ITAT Delhi held that initiation of action u/s. 154 of the Income Tax Act on the basis of shortfall in TDS on year end provisions reported in Form 3CD of the assessee cannot be faulted. Accordingly, matter remanded to AO.
Facts- The Assessing Officer (AO) found that for F.Y. 2012-13 the assessee deductor was required to deduct TDS aggregating to Rs. 15,59,44,667/- (including interest) on gross amount of Rs. 2,87,53,24,755/- under various TDS provision of the Income Tax Act, 1961 which the assessee had failed to do. AO, therefore, issued notice u/s. 154 of the Act to rectify the order passed by him u/s. 201(1)/201(1A) of the Act whereby demand of Rs. 4,39,84,927/- was raised.
Aggrieved, the assessee appealed before the CIT (A). CIT(A) quashed the impugned order of the AO. Being aggrieved, revenue has preferred the present appeal.
Conclusion- It is not in dispute that the AO proceeded to initiate action under Section 154 of the Income Tax Act on the basis of shortfall in TDS on year end provisions reported in Form 3CD of the assessee for FY 2012-13. If that be so, we are of the view that action of the AO to resort to the provisions of Section 154 of the Income Tax Act cannot be faulted. We also observe that no finding on merits of the case has been recorded by the CIT (A). We, therefore hold that in the interest of justice and fair play the issue needs to be restored to the file of the AO with a direction to decide the issue under consideration afresh in accordance with law after allowing reasonable opportunity to the assessee to explain its case.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the Revenue arises out of the order dated 11.02.2020 of the Ld. Commissioner of Income Tax, (Appeals) (“CIT(A)”) Delhi – 41 pertaining to Assessment Year (“AY”) 2013-14.
2. The Revenue has raised the following grounds:-
“1. Whether on the facts and circumstances of the case and in law, the CIT(A) failed to appreciate the fact and quashed the order and finding on the applicability of TDS on provisions in the balance sheet is not required to be made? Whereas the auditor of the assessee has reported TDS default in the statutory Audit Report i.e.in 3CD.
2. Whether on the facts and circumstances of the case and in law, the CIT(A) failed to appreciate the fact and quashed the order o f AO, which is based on the facts mentioned in Audit report i.e. 3CD Report and is covered by the provisions of section 154 of Income Tax Act? “
3. That the order of the CIT(A) being erroneous in law and on facts needs to be vacated and the order of the ACIT is to be restored.
4. That the appellant craves leave to add or amend any one or more of the ground of the appeal as stated above as and when need for doing so any arise. ”
3. In brief the Ld. Assessing Officer (“AO”) found that for Financial Year (“FY”) 2012-13 the assessee deductor was required to deduct TDS aggregating to Rs. 15,59,44,667/- (including interest) on gross amount of Rs. 2,87,53,24,755/- under various TDS provision of the Income Tax Act, 1961 (the “Act”) which the assessee had failed to do. He, therefore, issued notice dated 18.01.2017 under section 154 of the Act to rectify the order passed by him on 27.03.2015 under section 201(1)/201(1A) of the Act whereby demand of Rs. 4,39,84,927/- was raised. In response, the assessee furnished explanation vide reply dated 20.02.2017 which was not acceptable to the Ld. AO. He, therefore computed the liability of the assessee as under and raised demand accordingly:
|S. No.||Section||Gross Amount||TDS Amount|
4. Aggrieved, the assessee appealed before the Ld. CIT(A). Before him the assessee made submissions which the Ld. CIT(A) incorporated in para 4 of his order. The assessee had challenged the legality of proceedings taken by the Ld. AO under section 154 of the Act as also action of the Ld. AO on merits. The Ld. CIT(A) quashed the impugned order of the Ld. AO and allowed the assessee’s appeal observing in para 5 to 7.1 of his order as under:-
“5. Decision in appeal:
5.1 I have carefully considered the Submissions of the appellant, relevant provisions of law, and order issued by the AO and my findings on the issues raised by the appellant are given below.
Ground no.1 being general in nature does not need separate adjudication.
Ground no. 2.1 to 2.5, raised by the appellant relate to the rectification u/s 154 as being out of jurisdiction as it involves the rectification of an issue which as per the appellant is not a mistake apparent from record and is of debatable nature.
