Case Law Details
Toyota Kirloskar Motor (P) Ltd. Vs ITO (Karnataka High Court)
The Supreme Court in SHOORJI VALLABH DAS supra has held that income tax is a levy on income and the Act takes into account two points of time at which the liability to tax is attracted i.e., accrual of income or its receipt but substance of the matter is the income. It has further been held that if the income does not result at all, there cannot be a levy of tax even though in book keeping entry is made about a hypothetical income which does not materialize. The High Court of Delhi in Ericsson Communications Ltd. supra has also taken a view that in the absence of any accrual of income, there is no obligation on the part of the assessee to deduct tax at source. Similar view has been taken by various other High Court’s including this court.
In the light of aforesaid well settled legal position, we may advert to the facts of the case on hand. In the instant case, the provisions were created during the course of the year and reversal of entry was also made in the same accounting year. The Assessing Officer erred in law in holding that assessee should have deducted tax as per the rate applicable along with interest. The authorities under the Act 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 and 201(1A) could not have been initiated. For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the revenue.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2012-13. The appeal was admitted by a bench of this Court vide order dated 09.11.2018 on the following substantial questions of law:
“Whether in the facts and circumstances of the present case, the ITAT was right in law in affirming the order of CIT(A) in treating the appellant as “assessee in default” under Section 201(1) of the Act for non deduction of tax at source from the amount of Rs.8,74,32,988/- when such amount had not accrued to payee or any person at all?”
2. Facts leading to filing of this appeal briefly stated are that the assessee is a Joint Venture and is a subsidiary of Toyota Motor Corporation, Japan. The assessee is engaged in manufacturing and sale of passenger cars and multi utility vehicles. The assessee follows mercantile system of accounting and as per its accounting policies, the assessee at the end of the financial year i.e., 31st March of every year makes provision for marketing expenses, overseas expenses and general expenses on estimate basis in respect of works / contracts / services, which are in progress of completed but vendor is yet to submit bills to ascertain closest amount of profits / loss. The aforesaid provision is made in conformity with Accounting Standard -29. Subsequently, as and when invoices are received from the vendors the invoice amount is debited to provision already made with corresponding credit at the respective vendors amount. The assessee also deducts Tax Deductibe as Source (hereinafter referred to as ‘the TDS’ for short) h as required under the provision of the Act and remits the same along with interest to the government.
3. For the Assessment Year 2012-13, the assessee had made provision towards marketing, overseas and general expenses to the extent of Rs.1114,718,61 3/-. However, at the time of filing of the return of income for the aforesaid Assessment Year the provision which remained un-untilized as per books of accounts as on 30.04.2012 and on 31.10.2012 in respect of overseas and domestic payments respectively for an amount of Rs.9,27,41,2 39/- was not claimed as deduction under Section 40a(i) and (ia) of the Act and the same was offered to tax. Subsequent to filing of the return, the assessee received invoices from the vendors for the Assessment Year 2012-13 and the amount mentioned in the invoices was debited to the provision already made with a corresponding credit to the respective vendors account. The amount indicated in the invoices for a sum of Rs.5,589,454/- was utilized against the provision and the TDS along with interest was also discharged at the time of credit of the invoice amount to the account of the vendor. Subsequently, the amount which remained un-utilized i.e., a sum of Rs.8,71, 32,988/- in the provision account after completion of negotiation / finalization of services was reversed in the books of accounts of the assessee. The assessee received a communication on 30.07.2013 asking it to furnish details of computations of income, audit report in Form 3CD for the year ending 31.03.2012 reflecting the details of disallowances made under Section 40a(i) and (ia) of the Act. The assessee thereupon furnished the information vide communication dated 12.08.2013.
4. The Assessing Officer initiated the proceeding under Section 201 and 201(1A) of the Act and treated the assessee as assessee in default in respect of the amount made in provision, which was reversed / un-utilized for a sum of Rs.8,71, 32,988/- and the amount of TDS and interest on the aforesaid amount under Section 201(1A) was computed at Rs.14,18, 327/- and Rs.25,195/- was levied for late remittance of TDS. Thus, a total sum of Rs.17,10,879/- was determined as payable by the assessee.
5. The assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 20.06.2014 affirmed the order passed by the Assessing Officer. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’ for short). The tribunal by an order dated 31.10.2017 dismissed the appeal preferred by the assessee. In the aforesaid factual background, this appeal has been filed.
