequent year of payment. The assessee also claims that the provision of ₹1.5 crores made for offshore lawyers, which formed part of the disallowance, was not covered by section 40(a)(ia) of the Act as it related to non-residents. According to the assessee, payments to offshore lawyers did not attract any obligation to deduct tax at source under the India–Mauritius Double Taxation Avoidance Agreement, and the corresponding disallowance therefore deserved to be deleted.

3. Briefly stated, the assessee is a limited company engaged in asset management and advisory services. It filed its return of income on 28 November 2014 declaring income of ₹168,391,500. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961, was issued on 4 September 2015, followed by notices under section 142(1). During assessment proceedings, the learned Assessing Officer noted that the assessee had made provisions of ₹335 lakhs for marketing and distribution expenses and ₹63,950,507 for legal and professional charges and called upon the assessee to state whether tax had been deducted at source on those provisions. In response dated 26 September 2016, the assessee furnished the details. The Assessing Officer observed that a provision of ₹5 crores related to professional fees for overseas litigation. The assessee explained that, out of this amount, ₹83 lakhs represented actual expenditure on which tax was deducted at source, and ₹1.55 crores was payable to non-residents in Mauritius; according to the assessee, those professional payments were not taxable in India under the India–Mauritius DTAA and therefore did not require deduction of tax at source. The assessee also furnished a break-up of the expenditure, which the Assessing Officer reproduced in paragraph 4 of the assessment order. As per that break-up, ₹1.68 crores were payable to Amarchand Mangaldas and Suresh Shroff & Co., a resident concern, on which TDS was not deducted before 31 March 2014 but was deducted subsequently at the time of payment of bills in the next previous year. Similarly, ₹0.10 crores were payable to Shri Darius Khambatta, a resident, and ₹0.15 crores to AZB Partners, also a resident concern; in both cases, TDS was not deducted at the time of provisioning but was deducted subsequently when the bills were received. A further provision of ₹1.50 crores was made for offshore professional lawyers, on which no TDS was deducted before 31 March 2014. The assessee had also provided ₹0.10 crores for Sapphire Professional Services, a resident concern, which was reversed in the next previous year, and ₹0.11 crores was an unclassified provision on which no TDS was deducted and which was also subsequently reversed. Thus, the assessee had made year-end provisions aggregating to ₹3.55 crores in its books for financial year 2013–14 without deducting tax at source. The Assessing Officer held that the assessee was required to deduct tax at source on these amounts and accordingly disallowed ₹3.55 crores under section 40(a)(ia) of the Act in the assessment order dated 30 September 2016.

4. The assessee preferred an appeal before the learned CIT – A wherein the learned CIT – A confirmed the disallowance.

5. During the appellate proceedings, the learned authorized representative, Ms. Suman Lunkar, filed a 97-page paper book. The assessee relied on its audited financial statements for assessment year 2014–15 and on the submissions dated 26 September 2016 and 29 September 2016 filed before the learned Assessing Officer. The paper book also contained tax residency certificates and other relevant certificates relating to the foreign entities to whom payments had been made. The learned authorized representative first submitted that no tax was required to be deducted at source on year-end provisions. In support, she relied on the decision of the Hon’ble Gujarat High Court in Principal Commissioner of Income-tax v. Sanghi Infrastructure Ltd. (2018) 96 taxmann.com 370, wherein it was held that where a provision was made for expenses for which bills had not been received during the relevant year, disallowance under section 40(a)(ia) could not be made for non-deduction of tax at source. She also relied on the decision of the Hon’ble Karnataka High Court in Karnataka Power Transmission Corporation Ltd. v. Deputy Commissioner of Income-tax (2016) 67 taxmann.com 259 (Karnataka) [383 ITR 59], where it was held that, when an assessee had made a provision for contingent interest payable on delayed payments to suppliers but later reversed the entries on finding that the interest would not be paid, no liability to deduct tax at source under section 194A arose because no income had accrued to the payees. Referring in particular to paragraph 26 of that judgment, she submitted that, on the facts of the present case, no disallowance was warranted.

