Padamchand Khincha,CA for the Appellant. C.H. Sundar Rao, CIT-I(DR) for the Respondent.

ORDER

1. These are batch of 8 appeals by the Assessee against a common order dated 30.3.2012 of CIT(A)-LTU, relating to AYs 2006-07 to 2009-10. By the impugned orders, the CIT(A) confirmed the order of the Assessing Officer treating the Assessee as an Assessee in default u/s. 201(1) and also levying interest on tax not paid u/s. 201(1A) of the Act. The Assessee filed 4 appeals viz., ITA Nos. 749 to 752/Bang/2012, challenging the action of the Revenue in treating the Assessee as an Assessee in default u/s. 201(1) and also levying interest on tax not paid u/s. 201(1A) of the Act. According to the Registry, separate appeals had to be filed against the order of the Revenue in treating the Assessee as an Assessee in default u/s. 201(1) and separate appeals had to be filed in respect of the action of the revenue in levying interest on tax not paid u/s. 201(1A) of the Act. Hence the Assessee has filed appeals being ITA Nos. 1588 to 1591/Bang/2012 which relate to challenge to levy of interest u/s. 201(1A) of the Act. ITA Nos. 749 to 752/Bang/2012 are treated as appeals filed challenging the order passed u/s. 201(1) of the Act.

2. The Assessee is a wholly owned subsidiary of IBM World Trade Corporation, US (“IBM WTC”). The Assessee follows the mercantile system of Accounting. The Assessee makes provision for certain expenses in its books of accounts. As per the global group accounting policy, each of the entity of IBM group worldwide has to quantity its expenses every quarter, within 3 days of the end of every quarter. In respect of expenses for which invoices have been submitted or the payments have become due in respect of the expenses, the same are accounted for and if Tax Deduction at source (TDS) is found to be applicable on these expenses, the same is accounted for. However, in respect of expenses in respect of which only service/work has been provided/performed by the vendors, but for which the invoices have not been furnished or in respect of which the payments have not fallen due for payment to the vendors, a provision for such expenses is made in the books of account recognising the liability that has been incurred. The expenses are debited to the profit and loss account and the provisions are credited to a provision account and not to the vendor accounts as these have not fallen due for payment. These expenses, although credited to the provision account, do not lose the colour of being ascertained liabilities. On the basis of its knowledge of having received the services and incurred an expense for it, the Assessee recognises such expenses by providing for it as of the year end. Such expense provisions are however created on reliable estimates of the payment that is expected to be made on the settlement dates in future, that fall in the next accounting year. In the subsequent financial years, the provision entries are reversed and on receipt of invoices in respect of the respective expenses, the same are recorded as liabilities due to the respective parties, at which point in time taxes are withheld at source and paid to the Government in the due course.

3. Even though liability for certain expenses might not have accrued or arisen to the Assessee in accordance with the mercantile system of accounting, the Assessee on the basis of scientific methodology estimates such expenses and creates a provision for such expenses every quarter within 3 days of the end of the quarter. At the time of creation of provision it is not possible for the Assessee to identify parties or if parties are identified to arrive at the exact sum on which TDS is to be done.

4. The provision so created by the Assessee in the books of accounts for the various assessment years are as follows:—

F.Y. 2005-06

F.Y. 2006-07

FY 2007-08

FY 2008-09

5. According to the revenue, in respect of the provision so created by the Assessee in the books of accounts, tax at source was deductible in terms of the provisions of law referred in the chart given above as provided under chapter XVII-B of the Act. The last column in the chart referred to above gives the amount payable u/s. 201(1A) of the Act, for failure to deduct and pay TDS within the time required.

6. In terms of Sec. 40(a)(i) of the Act, if tax is deductible at source under Chapter XVII-B of the Act and where it is not so deducted at source on the amount of any interest or royalty, fees for technical services or other sum chargeable under the Act, which is payable outside India or in India to a non-resident, not being a company or to a foreign company, the same shall not be allowed as deduction while computing “Income from Business”. In terms of Sec. 40(a)(ia) of the Act, if tax is deductible at source under Chapter XVII-B of the Act and where it is not so deducted at source on the amount of any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), the same shall not be allowed as deduction while computing “Income from Business”. The relevant statutory provisions read as follows:

’40. Amounts not deductible.— Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—

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 during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation. — For the purposes of this sub-clause,—

(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), 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 during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation. — For the purposes of this sub-clause,-

7. The Assessee while filing return of income for the various assessment years referred to above, disallowed on its own the amounts referred to in the chart above in the computation of income because in terms of Sec. 40(a)(i) and Sec. 40(a)(ia) of the Act, the above amounts are not allowable as deduction.

