Suo-Moto Section 40(a)(ia) Disallowance Does Not Absolve Chapter XVII-B TDS Compliance Obligations

ORDER

Vikram Singh Yadav, Accountant Member.- This is an appeal filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeal), ADDL/JCIT (A)-2 Coimbatore, [‘Ld.CIT(A)’], dated 03.07.2024, pertaining to Assessment Year (AY) 2018-19, wherein the Revenue has taken the following grounds of appeal:

(a) “On the facts and in the circumstances of the case and law, the Id. ADDL/JCIT (Appeal) has erred in holding that provisions of TDS is not applicable on the amount disallowed under section 40(a)(ia) of the Act without appreciating the fact that the tax is required to be deducted as and when assessee becomes responsible for payment of above sum to other parties.”

(b) “On the facts and in the circumstances of the case and law, the Id. ADDL/JCIT (Appeal) has erred in holding that provisions of TDS is not applicable on the amount disallowed under section 40(a)(ia) of the Act without appreciating the fact that the expenditure has been credited by the assessee company in the account of the payee in the books of accounts of Assessee Company. The liability has been crystallised and the provisions have been made.

(c) “On the facts and in the circumstances of the case and law, the ld. ADDL/JCIT (Appeal) has erred in holding that provisions of TDS is not applicable on the amount disallowed under section 40(a)(ia) of the Act without appreciating the fact that the assessee itself too implicitly recognized that such credit entries are subject to TDS provisions. The assessee in its computation of income suo moto disallowed such entries u/s 40(a)(ia).”

(d) “On the facts and in the circumstances of the case and law, the ld. ADDL/JCIT (Appeal) has erred in holding that provisions of TDS is not applicable on the amount disallowed under section 40(a)(ia) of the Act without appreciating the fact that in the case of Inter Globe Aviation Ltd, v. ACIT, Central Circle 50(1), New Delhi, Delhi bench of Hon’ble ITAT held that tax payer is liable to deduct tax at source on year-end provisions”

(e) “On the facts and in the circumstances of the case and law, the ld. ADDL/JCIT (Appeal) has erred in holding that provisions of TDS is not applicable on the amount disallowed under section 40(a)(ia) of the Act without appreciating the fact the Hon’ble Tribunal’s Bangalore Bench vide its order No. ITA No. 1248/Bang/2014 dated 21.03.2022 in the case of Biocon Ltd v. DCIT-LTU, Bangalore has held that the TDS will be applicable on the provisions made by the assessee at the end of year.”

2. At the outset, it is noted that this matter was earlier disposed off by the Coordinate Bench vide its order dated 07.10.2025. Subsequently, the assessee moved a Miscellaneous Application and which was disposed off by the Coordinate Bench vide its order dated 05.02.2026, wherein the earlier order so passed was recalled and the matter was fixed for hearing of the matter afresh and in the light of the same, the matter has now come up for adjudication before us.

3. Briefly, the facts of the case are that from perusal of the Income Tax Return and Tax Audit Report (Form 3CD) filed by the assessee for the impugned assessment year 2018-19, the Assessing Officer observed that the assessee has made provision of different nature on which TDS was applicable. However, assessee failed to deduct TDS or after deducting TDS failed to pay the same to the Government treasury within the time prescribed and the total amount identified was Rs. 90,89,52,854/-. The Assessing Officer also took note of the fact that the assessee claimed that in computation of its total income, it has made suo-moto disallowance of 30% which came to Rs. 27,26,85,856/-. However, TDS at the applicable rates have not been effected on these credit entries. Accordingly, a show cause was issued to the assessee on 10.01.2020 as to why it should not be treated as “assessee in default” in respect of provision/credit entries u/s. 201(1)/201(1A) for the default committed in respect of non-compliance of TDS provisions. Further, the assessee was requested to furnish party-wise account of credit entries along with amount and Section under which TDS ought to be deducted and in absence thereof, it would be presumed that all the credit entries are in the nature of 194J transaction and order u/s. 201 will be passed.

