Disallowance u/s 40(a)(ia) for non deduction of TDS on amount credited to Provision account deleted

Disallowance u/s 40(a)(ia) for non deduction of TDS on amount credited to Provision account deleted by High Court on principles of consistency

ABCAUS Case Law Citation
ABCAUS 3460 (2021) (02) HC

Important case law relied referred:
Bharat earth movers vs. CIT (2000) 245 ITR 428 (SC)
Parashuram Pottery Works Co. Ltd. vs. ITO (1977) 106 ITR 1 (SC) 
Life Insurance Corporation vs. CIT (1996) 219 ITR 410 (SC)
Taparia Tools Ltd. vs. JCIT 372 ITR 605
Steam Navigation Co (1953) (P) Ltd. vs. CIT (1965) 56 ITR 52
Empire Jute Co. vs. CIT (1980) 124 ITR 1 (SC)
Shree Choudhary Transport Company vs. Income Tax Officer (2020) 426 ITR 0289 (SC)
The Director Prasar Bharati vs. Commissioner of Income Tax (2018) 403 ITR 0161(SC)
Pingle Industries Ltd. vs. Commissioner of Income Tax (1960) 40 ITR 0067.
Radhasoami Satsang vs. Commissioner of Income-tax (1992)  60 Taxman 248 (SC)

In the instant case, the Revenue had challenged the order passed by the ITAT in inter alia holding that the provisions of Section 194H of the Income Tax Act, 1961 (the Act) would apply when the payments are made to the agents or credited to the agents’ accounts whichever is earlier and not when the payment is credited to the provisions account.

The main contention of the Revenue was that Explanation (iv) to the Section 194H specifically provides where that any income is credited to any account, whether called “suspense account” or by any other name in the books of accounts of the person liable to pay such income such crediting shall be deemed to be income to the account of the payee and the provisions of this Section shall apply accordingly.

The return of income (ITR) filed by the respondent company was initially processed u/s 143(1) of the Act. Thereafter the case of the assessee was selected for scrutiny. While completing the assessment, the Assessing Officer (AO) inter alia made disallowance u/s 40(a)(ia) for non-deduction of tax at source (TDS) for payment of commission/brokerage paid.

The CIT(A) allowed the appeal of the company and deleted the addition made. On second appeal by the Revenue, the Tribunal by the impugned order dismissed the appeal preferred by the revenue.

Before the Hon’ble High Court, the Revenue placed reliance on the Explanation to section 194H and contended that due to debiting the said amount to the profit and loss account, the profit had come down and the amount is claimed as expenditure. Therefore, the payment of tax deducted at source ought to have been made. 

It was further submitted that making of payment is not necessary but debiting the amount will attract tax deducted at source provisions.

The assessee submitted that no part of amount was credited to any of the agent’s accounts maintained with the assessee. It was urged that the assessee has to make a provision for expenditure to adhere to the matching concept and the tax can be deducted only if the party had been identified and a permanent account number is obtained from such party. 

It was contended that it was impossible for the assessee to deduct TDS on the provisions when party had not been identified. Therefore, no adverse inference can be drawn as the  assessee could not perform the impossible.

It was further submitted that all corresponding TDS as and when due had been paid and TDS had been deducted. It was also pointed out that accrual of liabilities is certain on 31st March while vesting of right to receive by recipient was subject to certain conditions.

It was also pointed out that similar provisions were made in the earlier years as well as subsequent years and the tax was not deducted at source on the provisions and the department has not made any additions in respect of those provisions during the years in which return of income were selected for scrutiny assessment.

The Hon’ble High Court observed that the Hon’ble Supreme Court held that even though principles of res judicata do not apply to income tax proceedings but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year.

The Hon’ble High Court stated that similar provisions were made in earlier years as well as subsequent years by the assessee and the TDS was not deducted on the provisions. However, the Department had not made any additions with regard to the provisions made during the years in which returns of income were selected for scrutiny assessment.

Accordingly, following the principle of consistency settled by the Apex Court, the Hon’ble High Court answered the substantial question of law  against the revenue and in favour of the assessee.

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