8. Another consequence, apart from disallowance of the relevant amount while computing income from business, is that the Assessee is liable to proceeded against u/s. 201(1) & 201(1A) of the Act. Under Sec. 201(1) if the person responsible for paying to a non-resident or non-resident , any income chargeable to tax under the Act, fails to deduct tax at source, then he can be considered as an Assessee in default in respect of the tax payable on such income. Under Sec. 201(1A) such person is also liable to pay interest on such tax from the date on which it ought to have been paid till the time it is actually paid to the credit of the Government. According to the AO, the Assessee was therefore liable to treated as Assessee in default and was also liable to pay interest on tax payable.

“201. Consequences of failure to deduct or pay.— (1) If any such person referred to in section 200] and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer 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, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax :

Provided that no penalty shall be charged under section 221 from such person, principal officer or company unless the Assessing Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the 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 at twelve per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3) of section 200.

(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).”

9. In view of the clear admission on the part of the Assessee that it was obliged to deduct tax at source in terms of Chapter XVII-B of the Act on the various amounts for the various Assessment Years in the chart set out above, by making disallowance u/s. 40(a)(i) & 40(a)(ia) of the Act of the amounts referred to in the chart above in the return of income filed for the various assessment years, the AO initiated proceedings u/s. 201(1) & 201(1A) of the Act against the Assessee.

10. In reply to the show cause notice issued u/s. 201(1) & 201(1A) of the Act, the Assessee submitted that invoices were not received in respect of the underlying expenses and therefore there was neither accrual of expenditure nor was the payee identified as the amount was not credited to the account of the payee but to a suspense account. In other words the stand of the Assessee was that there was no accrual of expenditure in accordance with the mercantile system of accounting and therefore there was no obligation on its part to deduct tax source. The Assessee took a stand that though under the relevant provisions of law in Chapter XVII-B of the act there was obligation to deduct tax at source even when the amount is credited to a “Suspense Account”, there should be legal liability to pay and the payee should be known and only then the obligation to deduct tax at source arises. The Assessee also submitted that the provision entries are reversed in the subsequent financial year(s) and necessary taxes are withheld at source at the time of actual payment (when legal liability to pay arises and the identity of the party is known).

11. The Assessee relied on CBDT Circular No. 3/2010 dated 2.3.2010. The above circular was issued in the context of the provisions of Sec. 194A of the Act dealing with TDS obligation at the time of credit of interest income to the account of the payee and in response to representations received from Indian Banks Association (IBA) seeking clarification regarding deduction of tax at source from payment of interest on time deposits by banks using Core-Branch Banking Solutions (CBS) Software. In case of banks using CBS software, interest payable on time deposit is calculated generally on daily basis or monthly basis and is swept and parked accounting in the provisioning account for the purposes of macro-monitoring only. However, constructive credit is given to the depositors/payees account either at the end of the financial year or at periodic intervals as per practice of the bank or as per the depositors’/payees requirement or on maturity or on encashment of time deposits, whichever is earlier. The CBDT clarified the TDS obligations in such cases as follows:

As per provisions of section 194A of the Income Tax Act 1961, income tax has to be deducted at source at the time of credit of interest income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, at the rates in force if such interest amount exceeds specified limit. Further, Explanation to section 194A states that “for the purpose 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”.

2. Representations have been received from Indian Banks Association (IBA) seeking clarification regarding deduction of tax at source from payment of interest on time deposits by banks using Core-Branch Banking Solutions (CBS) software. In case of banks using CBS software, interest payable on time deposits is calculated generally on daily basis or monthly basis and is swept & parked accordingly in the provisioning account for the purposes of macro-monitoring only. However, constructive credit is given to the depositor’s/payee’s account either at the end of the financial year or at periodic intervals as per practice of the bank or as per the depositor’s/payee’s requirement or on maturity or on encashment of time deposits; whichever is earlier.

3. The matter has been considered by the Board. Explanation to section 194A was introduced with effect from 1.4.1987 by the Finance Act, 1987 to plug the loophole of avoiding deduction of tax at source by crediting interest in the books of accounts under accounting heads ‘interest payable account’ or ‘suspense account’ instead of to the depositor’s/payee’s account. Therefore, the Page 2 of 2 Explanation is not meant to apply in cases of banks where credit is made to provisioning account on daily/monthly basis for the purposes of macro monitoring only by the use of CBS software.