4. In response, the assessee filed its submissions, wherein, it was submitted that merely because it has not deducted tax at source on year end provisions, it cannot be treated as an “assessee in default” in respect of non-deduction of tax at source on provision entries as at the year-end, as the invoices from the concerned vendors were not received and accounted for in the books of accounts. It was further submitted that in view of the same, such provision amount has also been consistently disallowed under section 40(a)(ia) of the Act. It was submitted that such expenses cease to exist so far as income-tax law is concerned and they are as good as never been incurred by assessee company for the initial year in which the same are disallowed. Moreover, on such provision amount, the assessee company has paid much higher amount of tax i.e., at the normal corporate tax rate in lieu of 2%/10% towards TDS. It was submitted that in this manner, it has also been ensured the Revenue is not put to any loss. It was further submitted that the compliance with TDS provisions is done when the invoice is received from the vendors in subsequent years and the same is booked against the respective vendors in the books of accounts of the assessee and at that juncture, the tax is deducted at source at applicable rate and deposited with the Government Treasury within the prescribed timelines. Thus, it was reiterated that such expenses which are derecognized from the taxation perspective altogether by adding back to the taxable income in the relevant year and resultant corresponding tax being paid thereon at the corporate tax rate, the provisions of section 201(1)/(1A) of the Act should not be made applicable at all for the simple reasons that the assessee has paid tax at around 34% as compared to the maximum rate of TDS being 10%, thereby no loss having been caused to the Revenue.

5. The submissions so filed by the assessee were considered but not found acceptable and the assessee company was held liable to deduct TDS on the expenses and was treated as “assessee in default” within the meaning of Section 201(1) for not effecting TDS on the amount of Rs. 90,89,52,854/-. Further, the assessee was also directed to pay interest u/s. 201(1A) for default committed by the assessee.

6. Against the said findings, the assessee carried the matter in appeal before the ld. CIT(A), who has since deleted the demand raised by the Assessing Officer for default in deduction of TDS u/s. 201(1) and interest u/s. 201(1A) of the Act. Against the said order, the Revenue is in appeal before us.

7. During the course of hearing, the ld. DR submitted that the Assessing Officer observed from the ITR and Tax Audit Report that the assessee had made a provision towards expenses of Rs. 90,89,52,854/- on which TDS was applicable. However, the assessee did not deduct and deposit the TDS on the same. Though, the assessee claimed that it has disallowed 30% of the expenses u/s. 40(a)(ia) of the Act to the tune of Rs.27,26,85,856/- while computing its income. Subsequently, the Assessing Officer issued notice u/s. 201(1)/201(1A) and completed the proceedings by passing order u/s. 201(1)/201(1A), dated 20.02.2020, treating the assesse as “assessee in default” and determined a tax and interest liability u/s. 201(1) r.w.s. 201(1A) amounting to Rs. 2,58,38,567/-.

8. It was submitted that on appeal by the assessee, the ld. CIT(A) allowed the appeal and deleted the entire amount of tax liability u/s. 201(1) along with interest u/s. 201(1A), relying upon the decision of the Coordinate Mumbai Benches in case of Pfizer Ltd. v. Income-tax Officer (TDS) (OSD) [2013] 55 SOT 277 (Mumbai)/ITA No.1667/MUM/2010). It was submitted that the decision of ld. CIT(A) is not acceptable to the Revenue. In this regard, it was submitted that the expenditure has been credited in the books of accounts of the assessee company. The provisions have been made by the assessee company after taking into account the quantum of the work done by the payees for the company and consequent liability arising on the company to pay for such work. It was submitted that for the TDS liability to come into picture, actual payment is not mandated. The TDS liability gets attracted at the time of payment or credit in the books of accounts of the assessee company, whichever is earlier. In the instant case, although no payment has been made, credit entries have been made in the books of accounts of the assessee company. Accordingly, the assessee is liable for TDS deduction on these provisions/credit entries. It was further submitted that the assessee itself implicitly recognized that such credit entries are subject to TDS provisions, as the assessee company in its computation of income suo-moto disallowed such entries u/s. 40(a)(ia) of the Act. It was submitted that disallowance u/s. 40(a)(ia) is for non-deduction of TDS and the assessee cannot make a claim that the disallowance u/s. 40(a)(ia) is on the different footing from provision as emphasize under Chapter XVII of the Act. It was submitted that disallowance u/s. 40(a)(ia) come into picture only when the deduction as emphasized under Chapter XVII has not been made at the rate emphasized under that Chapter and where the “assessee is in default” u/s. 40(a)(ia), then the assessee is necessarily in default for non-deduction of TDS as per Section 201 of the Act.