5.2 The facts in this case are that order u/s 201 r.w.s. 201(1A) was passed by the AO on 27.03.2015 raising demand of Rs. 4,39,84 927/- u/s 194H of the Act on account of discount passed on to the assessee’s distributors towards sale o f services through RCV etc. In Appeal proceedings against the above order the CIT (A) confirmed the order of the AO vide order dated 18.12.2017. The appellant during the course of hearings has submitted that its appeal against the order o f CIT (A) dated 18.12.2017 is pending before the ITAT. However, from the origina l demand of Rs. 4,39,84,927/- raised by the AO, the assessee has paid Rs. 3,32,34,607/- under protest.
5.3 As per order passed u/s 154 r.w section 201(1) dated 19/02/2018 which is the subject matter of appeal, the AO has determined the following liability in the order.
|Particular||Amount in Rs.|
|1.||Total Liability as per order u/s 201(1)/201(1A) dated 27.03.2015||4,39,84,927/-|
|2.||Interest u/s 220 (2) of the Income Tax Act, 1961@ 1% per month till Feb. 2018||1,53,94,724/-|
|3.||Tax Liability for non deduction of tax as mentioned above||15,59,44,667/-|
|4.||Interest u/s 201(1A) on (3) @ 1% pr month till Feb. 2018||30,73,31,672/-|
5.4 It is seen that the liability / 20143) 2201014) of Rs 4.39 crore is same the original order dated 27.03.2015. The AO has added interest u/s 220(2) on the aforesaid amount from the date of the original order the date of rectification order dated 19.2.2018. As submitted by the appellant, out of the demand of Rs. 4.39 crore it has paid Rs. 3.32 crore. The A.O is directed to verify the claim of the appellant at the time of giving appeal effect to this order and rework the demand of any at that time. Accordingly ground number 14 and 15 are disposed off.
5.5 The two main issues in the appeal agitated by the appellant are-
i) Whether the AO could raise demand for non deduction of withholding tax on year end provisions booked in the expense account and mentioned in Form 3CD by passing an order u/s 154 of the IT Act?
ii) Whether the AO was correct in holding that the assessee was in default for non deduction of withholding tax on year end provisions booked in the expense account and mentioned in Form 3CD.
5.6 Regarding the first point it is seen that the AO has passed order u/s 154 rw 201(1) of the IT Act. The provisions of section 201(1) are reproduced as under:
“Consequence of failure to deduct or pay.
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 o f 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 the provisions of this Chapter on the sum paid to a 52[payee] or on the sum credited to the account of a 52[payee] shall not be deemed to be an assessee in default in respect of such tax i f such 52[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 as may be prescribed:
Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax
(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 o f 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:
Provided that in case any person, including the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a 52[payee] or on the sum credited to the account of a 52[payee] but is not deemed to be an assessee in default under the first proviso to sub-section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such 52 [payee].
(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1)
(3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any port of the tax from a person resident in India, at any time after the expiry of seven years from the end of the financial year in which payment is made or credit is given 53[or two years from the end of the financial year in which the correction statement is delivered under the proviso to sub-section (3) o f section 200 whichever is later].
(4) The provisions of sub-clause (i) of sub-section (3) of section 153 and o f Explanation 1 to section 153 shall, so far as may, apply to the time limit prescribed in sub-section (3)
Explanation. For the purposes of this section, the expression “accountant shall have the meaning assigned to it in the Explanation to sub-section (2) of section 288
5.7 The issue of withholding tax on year end provisions has been an issue o f litigation and has been deliberated upon in various judicial forums. There is no doubt that the taxability of year-end provisions is a debatable issue which needs to be adjudicated by a detailed examination of facts and reasoning on issues that could have conceivably different opinions.
The appellant has relied on following judicial precedents regarding the submission that debatable issues involving two opinions cannot be the subject matter of rectification u/s 154:
1. Principal Commissioner of Income Tax v/s Aura Securities Pvt. Ltd.  96 com (Gujarat)
2. Principal Commissioner of Income Tax-14, v/s Vinod Kumar Surana  87 com 347-(Calcutta)
3. Assistant commissioner of Income Tax, Circle- 2(2)(1), Mumbai v/s
Mahindra & Mahindra Ltd.  86 com 162 (Mumbai-Trib.)
5.8 I find the contention of the appellant supported by judicial precedents convincing that Section 154 of the Act clearly provides to rectify only those mistakes which are apparent from the record and not on debatable issues.