4. In view of the above position, it is clarified that since no constructive credit to the depositor’s/payee’s account takes place while calculating interest on time deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest by banks for the purposes of macro monitoring only. In such cases, tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals as per practice of the bank or as per the depositor’s/payee’s requirement or on maturity or on encashment of time deposits; whichever event takes place earlier; whenever the aggregate of amounts of interest income credited or paid or likely to be credited or paid during the financial year by the banks exceeds the limits specified in section 194A.’ (Emphasis supplied)

12. The Assessee therefore submitted that withholding tax provisions of the Act would not apply automatically on any expense being accounted. The obligation to withhold taxes arises only on the amount payable is exactly identified along with the payee to whom such amount is payable.

13. The AO did not accept the above submission of the Assessee for the following reasons:—

14. According to the AO, the above procedure followed by the Assessee was contrary to the accounting policy because once expenditure is booked in the profit and loss account, it cannot be reversed. According to the AO, the reversal entry as well as the booking of expenses based on invoices done in subsequent year is routed through the profit and loss A/c. This shows that the reversals are taken as income and the expenses booked on receipt of invoices are included in current expenses of that year. Though it is considered that the whole of disallowance made in the computation U/s 40(a)(ia) is reversed since this amount is claimed as deduction in the computation in the year when TDS is made, whether the whole of the amount is again booked and subjected to TDS is questionable. The AO referred to the explanation offered by the AR of the Assessee at the time of assessment proceedings that there cannot be any doubt that the expenses are claimed twice once as a provisional entry and another booked as per invoice, there is no clarification that TDS is made on the whole of the provisional entries so as to allow the disallowance U/s 40(a)(ia) in the year of TDS effected. According to the AO, the procedure followed by the Assessee may also lead to the allowing of the expenditure by one year prior to the incurring of the actual expenses. According to the AO, though there is no claim of expenses as the same is added back U/s 40(a)(ia), treating of such disallowance as a provision towards contingent liability cannot be ruled out. The details of the TDS made on such provisions made at the end of the year is also provided by the assessee on sample basis, contending that the number of entries are huge and hence cannot be provided in full within limited period. The complexity of the accounting aspect followed by the assessee gives rise to the non-verification of the deductions claimed under the Income Tax Act.

15. The AO called for details of payment of TDS but the Assessee could not produce the same. In the circumstances, the AO treated the Assessee as an Assessee in default in respect of taxes not deducted at source in respect of Provision for expenses made in the books of accounts and also levied consequent interest on taxes not paid to the credit of the Central Government.

16. Before CIT(A), the Assessee explained the manner in which Provision was created in the books and how the same was reversed and actual expenses booked in the profit and loss account and the point of time at which TDS is made and paid to the Government. Before CIT(A), the Assessee provided a summary of the year-end provision for the FY relevant for AY 2007-08 amounting to Rs, 209,31,30,953/-. Scrutiny of the same revealed that the provision constituted expenses such as commission to selling agents/ORC commission, sub-contracting charges, professional & consultancy fee, rent, etc. The Assessee provided a note on trail of events between booking of year-end provisions, subsequent reversals and effecting TDS on vendor payments. The Assessee clarified that in order to comprehend the entire mechanism, it was pertinent to note that the following events took place chronologically:—

17. The following chart was produced by the Assessee with regard to “Commission to selling agents – ORC commission” to buttress the above argument:—

Table 3

18. According to the Assessee,, it was quite apparent from the above Table that the entire provisions were being reversed in subsequent years, actual expenditure based on invoices were being booked and TDS was being deducted and duly paid to the credit of the Central Govt. In this connection, copies of challans evidencing payment of TDS on the commission to selling agents/ORC commission totaling to Rs. 23,36,71,818/- (Rs. 1,33,84,537/- + Rs. 22,02,87,281/-) on various dates were furnished:—