9. Further, reliance was placed on the Coordinate Delhi Benches in case of Inter Globe Aviation Ltd. v. ACIT [2020]  181 ITD 225 (Delhi – Trib.)/ ITA Nos. 5347/Del/2012 and 4449/Del/2013, dated 07.01.2020, wherein the Bench has held that the taxpayer is liable to deduct tax at source on year end provision since, payees are identifiable and the provisions are for ascertained liabilities. Further, reliance was placed on the decision of Coordinate Bangalore Benches in case of Biocon Ltd. v. DCIT LTU   (Bangalore – Trib.), wherein, it was held that TDS will be applicable on the provision made by the assessee at the end of the year.

10. It was further submitted that as far as the decision relief upon by the ld. CIT(A) of the Coordinate Mumbai Benches in case of Pfizer Limited (supra), the same is again not acceptable to the Revenue and the Revenue has challenged the same before the Hon’ble Bombay High Court, the substantial question of law has been admitted vide order dated 01.04.2015, in Income Tax Appeal No. 1390 of 2013 and the same is currently pending adjudication. It was accordingly submitted that the order so passed by the ld. CIT(A) be set aside and that of the Assessing Officer be sustained.

11. Per contra, the ld. Senior Counsel submitted that it is a case where the assessee has made year-end provision for expenses to the tune of Rs. 90,89,52,854/- in its books of accounts, such provisions were not based on any invoices received from the vendor/parties and were infact based on estimates from past experiences. It was submitted that the assessee was contractually not liable to pay any person when the provisions were created. These being merely ad-hoc provisions, no tax was deducted at source by the assessee company. It was submitted the said provision was disallowed by assessee while filing its return of income to the extent of 30% amounting to Rs.27,26,85,856/- as per the provision of Section 40(a)(ia) of the Act and the resultant income-tax thereon has been paid at the applicable corporate tax rate. It was further submitted that the entire provision of Rs. 90,89,52,854/-created at the year-end was either accounted for against the vendors in the books in the subsequent year(s) on receipt of invoices or was reversed. In this regard, it was submitted that the TDS compliances, where applicable were duly made in the subsequent financial year in respect of invoices received from the vendors on which the TDS was applicable to the turn of Rs. 76,31,57,103/-. Further, provision amounting to Rs. 13,83,21,655/-was reversed as the same was in the nature of ad-hoc provision and no invoices were received from the vendor entities and the remaining amount of Rs. 74,74,095/- was not subject to TDS as it related to material purchase, reimbursements, below threshold, etc. It was accordingly submitted that as and when the liability to pay the parties arise, i.e, as and when the invoices were received, the taxes were deducted at source and the same was paid to the account of the Government Treasury. It was accordingly submitted that it is not a case that the assessee has not complied with the provisions of Chapter XVII, in fact the assessee has duly complied with a provision of Chapter XVII to the extent they were applicable and the said compliance was made in the subsequent financial year.

12. It was submitted that similar submissions were made before the Assessing Officer. However, the Assessing Officer has not recorded any specific finding in this regard and has summarily hold the assessee to be “assessee in default” in violation of the provisions of Chapter XVII of the Act.

