One of the most disputed arguments between assessee and income tax department is that whether payments made towards specified expenditure attracts disqualification under section 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 year end 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 2019 to Mach 31st 2020 should only be accounted in FY 2019-20 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 2019 to Mach 31st 2020 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.
The above is the personal thought of the author ‘Manish Kumar Agarwal, FCA‘ and is ready to accept any kind of suggestion or feedback. Please mail me at [email protected]
Republished with Amendments