05-05-2007 – Rs. 13,96,863/-

07-06-2007 – Rs. 16,43,674/-

06-08-2007 – Rs. 16,53,150/-

06-09-2007 – Rs. 1,00,94,276/-

05-10-2007 – Rs. 38,67,182/-

06-11-2007 – Rs. 16,15,951/-

06-12-2007 – Rs. 40,50,902/-

It was further clarified that at the time of making the year-end provisions, the same was being disallowed by the appellant in the computation statements and suffered tax in the year in which the disallowance was made. However, in the subsequent year, the earlier year-end provisions were reversed by crediting the same to the profit and loss account (implying an income) as and when actual expenses (vendor liability) were booked. TDS was done at the time of actual expense booking. At the time of reversing the provisions in the subsequent year, these provisions were credited to the P & L A/c and the profit for the subsequent year was inflated to that extent. When the actual expenses were booked (i.e. the vendor liability), the same was debited to the P & L A/c, it was pointed out that any short/excess provisions would therefore automatically get adjusted in the P&L A/c. In the Return of Income, the disallowance (made in the earlier year) was claimed as an allowance separately owing to the TDS having been done in that year and consequently there was no double deduction claimed in the above process. According to the Assessee, if the actual expenses booked were not allowed as a deduction in the subsequent year, it would result in double taxation of the same amount, once in the year when the provision was made and also in the year of reversal. The Assessee opined that it was a fundamental rule of law that the same income could not be taxed twice. Reliance was placed on Supreme Court ruling in the case of ITO, v. Bachu Lal Kapoor Kewal Ram [1966] 60 ITR 74 wherein this principle was considered that the provisions of the Income Tax Act did not envisage double taxation of same income.

19. The basis of quantification of the provision for expenses was explained by the Assessee as follows:—

“3.3 As regards the basis for quantification of the provisions for expenses in r/o which disallowances were made u/s 40(a)(ia) in the 4 AYs concerned, the appellant, vide written submissions dt. 23-11-2011, submitted that there were broadly two ways of determining the provision amounts. Firstly, if the expenditure was by virtue of a contractual obligation, i.e., if a purchase order had been raised, the provision was made on the basis of the same. However, the vendor’s invoice would not have been received/accounted for by the appellant in its accounts payable systems which may be either because the invoices were not due as per the contract between the appellant and the vendor or because the vendor had not made a claim on the appellant. Therefore, pending a demand made by the vendors on the appellant, the appellant merely made accounting provisions in its books of accounts based on the purchase orders and estimates of the probable amounts that could be raised on the appellant by the vendors. With regard to the break-up provided by the appellant on one of the expenses pertaining to ORC commission provision reversal in Sept. 2007, sample copies of purchase orders of 2 parties, viz., Iris and M/s Wipro Ltd. were called for in the absence of invoices to substantiate the appellant’s claim. Till date, no efforts were made to provide copies of either the sample purchase orders or the invoices subsequently received in r/o the above 2 parties.

3.3.1 Secondly, it was contended that for certain expenses where there were no specific invoices received or purchase order raised which were incurred on a recurring basis such as rent, etc., provisions were made based on the past years data. For certain expenses, it was stated that if the monthly expenditure was constant, then a provision of same amount would be made for the last accounting month. Further, if there was a progressive increase in the amount of expenditure on a month-on-month basis or year-on-year basis, the same progression percentage was considered for accounting the provision. Thus, according to the appellant, a scientific method was being followed to arrive at the provision amounts. However, since there was an element of estimation involved, the provisions did not partake the nature of a liability payable to the vendors (at the time of making the provisions), the same could not be considered as income in the hands of the vendors. Accordingly, the appellant concluded that the provisions of tax deduction at source (“TDS”) were not applicable. In this context, the appellant was directed to furnish instances of expenses incurred on a recurring basis, instances of past years data relied upon as well as a write-up on constant expenses suitably backed by corroborative evidence. None of the above particulars were provided at any point of time during appellate proceedings.

3.3.2 As for the consolidated Provision A/c called for in r/o of all 4 AYs with opening balances, entries made relating to transactions made during the year and closing balances, vide its submissions dt. 30-12-2011, the appellant provided an illustration for sub-contracting expense provision created for AY 2007-08 to the tune of Rs. 87.03 crores comprising of the following 4 amounts:—

At the time of accounting the vendor invoice, in so far as TDS was concerned it was pointed out that broadly there could be four possibilities:

– TDS applies on the amount mentioned in the vendor invoice (and accordingly TDS is made by IBM)

– TDS doesn’t apply on the vendor invoice owing to the vendor having provided a NIL withholding/lower withholding certificate from the Income-tax Department as per section 197 of the Act.

– TDS doesn’t apply on the vendor invoice as the vendor liability pertains to amounts on which TDS provisions don’t apply (for e.g. in the case of supply of goods, etc.)

– TDS doesn’t apply on excess provisions reversed. At the time of accounting the vendor liabilities as above (in the subsequent year), any excess provision that was made as of March 3l of the last year is reversed. Since it is reversal, no TDS was required at the time of accounting the provision in the previous year.”

