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

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Category : Income Tax (28248)
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Tags : CA Manish Agarwal (17) section 40(a)(ia) (219) TDS (1121)

37 responses to “TDS on Provision for Expenses for which no invoice been received”

  1. Bikash Mohanty says:

    Should I file Return for tds deducted on provisional expenses. If yes, how do I know the party name & how to treat difference amount between Invoice & provision booked?

    • Pritesh Vaghela says:

      You need not to make provision for TDS if the party is not identifiable.
      Above comment is based on the decision of Bombay HC .

  2. prashanth.gr says:

    march month expenses, we are booked provision but now vendor change the billing date as april current date

  3. VARSHA says:

    Dear Sir, Madam

    New GST what about percentage of TDS.

  4. Ashok Patankar says:

    Dear Sir,

    Please clarify my point, which is as under :-

    I am doing a works contract. I have not raised invoices to my customer for the month of March in F/Y. 2014-15. But I have taken in stock as works executed and later on I have raised the invoices in F/Y. 2015-16. However, my customer deducted TDS on a certain amount of work executed during March, 15, the TDS also reflects in 26AS. What type of Provision is to be made by me in my books of accounts. Closing balance of my customer as on 31.03.2015 is NIl.

    Please reply.

    • Rana Chatterjee says:

      Dear Mr. Ashok Patankar, it is the common practice of business house to make provision of expenses at the year end even though they have’nt received invoices from the service provider in that year. When they make provision of such expenses they are liable to deduct TDS at the prescribed rate to avoid disallowance of that expense. Non deduction of TDS will attract interest u/s 201 (IA) with a levy of penalty u/s 271C during assessment and the ITO will make addition of such expenses.
      Now in your case, during the year 2014-2015 you have provided some services in the month of March 2015 and you have not submitted invoice during March 2015 which you have submitted in the next financial year and the service receiver provides expense in his books with a deduction of TDS which is reflected in 26AS.
      So you have to pass an adjusting entry in your books as on 31.03.2015 as follows :
      Debtors A/c —— Dr (Service amt less TDS)
      TDS A/c ——–Dr ( TDS amt as per 26AS)
      To Advance of Receipt of Service ( Gross Amt.)
      “Advance of Receipt of Service” will be reflected under the Head “Current Liabilities” in your Permanent Records ie. Balance Sheet.
      In the next year ie. on 2015-2016 you have raised invoice and accordingly Sundry Debtors will be debited and income account will be credited as follows :
      Sundry Debtors A/c — Dr
      To, Service Charges A/c —- Cr
      ( with the value of your invoice )
      Now, at the same time you have to pass another adjusting entry during 2015-2016 as follows :

      Advance of Receipt of Service A/c — Dr
      To, Sundry Debtors
      because the debtors balance have already been increased and included in the closing balance of 2014-2015 with the adjusting entry during 2014-2015.
      Hope this will clear your doubts

  5. karuna says:

    can a exp related to previous years can be booked in p&l account of company . pls suggest

  6. Saurabh says:

    If telephone bill is in the name of employee and the expense is reimbursed by the Company .Does it attracts tds ??????

  7. CHANDULAL DARJI says:

    we are in export business, our export bills are up to year ending 31.03.2015 and its CHA & Other charges bills will be receive in next financial year ie. after 1-4-2015 so
    pl.guide us our liability of TDS on CHA Bills which was expenseout in 2014-15 in our Book and CHA bills of 2015-16.

  8. Kailash says:

    Dear Sir,

    We are the contractors for construction of a Hospital Building.
    We have availed the interest bearing mobilisation advance from client
    The client has calculated the interest and deducted from our running account bills
    Such interest has been booked as expenditure in our books
    TDS could not be affected on such interest as there is no control over payment of such sum to the client and the entire amount of interest has been deducted from our payment
    The gross amount of bill is suffered TDS while releasing the payment to us by client.
    Kindly let me know the applicability of TDS on such interest and consequence of not making TDS on interest.

  9. rangaraj says:

    what will be entry for the rent which is to be adjust in the Rent deposit, which also have the TDS deduction impact

  10. Anand Burud says:

    Dear Sir’s

    One of our vendor’s payment i wrongly deducted TDS under 194H(10%) insted of 194C(1%) and also tds payment is made, so is there any solution to rectify this entry. please reply me.

  11. Sunil Rawat says:

    Here, I would like to share my experience in one of my assessee’s case, where he did not deducted TDS on provision for expense, just because he did not received the final invoice copy even if he knew about the name of party and pan number of the same.

    Tax auditor put this remark on his report and disallowed the same in Tax Audit Report, however assessee received invoice copy after tax audit report date but before filing income tax return so he reversed the provision for expense in succeeding year (i.e. on receipt of invoice which has date of succeeding year only) and deducted the tax on expense booked as per invoice and at the time of filing return of income he allowed those expenses.

    At the time of assessement ITO raised the query regarding mismatch of disallowance of expense as per tax audit report and income tax return, assessee explained the case and he proved that he has deducted TDS on receipt of actual biil because expense amount was not known to him at the time of provision. And ITO allowed the expense.

  12. 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

  13. sagar says:

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

  14. 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

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