13. It was further submitted that the matter is squarely covered by the various decisions of the Coordinate Benches and reference was drawn to the decision of the Ahmedabad Benches in case of PCIT v. Sanghi Infrastructure Ltd. [ITA No. 2576/Ahd/2012, dated 30-09-2016], which has subsequently been affirmed by the Hon’ble Gujrat High Court in case of PCIT v. Sanghi Infrastructure Ltd.   (Gujarat). It was submitted that this is the only High Court decision which is available on the subject wherein the Hon’ble High Court of Gujarat has decided the matter in favour of the assessee and it was held that where the provision was made by the assessee for expenses for which bills were not received during the year under consideration, no section 40(a)(ia) disallowance could be made for nondeduction of TDS.

14. It was further submitted that as far as the decision of the Coordinate Mumbai Benches in case of Pfizer Limited (supra) is concerned, in the said case, the Bench has held that since the payees were not identifiable at the time of making the provision, no TDS is to be done on the said payment and the contentions in the context of Section 40(a)(ia) were also considered and on the entirety of the facts, the matter was decided in favour of the assessee. It was accordingly submitted that it is not just in the context of disallowance u/s. 40(a)(ia) but also the fact that the payees were not identifiable, the Coordinate Bench has decided the matter and the said decision continue to hold the field and as far as the appeal filed by the Revenue before the Hon’ble Bombay High Court is concerned, it was submitted that the same is currently pending adjudication as submitted by the ld. DR and in any case, there is no stay on the order of the Coordinate Mumbai Benches. It was accordingly submitted that the order so passed by the ld. CIT(A) be confirmed and the appeal of the Revenue be dismissed.

15. We have heard the rival contentions and pursued the material available on record. The Assessing Officer has held that the assessee to be “assessee in default” in terms of Section 201(1) of the Act on account of non-deduction of TDS as required in accordance with the provisions of this Act. In this regard, we refer to the provisions of Section 201(1) which provides that where any person, including the principal officer of a company, who is required to deduct any sum in accordance with the provisions of this Act, 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.

16. It has been further provided that where 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 payee, or on the sum credited to the account of a payee, shall not be deemed to be an “assessee in default” in respect of such taxes where such payee has furnished his return of income u/s. 139, has taken into account such sum for computing income in such return of income, and has paid the tax due on the income declared by him in such return of income, and the person furnishing a certificate to this effect from an accountant in such form as may be prescribed.

17. Therefore, what needs to be established before the assessee be held to be an “assessee in default” is that he is required to deduct any sum in accordance with the provisions of this Act and if he fails to deduct the whole or any part of the tax, in such situation, he shall be deemed to be an “assessee in default”. Further, it has been provided that where the payee to whom the sum has been paid or the sum has been credited has furnished his return of income, taken into account such sum for computing income, and has paid taxes due on the income declared by him in such return of income, then the assessee shall not be deemed to be “assessee in default” in respect of such taxes. Therefore, on combined reading of Section 201(1) read with the proviso, we find that primarily it is the responsibility of the person who is required to deduct any sum in accordance with the provisions of this Act to deduct the tax, and where such person fails to deduct, even in such situation, it has been provided that where the person to whom the amount has been paid or the sum has been credited has taken the said amount as part of his return of income and has paid due taxes thereon, then in that situation, the assessee cannot be held to be an “assessee in default”.

18. Further, in terms of Section 40(a)(ia) of the Act, it provides that 30% of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B, and such tax has not been deducted, or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139, then, notwithstanding anything contained to the contrary in Section 30 to 38, the said amount shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. It further provides that where the assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum, but is not deemed to be an “assessee in default” under the first proviso to sub-section (1) of Section 201, then for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee.

19. We, therefore, find that the provisions of Section 40(a)(ia) are to ensure that the assessee complies with the provisions of Chapter XVII-B of the Act and are more in the form of deterrence, and at the same time, the assessee continues to be liable in terms of compliances with the provisions of Chapter XVII-B of the Act. Therefore, one has to see whether the provisions of Chapter XVII-B are applicable in a particular case or not. Secondly, whether due compliances have been made by the assessee in terms of Chapter XVII-B of the Act, and where the compliances have not been made, then the consequences in terms of been treated as assesse in default in terms of section 201(1) and Section 40(a)(ia) shall devolve on the assessee.