20. A reconciliation statement for the sub-contracting expense provision made in FY 2006-07 was furnished as under:—

“Table 4

Therefore, having remitted the TDS amount in FY 07-08, the TDS demand should not arise and should be deleted.

3.3.3 A consolidated CA’s certificate dt. 29-02-2012 for the aforementioned years (viz., Ays 2006-07 to AY 2009-10) was furnished along with the appellant’s letter dt. 08-03-2012 in r/o a review conducted to ascertain compliance in r/o tax deducted at source (“TDS”) as appropriate in the immediately succeeding financial years on such expenses. The CA certified that the procedures performed solely for the said financial years was carried out in the immediately succeeding financial year in r/o “Sub-contracting” and “Commission” expenses only. Its first step was to examine whether the expense provision accruals made (which were disallowed u/s 40(a)(ia) of the Act) were reconciled with the subsequent vendor payments made against these provisions. The matching exercise was done based on certain factors such as description and period of services mentioned in the vendor invoices. In the second step, all the payments for the services pertaining to prior year (indentified in Step 1 above) were traced into the electronically filed Tax Deduction at Source (“TDS”) statements, to identify and establish the TDS done on these payments. It findings were reported in the Annexure to its Report which is reproduced below:—

Table – 5(a)

Commission

Table – 5(a)

Subcontracting

21. The CIT(A) however did not agree with the submissions of the Assessee for the following reasons:—

Thus the order u/s. 201(1) & 201(1A)of the Act were upheld in principle by the CIT(A).

22. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeals before the Tribunal.

23. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assessee at the outset brought to our notice that pending disposal of the appeals, the Assessee had furnished before the AO, details regarding the actual payment of TDS in subsequent financial year, on the provisions made in the various financial years. These details were verified by the AO. The AO has addressed a letter to the DR in which the AO after verification has found that the Assessee had deducted tax at source at the time when the provision made in one financial year is subsequently reversed and the expense booked in the subsequent financial year. The following are the contents of the said letter (copy filed by DR in Court) , in so far as it relates to taxes deductible at source.

“3. During the course of appellate proceedings before the Hon’ble ITAT the assessee company took the same plea that it had deducted tax at source in the subsequent year on all the amounts that was disallowed u/s. 40a(i) and 40a(ia) as and when these amounts were paid. The Hon’ble ITAT therefore directed that such details be produced before the Income Tax Officer (TDS) for verification.

4. At the remand stage the assessee company has now submitted year wise details of rental charges paid, professional charges paid, contract amounts paid and details of other payments. The details of year end provisions as per tax audit report (disallowed u/s. 40a(i) and 40a(ia)), payments made in subsequent year in respect of these provisions and details of tax deducted at source on such payments along with proof of deposit of such TDS into Govt. account were called for and systematically verified. Since, the transactions were enormous in respect of these four assessment years, verifications were carried out randomly for different months for these assessment years. After thorough verification of the transactions in respect of the months selected randomly and after analysis of consolidated annual figures separately for each sections of TDS, it is seen that the amounts which were shown as provisions as on 31 March of a particular year, whether either liquidated by way of payment or was added back to the profit and loss account in subsequent year. Wherever payments were made tax has been deducted at source under the relevant provisions of the IT Act and remitted to the Govt. account.

5. Though, the tax has been deducted at source at the time of payments in respect of provisions made as on 3l March, it is be stated that it was the assessee company’s responsibility to deduct tax at source and remit it to the Govt. account as soon as item of expenditure is debited by it in the books of accounts. Reference is invited to sub section 2 of section 194C, which mandates that the any amount credited to any account whether called “suspense account” or by any other name, in the books of accounts 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. Similar provisions/explanation is also to be found in other sections relating to TDS. Thus, it can be seen that the assessee company has failed to deduct tax at source on the provisions made by it as at 31st March within the stipulated time.

The assessee company has deducted tax at source on these amounts in the subsequent year as and when the same were paid by it. Thus, it is liable for charging of interest u/s. 201(1A) for delayed deduction and remittance of tax to Govt. account.” (Emphasis supplied)

24. In view of the above, the demand on account of tax u/s. 201(1) of the Act, in our view, will no longer survive. However the appeals will survive with regard to the liability of the Assessee to interest u/s. 201(1A) of the Act. Therefore the appeals in so far as it relates to challenge to order u/s. 201(1) of the Act have to be allowed.