6. Learned Senior counsel for the assessee submitted that the Authorities under the Act erred in law in holding that assessee was liable to deduct tax at source under Section 195, 194C, 194J, 194H and 194I of the Act when it credited the amount of Rs.8,71, 32,988/- to the provision for expenditure account for domestic and overseas payment. It is further submitted that the amounts in respect of which a provision was made and which remained un-utilized was reversed in the books of accounts as the same was not payable to anyone and therefore, no tax could be levied on an amount which was payable to anyone and did not accrue in any income. It is contended that no tax liability can be fastened on the assessee on account of an entry made in the books of accounts in the absence of any income and a machinery provision in a taxing statute has to be interpreted with reference to the taxing event. It is further submitted that in the fact situation of the case neither provision of Section 201 nor Section 201(1A) could have been invoked. However, the aforesaid aspect of the matter have been considered by the authorities. In support of aforesaid submissions, reliance has been placed on decisions in ‘DIRECTOR OF INCOME TAX VS. ERICSSON COMMUNICATIONS LTD., (2015) 378 ITR 395, ‘KARNATAKA POWER TRANSMISSION CORPORATION LIMITED VS. THE DEPUTY COMMISSIONER OF INCOME TAX (TDS) CIRLCE 26(2)’, (2016) 383 ITR 59, ‘COMMISSIONER OF INCOME TAX, BOMBAY CIT I, BOMBAY VS. SHOORJI VALLABHDAS & CO.’, (1962) 46 ITR 144, ‘PR.COMMISSIONER OF INCOME TAX-4, AHMEDABAD VS. SANGHI INFRASTRUCTURE LTD, R/TAX APPEAL NO.404 OF 2018, ‘SULTLEJ COTTON MILLS LIMITED VS. COMMISSIONE ROF INCOME TAX, CALCUTTA’, (1978) 4 SCC 358, ‘TA PARIA TOOLS LIMITED VS. JOINT COMISSIONER OF INCOME TAX SPECIAL RANGE-I, NASIK, (2015) 7 SCC 540, ‘CIT, BANGALORE VS. B.C.SRINIVASA SHETTY’, (1981) 2 SCC 460, ‘SUNIL SIDARTHBHAI VS. COMMISSIONER OF INCOME TAX, AHMEDABAD, GUJARAT’, (1985) 4 SCC 519.
7. On the other hand, learned counsel for the revenue submitted that TDS on the gross amount has to be deducted as soon as the provision is made and on the basis of the entries made in the books of accounts, the order of assessment is passed. It is further submitted that the Commissioner of Income Tax (Appeals) and the tribunal has rightly held that the assessee is liable to deduct tax at source under Sections 195, 194C, 194J, 194H and 194I of the Act. It is also submitted that no interference with the order of the tribunal is called for in exercise of powers under Section 260A of the Act.
8. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 201(1) and 201(1A) of the Act, which reads as under:
201(1) Where any person, including the principal officer of a company,-
(a) who is required to deduct any sum
in accordance with the provisions of this Act or
(b ) referred to in sub-section (1A) of section 192, being an employer,
does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:
Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with thteprovisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee
(i) has furnished his return of income under Section 139;
(ii) has taken into account such sum for computing income in such return of income and
(iii) has paid the tax due on the income declared by him in such return of income,
And the person furnishes a certificate to this effect from an accountant in such form a may be prescribed.
1A Without prejudice to the provisions of Sub-Section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest-
(i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and
(ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid,
And such interest shall be paid before furnishing the statement in accordance with the provisions of sub-Section (3) of Section 200.
9. Thus, it is evident that if an assessee fails to deduct the TDS as required under the provisions of the Act, he is treated as assessee in default. Section 194C (1) of the Act mandates that a person who makes a payment to any non resident Indian, has to deduct the tax at the time of payment. Similar language is employed in Section 194J, 194H and 194I. Thus, the tax is required to be deducted at the time when the payment is made. In other words, when an income accrues under the provisions of the Act.
10. The Supreme Court in SHOORJI VALLABH DAS supra has held that income tax is a levy on income and the Act takes into account two points of time at which the liability to tax is attracted i.e., accrual of income or its receipt but substance of the matter is the income. It has further been held that if the income does not result at all, there cannot be a levy of tax even though in book keeping entry is made about a hypothetical income which does not materialize. The High Court of Delhi in Ericsson Communications Ltd. supra has also taken a view that in the absence of any accrual of income, there is no obligation on the part of the assessee to deduct tax at source. Similar view has been taken by various other High Court’s including this court.
11. In the light of aforesaid well settled legal position, we may advert to the facts of the case on hand. In the instant case, the provisions were created during the course of the year and reversal of entry was also made in the same accounting year. The Assessing Officer erred in law in holding that assessee should have deducted tax as per the rate applicable along with interest. The authorities under the Act 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 and 201(1A) could not have been initiated. For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the revenue.
In the result, the impugned orders dated 31.10.2017, 20.06.2014 and 11.03.2014 passed by the tribunal, Commissioner of Income Tax (Appeals) and the Assessing Officer respectively are hereby quashed. In the result, the appeal is allowed.
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