20. Therefore, the fact that the assessee has done suo moto disallowances in its return of income u/s. 40(a)(ia) of the Act, in our considered view, cannot absolve the assessee from the requirement of compliances of provisions of Chapter XVII-B of the Act, and the assessee continues to be liable in terms of the compliances so provided in Chapter XVII-B of the Act.

21. We need not dwell further into the matter, taking into consideration the fact that the Hon’ble Bombay High Court in case of Pfizer Limited (supra) has since admitted a substantial question of law in terms of whether, in view of disallowances u/s. 40(a)(i)/40(a)(ia), no demand can be raised u/s. 201(1) read with section 194C/194J of the Act.

22. Coming back to the requirement as to whether the assessee has failed to comply with the provisions of Chapter XVII-B of the Act and whether the assessee can be held to be an “assessee in default” in terms of Section 201(1) of the Act. In this regard, we find that it is the case of the Revenue that the assessee has not deducted TDS on the year-end provisions created in its books of accounts and has referred to the disclosure made in the Tax Audit Report wherein the auditors have disclosed three separate consolidated numbers in terms of section 194J, 194C, and 194I, where the assessee has not deducted the TDS under the respective provisions. As against that, it is the case of the assessee that the compliances have been duly made in the subsequent financial year, when the invoices were actually received from the vendors and in this regard, it has been submitted before us that as against the year-end provision of Rs. 90,89,52,854/-, the assessee has duly deducted the TDS on amount of Rs. 76,31,57,103/- and therefore, where the TDS has been duly deducted though in the subsequent financial year, the assessee cannot be held to be an “assessee in default” as it is not a case of non-deduction but a case of a deduction as and when the invoices have been received from the respective vendors. Further, it has been submitted that the provision amounting to Rs. 13,83,21,655/- was in the nature of ad-hoc provision and the same has been reversed in the subsequent financial year and the remaining amount of Rs. 74,74,095/- relates to expenditure in terms of material purchased, reimbursement, etc. which were not subject to TDS.

23. We find that the AO has referred to disclosure on the tax audit report and has arrived at the finding that since the assesse has failed to deduct TDS on year end provisions, the assesse is held to be assessee in default. The disclosure in the tax audit report is no doubt a good starting point, however, in absence of requisite disclosure in the tax audit report in terms of individual vendors and amounts and corresponding TDS liability, as we have noted earlier, where only gross numbers have been stated, before the assesse is charged with consequences in terms of section 201(1)/201(IA) of the Act, it is essential to understand as to how the provisions are made in the books of accounts, what accounting entries are passed while creating the provisions, whether entries are passed in the account of individual vendors whereby specific sums are provided/credited or entries are passed in terms of general expenses heads and provisions for expenses to meet and comply with the accounting requirements and standards of preparing and maintaining the financial statements. Identification of individual vendor accounts and credits in the individual accounts and basis thereof in terms of estimation or actual invoices are essential to determine the nature and quantum of TDS liability in the hands of the assesse. We however, find that there is no material available on record to this effect except for gross number in the tax audit report which are clearly insufficient and therefore, in absence of the same, we deem it appropriate that the matter is remitted to the file of the AO to thrash out the relevant facts and thereafter, determine as to the liability of the assesse in terms of compliances under chapter XVII-B of the Act. The AO is also directed to verify the compliances as so claimed to be done by the assesse in the subsequent financial year and thereafter, decide the matter a fresh in accordance with law after providing reasonable opportunity to the assessee.

24. Given that, we have set-aside the matter to the file of the AO to thrash out the relevant facts, we do not deem it necessary to refer to the various authorities quoted at the Bar as each one of them with turn on their respective facts and circumstances of the case.

25. In the result, the appeal filed by the Revenue is allowed for statistical purposes.