6. She then referred to the details of legal and professional fees. With respect to Amarchand Mangaldas and Suresh Shroff & Co., she submitted that tax had been deducted at source on ₹10,862,489 and deposited with the Central Government before the due date for filing the relevant return of income for AY 2014-15, therefore, no disallowance was called for to that extent. For the further sum of ₹1,611,470, she submitted that TDS was deducted after filing the return of income and, accordingly, the assessee should be allowed deduction in the year in which the tax was deposited. As regards Shri Darius Khambatta, she submitted that ₹60,000 paid on 22 September 2014 formed part of the payment made to Amarchand Mangaldas and Suresh Shroff & Co. In relation to AZB Partners, she submitted that tax on ₹9 lakhs was deducted and deposited before the due date for filing the return of income, while tax on ₹622,068 was deducted and paid after such filing; therefore, the latter amount should be allowed as deduction in the year of deposit. With respect to offshore lawyers, she submitted that ₹14,239,905 was payable for services rendered outside India by foreign residents. Since tax residency certificates were available and the payments were covered by the applicable Double Taxation Avoidance Agreement, the income was not chargeable to tax in India under section 195 of the Income-tax Act, 1961, and no obligation to deduct tax at source arose. She further submitted that section 40(a)(ia) did not apply to such foreign payments. She also stated that, against a provision of ₹100 lakhs, only ₹8,821,545 was identifiable as payable to various service providers and the balance was an ad hoc provision on which no tax was required to be deducted. According to her, whenever bills were subsequently received and payments were made, tax was deducted at source at that stage. Finally, she submitted that the provision of ₹10 lakhs made for Sapphire Professional Services in financial year 2013–14 was reversed in financial year 2014–15 and, therefore, no tax was deducted at source on that provision.

7. In view of the above facts, she submitted that the order passed by the learned CIT(A), without considering the merits of the case, was unsustainable in law. She further submitted that, in any event, the addition made by the learned Assessing Officer was also not sustainable.

8. The learned Departmental Representative strongly supported the order of the learned Assessing Officer. He submitted that, where the assessee had made provisions for payments to identified professionals, the nature of services and the quantum of expenditure were also clearly ascertainable. Therefore, merely because the bills were received in the subsequent year, the assessee could not avoid its obligation to deduct tax at source. Referring extensively to section 194J of the Act, he submitted that tax was required to be deducted at source when the provision was made. As regards payments to foreign lawyers, he submitted that the assessee had not substantiated its claim by furnishing the relevant tax residency certificates and, therefore, the Assessing Officer was justified in making the disallowance.

9. As to the decision of the Hon’ble Gujarat High Court, relied upon by the learned authorized representative, he submitted that the facts of that case were materially different. In that case, lease rent of ₹70 lakhs was disallowed under section 37(1) of the Act, and a further sum of ₹16 lakhs was disallowed for non-deduction of tax at source. The Court held that the amount payable represented contingent liability. In the present case, however, the assessee’s liability had crystallized: the parties were identified, the nature of services was known, and the amount payable was quantified. The assessee had not treated these liabilities as contingent. If the assessee were to contend otherwise, the expenditure would itself become disallowable under section 37(1) of the Act, and the audited annual accounts would require scrutiny. Accordingly, the Gujarat High Court decision did not apply to the facts of the present case. He further submitted that an assessee cannot make a provision in one year, deduct tax in a subsequent year, and thereby avoid disallowance in the year in which the provision was made.

10. Regarding the decision of the Hon’ble Karnataka High Court, the learned Departmental Representative submitted that, as noted in paragraph 27 of that judgment, the liability there was found to be contingent, unlike the present case. He pointed out that Karnataka Power Transmission Corporation Ltd. concerned interest payable on delayed payments for power purchases, where the agreement provided for interest to suppliers. The assessee in that case had created a provision for such contingent interest, which was later stated to be unnecessary in view of its understanding with the suppliers. Thus, no expenditure was ultimately claimed because the liability was contingent. In contrast, the assessee had never disclosed the impugned amounts as contingent liabilities. He further submitted that, if the assessee now characterized them as contingent, the expenditure would in any event be disallowable under section 37(1) of the Act, and the provisions recorded in its audited books of account would become questionable.

11. He also submitted that the assessee maintained its books of account on the accrual basis in accordance with accepted accounting principles and applicable accounting standards. Having recorded the expenses on that basis, the assessee could not contend that the liabilities were contingent so that no tax was required to be deducted at source.

12. We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee admittedly made provisions aggregating to ₹355 lakhs for various professional services as at 31 March 2014 without deducting tax at source. This included a provision of ₹1.5 crores for offshore professional lawyers, on which no tax was deducted. In our view, insofar as the payments are related to resident professional service providers, the assessee was required to deduct tax at source under section 194J of the Act. The nature of the services, the amount payable, and the payees were all identifiable, and the provisions were made on that basis. The assessee therefore could not avoid its obligation to deduct tax at source merely because the bills were received in the following year. To that extent, we uphold the orders of the lower authorities. The liability to deduct tax at source crystallized on 31 March 2014, when the assessee made provisions for the exact amounts payable to the identified lawyers. The fact that bills for the same amounts were subsequently received from those entities further shows that the provisions were neither ad hoc nor unquantified. It is also undisputed that the assessee debited the amounts to the profit and loss account and credited them to an account for expenses payable towards legal and professional fees, which fall within section 194J. We therefore reject the learned authorized representative’s contention that no liability to deduct tax at source arose on the provisions, or that deduction of tax in the subsequent year, on receipt of bills, absolved the assessee from its obligation to deduct tax at source when the provisions were made on 31 March 2014.

