TDS applicability on provision made at the year end

TDS APPLICABILITY ON PROVISIONS MADE YEAR END WHERE PAYEE NOT
KNOWN AND AMOUNT INDETERMINATE

The Issue is relating to TDS on provisions for Exps. at the year end. The TDS Provisions are very clear that if any amount of Expense is charged to Trading and Profit & Loss account which attracts TDS deduction, TDS has to be deducted and paid as per Provisions contained in Income Tax Act else Expenses so charged shall be liable to disallowed as per Section 40a(ia).

Now the question which is a matter of discussion is whether TDS provisions are applicable on “Provisions made in the books of accounts”. In simple reading of relevant sections the answer is positive and accordingly TDS provisions are applicable on all provisions made in the books of accounts.

Now question arises how TDS Provisions can be applied where Payee is not known as TDS is deducted and deposited in payee’s name. In business parlance at the year end sometimes on accrual basis and prudence, certain expenses have to be accounted for in the relevant financial year on estimated basis to bring true and fair financial pictures. As the payee name in some cases not known at the time of provisions how TDS can be deducted.

Before reaching on any conclusion first we have to refer Explanation to Section 194A(1) which are as under-

Explanation – For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to  the account of the payee and the provisions of this section shall apply accordingly. [Emphasis on red colour words]

Further due to difference of opinions the said matter had already gone in appeals and various judgments pronounced by various ITAT which says that” TDS mechanism cannot be put into practice until identity of the person in whose hands, it is  includible as Income can be ascertained.”. Even in one case it has been pronounced that “TDS shall be made only if the payee was identified and quantum of payment was also ascertainable on the last day of the FY.” Following are the relevant judgements:-

1. Industrial Development Bank of India Vs. ITO[2006] 104 TTJ 230 (Mum)

2. Dishnet Wireless Ltd. Vs. Dy. CIT [2015] 123 DTR (Trib) 153 (Chennai),

3. IBM India P.Ltd. [2015] 128 DTR (Trib) 25 (Bang) ; and

4. Karnataka Power Transmission Corporation Ltd. Vs. Dy. CIT (TDS) [201 6} 383 ITR 59 (Karn.)

We also know about a Letter of CBDT, addressed to Tata Iron and Steel Co. Ltd. bearing No. 275/126/96-IT(B), Dt. 05.07.1 996 Stating that there will be no deduction of tax at source in each such year as the payee is not known.

CONCLUSION :-

Now we can say as under :-

1. TDS on Provisions for Exps. can only be NOT made, where payee name as well amount in respect of the payee ( i.e. BOTH) are not known or determined.

2. The assessee has to prove the above facts regarding payee not known and amount in respect of payee is indeterminate then only assessee can escape from the TDS Provisions.

3. Subsequently the assessee had to deduct TDS when payee name known and amount determined.

4. The auditor has to disclose the above facts in his Audit report with reasons why TDS not deducted.

5. As none of the decision are given by Jurisdictional authority like CIT(A) MP, ITAT (MP), HC (MP) hence there might be a situation that during the course of Scrutiny assessing officer does not agree with the submission and apply provisions of section 40a(ia) against which the assessee has to prefer appeal upto High court.

6. As a safer side we advice, if assesse came to know about the payee and amount determined even after 31st March but before finalising the balance sheet , pass entries of TDS in the books of accounts on 31st March and Deposit the tds accordingly with interest if any.