25. As far as the question whether the TDS provisions are attracted when the Assessee makes a provision for expenditure in the books of accounts, the learned counsel for the Assessee made submissions which are identical to submissions made before the AO/CIT(A). His submissions were:—

26. The learned DR submitted as follows:—

27. We have carefully considered the rival submissions. Provisions of Sec. 40 of the Act start with a non obstante clause and provides that, “Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sec. 40(a)(i) and 40(a)(ia) of the Act lists of certain items of expenditure and categories payees as “Residents” “Non-Residents”. In respect of the items of such expenditure there if there is an obligation to deduct tax at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, than the expenditure cannot be claimed as a deduction. Sec. 200(1) appears in Chapter XVII-B of the Act and it provides that any person deducting any sum in accordance with the foregoing provisions of this Chapter i.e., Chapter XVII-B shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Sec. 201(1) of the Act is triggered when If any such person referred to in section 200 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, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. The contention of the learned DR that the Assessee having admitted its default u/s. 40(a)(i) & 40(a)(ia) of the Act, cannot in proceedings u/s. 201(1) of the Act, be heard to say that there was no default under chapter XVII-B of the Act is therefore correct. The disability u/s. 40(a)(i) & 40(a)(ia) of the Act, and the liability and Sec. 201(1) of the Act cannot be different and they arise out of the same default. Once there is a disallowance u/s. 40(a)(i) & 40(a)(ia) of the Act, it is not possible to argue that there was no liability under chapter XVII-B of the Act and therefore the provisions of Sec. 201(1) of the Act will not be attracted.

28. Now let us examine the various point of time at which liability to deduct tax at source is laid down in the various provisions of the Act. Sec. 192(1) fixes the point of time when payment made is in the nature of salary and the point of time at which tax had to be deducted is at the time of making payment. Sec. 194 of the Act fixes the point of time when dividend is paid and lays down that obligation to deduct tax at source is before making any payment In cash or before issuing any cheque or warrant or before making any distribution or payment to a shareholder.

29. Sec. 194-C applies when payment is made to contractor. The point of time at which tax had to be deducted at source is at the time of credit to the Account of contractor or payment in cash or cheque, whoever is earlier. Sub-Section (2) of Sec. 194-C lays down that where any sum referred to in sub-section (1) is credited to any account, whether called “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. Similar provision such as Sec. 194(2) exists in Sec. 194-H Explanation (ii) of the Act which applies when the payment made is in the nature of “Commission or brokerage”, in Sec. 194-J Explanation (c ) when payment made is Fees for Technical or Professional Service and Sec. 195 Expln.-1 when payment is made to non-resident. The reason for introduction of provisions such as Sec. 194(2) of the Act has been explained in CBDT circular No. 550 dated 1.1.1990 as follows:

“26.3 Under the existing provisions of section 193 of the Income-tax Act, tax has to be deducted at source by the person responsible for making any payment in the nature of interest on securities at the time of payment. The liability to deduct tax at source was being postponed by making a provision for such payment. In order to prevent the postponement of liability to deduct tax and payment to the credit of the Central Government, the Finance Act has provided that tax will be deducted at source either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier. For this purpose, credit to any suspense account or any other account, by whatever name called, shall be deemed to be a credit of such income to the account of the payee.” (Emphasis supplied)

30. It is thus clear from the statutory provisions that the liability to tax at source exists when the amount in question is credited to a “suspense Account” or any other account by whatever name called, which will also include a “Provision” created in the books of accounts. Therefore it is not possible for the Assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered.

31. With regard to the argument of the learned counsel for the Assessee that there is no accrual of expenditure as per the mercantile system of accounting and that the payee is not identified, we agree with the conclusions of the CIT(A) on this aspect. The CIT(A) has rightly held that under the mercantile system of accounting accrual of liability for any expenditure is not dependent of receipt of invoice from the person to whom payment for expenditure has to be made and that accounting practice followed by the Assessee was contrary to the mercantile system of accounting. The claim of the Assessee that it creates provision in the books of account on an estimated basis in some cases, on a historical basis in other and using some sort of arithmetical or geometric progression in some other cases was not acceptable. The Assessee had not established this plea with concrete evidence. The conclusion of the CIT(A) that the Assessee has full knowledge of what is due to its Vendors, sub-contractors, commission agents etc. Therefore there was no necessity to create provision in our view is justified in the facts and circumstances of the present case.

