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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 mr_manish_ca@yahoo.com

Republished with Amendments

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57 Comments

  1. siddharth waghmare says:

    Dear sir,
    If invoice date is 3 march 2022 but service given in next month april 22 so can i booke this invoice in april-22 and deduct tds in april????

  2. Its Aaba says:

    Dear Sir,

    Query related TDS provision credit not avail.

    As per my comapny book PO issued on dated 31-03-2020 also expenses book as provision in books and also dedcuted TDS on same and file return for period 31-03-2020. But billed received by party Aug 2020 dated as per party said bill issed for fy 20-21 , so they can not claim the TDS amunt , which we dedcuted on provsion exp.

    So please teel me party can claim TDS or not.

  3. Rakesh Gupta says:

    Dear Sir, one co booked the amount of Rs 3.5 L nd tds @7.5% showing in my as26 on 25.03.2021 for FY 2020-21. But payment was made to me in June for Rs 1.61 L after deducting tds out of 1.75 L.
    I’m an individual nd now have higher tax liability without any money reced during FY 20-21. Pl let me know why this entry not being subtracted as is being done by banks, govt depots etc as being seen in my as26. What is provision of law for treatment of tax? Pl help. Thanks

  4. Dhiraj Sangwai says:

    Hello, If we book exps in March ( previous F.Y ) without GST & Invoice received in May with GST ( current F.Y.) then what will be entry in current year ?
    Please suggest

  5. Umar Nasir says:

    Dear Sir
    I have received notice from CPC Section 40 a(ia).Assesse purchase a land amount 63,46000.00
    CPC Disallowed 30% of 63,46000.00=1903800.
    I am agree to pay 1% TDS on 6346000.What is the procedure to Solve the matter.CPC Issued the Demand.

  6. Gaurav says:

    Hi,

    The TDS was deducted against the provision in the previous financial. Can we claim its return because it has increased our sales of the previous financial and the same is reflecting in form 26AS

  7. Shweta singh says:

    What is the journal entry ” if i received a invoice dated on 1Apr,2020 and period of rent charged was march (1mar, 2020 to 31 mar, 2020) with GST and TDS applicable”??

  8. Shweta singh says:

    Please reply,

    What is the journal entry including GST and TDS if the invoice date is 1Apr, 2020 and the period for which the the invoice raised or service provided was 1Mar, 2020 to 31Mar, 2020 with example.

  9. K.RENGARAJAN says:

    Sir.,

    Please clarify that how to account in GL for Security charges of current month ie., for July2020 with GST and TDS deduction,but the July2020 bill is received in Next month ie., in August2020

    Thanks and regards

  10. sunil shetty says:

    hi,

    Team please suggest below query

    I have a situation that some off expenses we don’t know the party name and invoice so, in this case how can pass the reverse entry for the same. and i have only payment entry.

    Please help me.

    Thank you in advance.

  11. KARTHE says:

    Hi there, If TDS not provided on provisions like Audit fees payable, the TDS not provided shall be disallowed. But is there any accounting violations in not providing TDS? If yes kindly refer the source/ Sec Number

  12. Ankit says:

    I had received an Invoice dated 31/03/2019 of courier charges in June 2019. I had made a provision of expense in 31st March as balance sheet is still not finalised and paid the TDS amount with interest. And this provision reverse in June 2019 with Vendor Account. TDS return for Q4 (18-19) had already filed in May 2019.

    Now my query is :
    1. As TDS return for Q4 18-19 had already filed, Can I file this TDS on provision amount with respective vendor in Q1 19-20 TDS return? or do i need to revise Q4 18-19 return again and file the respective entry in revise return.

    2. If we forgot to file any TDS amount in previous year fiscal year TDS returns, can i file that entry in current fiscal year TDS return or do we need to revise TDS return of last FY.

    3. My another question is, if we forgot to deduct any TDS amount in earlier Fiscal years, Can we deduct that amount in current year and file in current year TDS return.

  13. SHALINI KV says:

    Jan – March bills are got on may…No entry or not accounted that bill. We may make provision entry on may.HOw the Tds deducted.
    IS tds deducted on may month or March

  14. GIRIDHARAN KASTURI says:

    Sir
    I have paid rent of April 2019 on march 2019 deducting TDS. How is the provision for expenses treated for TDS. Pl confirm

  15. Pramod Dhore says:

    Sir,

    Please suggest, how to book entry TDS deducted but not deposit & not paid to Employee/deductee.

    I want to book expenses for this amt.

  16. 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?

  17. 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.

  18. 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.

  19. 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.

  20. 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.

  21. 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.

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. 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.

  28. 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

  29. 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 !!

  30. 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.

  31. 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 ??

  32. 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.

  33. 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 ??

  34. 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.

  35. 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

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