6.1 Regarding the issue of year end provisions I find that the same has been the subject matter of appeal in AY’S 2014-15, 2015-16 & 2016-17. As per facts of the case, on the basis of enquiry and reference received from the A.O, the concerned Addl. CIT levied penalty u/s 271C vide order dated 30.10.2017 for all three assessment years i.e. 2014-15, 2015-16 and 2016-17. The appeal of the assessee for those years has been allowed by a combined order for all the three years dated 04.09.2018 on the ground that the expenses were only in the nature o f year end provisions and as no identifiable amount was paid or credited, therefore liability of TDS did not arise. The CIT (A) has noted as under:-
“I have considered the facts and circumstances of the case and submission of the appellant. I find that the appellant has been consistently following the same accounting system. Since, the expenses are identifiable, therefore, provision is made to comply with the accounting standard and fair presentation of financia l statements as per regular accounting practice. On calculation of tax computation, relevant expenditure is disallowed u/s 40(a) (ia)/40(a)(i) of the IT Act and added back and the actual amount which has been crystallized during the relevant year is reduced. In the subsequent year, as and when the amount of expense is paid or credited to the relevant party then tax on the same is deducted. This happens because of facts that on several sites expenses are incurred based on allocated budget of the head office and continues to be pending as work in progress at the end of the financial year. Therefore, the appellant has to make several provisions in respect of approved budget expenses based on the site budgets and contract on which invoices are not received till the date of booking of provision. Since the amount was neither credited nor paid, TDS liability did not arise. In view of the peculiar circumstances of the case of the appellant. I find merit in its argument that since only provision was made and there was no amount credited or paid to any identifiable person, therefore, liability of TDS did not arise. As and when the amount is credited or paid, TDS is deducted. Under these circumstances and in view of the case laws relied upon by the appellant in its written submission, I am of the view that on such facts penalty u/s 271C is not found to be sustainable. ”
6.2 Although, the issue in the instant appeal is the same as that in the penalty proceedings u/s 271C, however the applicability of the provisions under chapter XVII is different from penalty proceedings. One does not follow the other automatically as the liability and scope of the substantive and penal provisions are different. Hence the appeal against the order u/s 154/201(1) has to be dealt separately from the order of the CIT (A) against 271C order. However, the substantive issue of applicability of TDS on year end provisions is not taken up in this order as the demand raised by the AO as per order dated 19.2.2018 is beyond the scope of section 154 proceedings. Accordingly, the said order is quashed and finding on the applicability of TDS on provisions in the balance sheet is not required to be made.
7.1 Further regarding the addition of interest u/s 201(1)/201(1A) on account o f year end provisions from the date of deduction till the date of the assessment order under appeal, the same is merely consequential in nature to the issue o f year end provisions. Therefore, on the facts and circumstances of the case and following the judicial precedents relied on by the appellant the order passed by Ld. AO u/s 154 of the Act is held to be unjustified and is quashed. ”
5. Dissatisfied, the Revenue is in appeal before the Tribunal and all the grounds relate thereto.
6. The Ld. CIT-DR relied on AO’s order. He submitted that on facts the Ld. AO was justified in resorting to provisions of section 154 of the Act. There is mistake apparent from the record. He further contended that the Ld. CIT(A) has not dealt with the issue on merits.
7. The Ld. AR drew our attention to the observations of the Ld. CIT(A) on the issue of withholding tax on year end provisions and inapplicability of the provisions of section 154 of the Act. The Ld. AR also referred to the reply dated 20.02.2017 submitted in response to notice dated 18.01.2017 issued by the Ld. AO, copy of which is at pages 109-110 of Paper Book. Our attention was also drawn to the detailed reply filed before the Ld. AO on 13.03.2018. A copy thereof is at pages 131-139 of the Paper Book.
8. We have carefully considered the rival submissions and perused the record. It is not in dispute that the Ld. AO proceeded to initiate action under section 154 of the Act on the basis of shortfall in TDS on year end provisions reported in Form 3CD of the assessee for FY 2012-13. If that be so, we are of the view that action of the Ld. AO to resort to the provisions of section 154 cannot be faulted. We also observe that no finding on merits of the case has been recorded by the Ld. CIT(A). We, therefore hold that in the interest of justice and fair play the issue needs to be restored to the file of the Ld. AO with a direction to him to decide the issue under consideration afresh in accordance with law after allowing reasonable opportunity to the assessee to explain its case. We order accordingly.
9. In the result, the appeal of the Revenue is treated as allowed for statistical purposes.
Order pronounced in the open court on 1st August, 2023.