32. With regard to the argument of the learned counsel for the Assessee that there is no charge u/s. 4(1) of the Act in the hands of the payee and therefore the TDS provisions are not triggered, we find that Chapter XVII of the Act deals with collection and recovery of tax. Sec. 190(1) provides that “Notwithstanding that the regular assessment in respect of any income is to be made in a later Assessment Year, the tax on such income shall be payable by deduction or collection at source or by advance payment”. Sec. 190(2) of the Act provides that“Nothing in Sec. 190 shall prejudice the charge of tax on such income under the provisions of Sec. 4(1) of the Act.” The statutory provisions therefore clearly envisage collection at source de hors the charge u/s. 4(1) of the Act. The sum collected by way of tax collection at source is appropriated as tax paid by the payee only on assessment in the hands of the payee. Sec. 195 however uses the expression “Chargeable to Tax”. In the present case, it is not the case of the Assessee that payments made to non-residents are not chargeable to tax nor has the Assessee been able to demonstrate as to how payment made to non-resident is not chargeable to tax. The Assessee is a person making payment and the simple obligation cast upon him is to deduct a sum specified by the Act from and out of the payment and remit to the credit of the Central Government. The person making payment after deduction of tax at source gets a valid discharge in law for the entire amount paid.

33. As rightly contended by the learned DR, the CBDT Circular No. 30/2010 is a specific circular applicable in the case of Banks and issued under peculiar circumstances. The Assessee cannot take shelter under the said Circular.

34. The argument that TDS provisions operate on income and not on payment, in the facts and circumstances of the present case, is erroneous. As we have already seen Sec. 194C, 194J and 195, which are the sections applicable in the present case, does not use the expression, “Income”. The above sections use the expression “Sum” and tax deduction has to be on the “sum so paid”. Sec. 194H and Sec. 194-I deal with TDS obligation on payment of commission and rental income. These payments by its nature are specific and the entire payment is attributable to commission or rent and therefore the commission and rent paid is treated as “income” and therefore the expression income by way of commission or rent is found in these sections. Moreover as person responsible for making payment, it is the duty of the Assessee to deduct tax at source. Sec. 194C, 194-J, 194-H and 194-I do not use the expression “Chargeable to tax”. As we have already seen, it is not the case of the Assessee that the payments are not chargeable to tax in the hands of the payee. As we have already seen, the Assessee deducted tax on the provision made for various expenses in the subsequent financial years when the provision entries were reversed. The Assessee therefore cannot take a plea that the payments in question are not chargeable to tax and therefore there was no obligation on its part to deduct tax at source.

35. We will now deal with the various case laws on which the learned counsel for the Assessee placed reliance. In Dy. CIT v. Telco Construction Equipment Co. Ltd. [IT Appeal No. 478 (Bang.) of 2012 for AY 07-08 order dated 7.3.2014], the question for consideration was obligation to deduct tax at source in respect of provision created in the books towards commission payable under Sec. 194-H of the Act. The Commission agent had undertaken to sell product, collect amounts from customers and also obtain C forms. The sale through the agent had concluded. The commission payable was shown as “provision” since the agent had to collect the amounts from customers and also obtain “C” forms. The Tribunal held in para-6 of the aforesaid order that the Assessee had credited the amount to a provision account and not to the agent’s account and therefore provisions of Sec. 194H of the Act are not attracted. The Tribunal also held that the agent would get a vested right to receive commission only when they fulfill the obligations under the agreement. Expln.(ii) to Sec. 194H of the Act was neither brought to the notice of the Tribunal, nor was that provision considered by the Tribunal. In that sense it can be said that the precedent is sub silentio and therefore not binding. Besides the above, in the present case the Assessee’s claim that there was no accrual of liability, as we have already seen is not correct.

36. The next decision on which the learned counsel for the Assessee placed reliance was that of the ITAT Pune Bench in the case of Dy. CIT v. Yeota Merchants Co-op. Bank Ltd., ITA No. 805/PN/2011 for AY 07-08 order dated 31.8.2012. In the aforesaid case Provision for audit fees was disallowed u/s. 40(a)(ia) of the Act for non-deduction of tax at source u/s. 194J of the Act. The audit fee in question was payable to auditors who are appointed by the Co-operative Department, after the end of the relevant previous year. The Tribunal found that such audit fee was a statutory liability payable as per the provisions of the law of State of Maharashtra applicable for State Co-operative Societies. It was therefore held that there was neither accrual of liability nor was the payee known and therefore TDS provisions were not implemented due to peculiar situation and therefore the disallowance u/s. 40(a)(ia) of the Act was deleted. In the present case, as we have already seen, there is nothing to show that there was no accrual of liability nor was there any statutory liability that existed.