13. However, we accept the assessee’s contention that, where tax on any such sum is deducted in a subsequent year, or is deducted during the relevant previous year but paid after the due date specified under section 139(1) of the Act, the corresponding expenditure is allowable in the previous year in which the tax is actually paid. Conversely, where tax deducted at source is deposited on or before the due date for filing the return under section 139(1), the deduction must be allowed in that assessment year. This clear statutory position is required to be followed by the learned Assessing Officer.

14. In the present case, the assessee made payment of ₹16,873,959 to a law firm, out of this amount, tax was deducted at source on ₹10,862,489 and, according to the assessee, deposited with the Central Government before the due date for filing the return of income for assessment year 2014–15. So this sum cannot be disallowed for AY 2014-15. The balance amount of ₹6,011,470 was also subjected to TDS, but the tax was deposited after the return was filed. Accordingly, that amount is allowable as deduction in assessment year 2015–16.

15. Similarly, in the case of Mr. Darius Khambatta, the assessee stated that payment was made on 22 September 2014 and that tax was deducted and deposited before the due date for filing the return of income under section 139(1) of the Act for assessment year 2014–15. Therefore, no disallowance could be made in respect of this payment.

16. In the case of AZB Partners, tax on ₹9 lakhs was deducted and deposited with the Central Government on or before the due date for filing the return of income for assessment year 2014–15. Therefore, no disallowance is called for to that extent. However, tax on the further sum of ₹622,068 was deposited after the due date for filing the return for assessment year 2014–15; accordingly, that amount is allowable as deduction in assessment year 2015– 16.

17. With respect to the payment of ₹14,239,905 to offshore lawyers, the assessee submitted that the amount was not chargeable to tax in India and, therefore, no obligation to deduct tax at source arose under section 195 of the Act. We agree with the learned authorized representative that the learned Assessing Officer and the learned CIT(A) did not examine this aspect, despite it having been raised before them. Accordingly, we restore the issue of disallowance relating to payments made to offshore lawyers to the file of the learned Assessing Officer. The assessee shall establish that the payments made to those entities were not chargeable to tax in India and that the benefit of the applicable Double Taxation Avoidance Agreement was available. The learned Assessing Officer shall examine the matter afresh in accordance with law.

18. As regards the provision of ₹100 lakhs, out of which ₹8,821,545 has been identified as payable, the assessee was required to deduct tax at least on the identified amount. If, on verification, it is found that tax was deducted after the end of the financial year but deposited before the due date for filing the return of income for assessment year 2014–15, the corresponding addition shall be deleted. Otherwise, the expenditure shall be allowed in the year in which the tax is actually deducted and deposited. Subject to this verification, the disallowance for assessment year 2014–15 is confirmed.

19. The assessee stated that a provision of ₹10 lakhs was made as payable to Sapphire Professional Services but was reversed in the subsequent financial year, as the amount was ultimately not payable to that party. Since the provision was not ascertained liability, the expenditure is disallowable under section 37(1) of the Act. The disallowance is therefore confirmed.

20. As regards the judicial precedents cited before us, we note that, in its submissions dated 26 September 2016 and 29 September 2016, particularly paragraph 1.1 at page 73 of the paper book filed by BMR Associates LLP, the assessee itself stated that the provisions for expenses were not contingent in nature. Therefore, as submitted by the learned Departmental Representative, the decisions of the Hon’ble Gujarat High Court and the Hon’ble Karnataka High Court relied upon by the assessee do not apply to the facts of the present case. The assessee’s reliance on those decisions is therefore misplaced.

21. We also direct the assessee that whenever the tax deducted at sources is deposited on or before the due date of filing of ROI for AY 2014-16=5, on verification, the ld AO should delete the disallowance. Where such tax is deducted and deposited after the due date of filing of ROI for AY 2014-15, the ld AO on verification should allow the deduction for that year and retain the disallowance for this year.

22. In the result appeal of the assessee is partly allowed as indicated above.

Order pronounced in the open court on 15^thJune, 2026.