Assessee bound to deduct TDS u/s 194I and 194J on the provisions made in accounts

Assessee duty bound to deduct TDS u/s 194I and 194J of the Act on the provisions for rent and professional fees made in the accounts

In a recent judgment, ITAT Surat has held that, the assessee duty bound to deduct TDS under section 194I and 194J of the Act on the provisions for rent and professional fees made in the accounts.

ABCAUS Case Law Citation:
5014 (2026) (01) abcaus.in ITAT

The appellant assessee was Co-operative Bank. In the course of assessment, the Assessing Officer found that the assessee had made provision for rent expenses and also claimed deduction for legal & consultation fees on which no tax deduction at source (TDS) was made.

On the basis of this information the TDS Assessing Officer initiated proceeding u/s.201(1) r.w.s 201(1A) of the Income Tax Act, 1961 (the Act). The AO TDS noticed that the assessee was required to deduct TDS at the rate of 10% on the rental expense under the provision of section 194I of the Act. Similarly, the TDS was required to be deducted @ 10% u/s.194J of the Act on the legal and consultation expenses.

Since the TDS AO was not satisfied with the explanation of the assessee regarding the non-deduction of TDS, the assessee was treated as “assessee in default” and accordingly a demand was raised under the provision of section 201(1) r.w.s 201(1A) of the Act.

The CIT(A) vide impugned order dismissed the appeal of the assessee.

Before the Tribunal, the assessee submitted that the Assessing officer had already disallowed the rental and legal and consultation fees under the provisions of section 40(a)(ia) of the Act, while completing the assessment, therefore, no addition u/s. 201(1)/201(1A) of the Act was called for.

Regarding non deduction of TDS, it was explained that the assessee had only made a provision for rental expense and no rent was actually paid to the owners. The legal and consultation fees was also explained to be only a provision. It was stated that since the amounts debited to the account were only a provision, no TDS was made thereon.

The Tribunal observed that the provision of section 194I of the Act stipulates that any person (other than individual and HUF) is required to deduct TDS at the time of credit of rent to the account of the payee or at the time of payment thereof, whichever is earlier. The liability to deduct TDS u/s 194J of the Act on payment of fees towards professional services, is identical. Thus, the assessee was duty bound to deduct TDS u/s.194I and 194J of the Act on the provisions for rent and professional fees made in the accounts.

The Tribunal opined that merely, because the expenses were disallowed u/s 40(a)(ia) of the Act, the assessee cannot escape the consequence of failure to deduct TDS as stipulated u/s.201(1) of the Act. The provisions of section 40(a)(ia) and section 201(1) operate in different domain and are not mutually exclusive to each other.

The Tribunal further observed that no evidence was brought on record by the assessee that the recipients of rent and legal and consultation fees had filed their return of income, had taken the amount received from the assessee in computation of their income and also paid tax thereon. The assessee had also not brought on record any declaration by the recipients of rental income and legal & consultation fees that their income was below the taxable limit and no TDS was required to be made by the assessee in this respect.

The Tribunal opined that the assessee being a bank and having advice of technical experts, can’t take a plea that it was unaware of the obligation under the Act to deduct TDS at the time of making provision. Since the conditions as stipulated in the proviso to section 201 of the Act was not found fulfilled in the present case, the AO TDS had rightly treated the assessee as “assessee in default”.

The Tribunal also noted that assessee had admitted that the assessee had made only provision of expense and the amount was not credited to parties account due to disputes. However, the provision was made in the F.Y.2012-13 whereas the TDS AO had initiated the proceeding in the F.Y. 2018-19, still the assessee had not explained about the status of the provision or resolution of the dispute after six years. The rent must have been paid or provided as per agreement and nothing prevented the assessee to deduct the TDS on the provision for rent as made in the accounts.

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