37. The next decision on which the learned counsel for the Assessee placed reliance was the decision of ITAT Bangalore in the case of Bovis Lend Lease (I) (P.) Ltd. v. ITO [2010] 36 SOT 166. The facts of the case were that the Assessee engaged a non-resident for rendering management services. The Assessee credited the sum payable to non-resident to an Outstanding Expenses Account. As per the agreement with the non-resident had to submit a statement of service charges along with invoice and 30 days from receipt of invoice the Assessee had to pay the sums to the non-resident. The services were rendered by the non-resident and sums due to the non-resident were credit in an outstanding expenses account. The account of the non-resident was however credited after receipt of invoice which was in a later financial year. The Assessee had obtained order u/s. 197 of the Act for non-deduction of tax at source and remitted the amount to the non-resident without deduction of tax at source. The revenue initiated proceedings u/s. 201(1) of the Act on the ground that the certificate u/s. 197 was not valid and that the Assessee was bound to deduct tax at source at the time of credit to outstanding expense account. The Tribunal held that the management service fee was not taxable and therefore there was no TDS obligation. The Learned counsel for the Assessee relies on an observation in para 88 of this order wherein the Tribunal has observed that application u/s. 197 of the Act for non-deduction of tax at source need not be made at the time of credit or payment, whoever is earlier and can be made belatedly also. From this probably he wants to conclude that TDS obligation arises only at the time of credit to the account of payee or actual payment whichever is earlier. This decision, in our view, is not applicable to the present case. As we have already seen, the law provides for a deeming fiction fore e.g. Sec. 194C(2), deeming credit to a suspense account as a credit to the account of the payee. This fiction is neither considered nor dealt with any of the orders cited by the learned counsel for the Assessee.

38. The next decision cited by the learned counsel for the Assessee is the decision of the Hon’ble Karnataka High Court in the case of Bharti Airtel Ltd. v. Dy. CIT [2015] 372 ITR 33/228 Taxman 219 (Mag.)/[2014] 52 taxmann.com 31. In this decision the question was whether the difference between the Maximum Retail Price (MRP) and the price at which prepaid cards used in cellular phones are sold to a dealer is commission on which Bharati Airtel Ltd., had to deduct tax at source u/s. 194-H of the Act. The Hon’ble Karnataka High Court in para-63 observed that where existence of income in the hands of the payee is absent there can be no TDS obligation. The learned counsel for the Assessee has placed reliance on the above observation. In our view the question before the Court was different and the issue with which we are concerned in the present appeals was never under consideration by the Hon’ble High Court. It is possible to pick words from a decision and use it out of context.

39. In the case of UCO Bank v. Union of India [2014] 369 ITR 335/[2015] 228 Taxman 141/[2014] 51 taxmann.com 253 (Delhi) the question before the Hon’ble Delhi High Court was as to whether the Bank in which deposits are kept by the Registrar General of Delhi High Court pursuant to orders of court, should deduct tax at source u/s. 194A of the Act. The Hon’ble Court held that Registrar General was neither the payee nor recipient of income and that the funds kept in deposit are funds which are “custodia legis”. The Hon’ble Court observed that if TDS is deducted that would amount to recovery of tax without the corresponding income being assessed in the hands of any assessee. In the absence of an ascertainable assessee the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax u/s. 4 of the Act but takes a form of a separate levy, independent of other provisions of the Act which is not permissible. In our view the aforesaid observations are not applicable to the present case. As we have already seen, the Assessee is fully aware of the payee but postpones credit to the account of the payee for want of receipt of invoice. We are, therefore, of the view that the ratio laid down in the aforesaid decision will not be any assistance to the plea of the Assessee before us.

40. The learned counsel for Assessee relied on some decisions of ITAT benches where in the case of Banks, TDS obligation was held to be not applicable based on Circular No. 30/2010. We have already held that the said CBDT circular is applicable to banks and cannot be taken advantage by the Assessee who is not a bank. We are therefore not discussing the said decisions.

41. For the reasons given above, we do not find any merit in the appeals that relate to challenge of levy of interest u/s. 201(1A) of the Act. The appeals, in so far as it relates to holding the Assessee as an “Assessee in default” u/s. 201(1) of the Act are however allowed.

42. In the results, the appeals that relate to challenge of levy of interest u/s. 201(1A) of the Act are dismissed. The appeals, in so far as it relates to holding the Assessee as an “Assessee in default” u/s. 201(1) of the Act are however allowed.

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