If payee is not identifiable, TDS provisions are not applicable. Amounts disallowed under section 40(a)(i)/40(a)(ia) for non deduction of tax cannot be again subject to TDS provisions in order to treat the assesse as an assesse in default

Facts

 A survey was conducted in the premises of Pfizer Limited (taxpayer). The Assessing Officer (AO) noted that tax was not deducted by the taxpayer inter alia in respect of provisions.

The journal entries passed by the taxpayer in its books of account were as under:

 

At the time of making year end provision

Expenses A/c Dr xxx

To Provision for expenses A/c Cr xxx

 

On the first day of the next financial year

Provision for expenses A/c Dr xxx

To Expenses A/c Cr xxx

 

At the time of making payment to parties on the basis of actual invoices received

Expenses A/c Dr xxx

To Vendor A/c Cr xxx

To TDS payable A/c Cr xxx

 

An order under section 201(1) and 201(1A) of the Income-tax Act, 1961 (the Act) was passed by the AO treating the assessee in default for non-deduction of tax.

The Commissioner (Appeals) upheld the AO’s action.

Issue before the Tribunal

Whether levy of tax under section 201(1) and interest under section 201(1A) of the Act is justified?

 

Observations and Ruling of the Tribunal

 It is undisputed that the taxpayer had made provision for expenses which were disallowed under section 40(a)(i)/40(a)(ia) of the Act while filing its income-tax return.

As per the journal entries passed, once the individual payee was identified, all the provisions relating to taxes deducted at source (TDS) were applicable. The Mumbai Tribunal1 has held that provisions of TDS are not applicable in the absence of any identifiable payee.

As the payee was not identifiable at the time of making provisions, TDS is not required to be deducted. The entire provisions were written back in the next year and the actual amounts paid/credited were subjected to TDS which was undisputed.

Where an amount was disallowed under section 40(a)(i)/40(a)(ia) on the basis of the Audit Report of the Chartered Accountant, the taxpayer cannot be treated as an assessee in default under section 201(1) of the Act in respect of same amount again. If the revenue’s contention was to be accepted, then disallowance under section 40(a)(i)/40(a)(ia) cannot be made and the provisions of section 40(a)(i)/40(a)(ia) to that extent may become otiose.

 

Conclusion

Provisions of TDS are not applicable if the payee is not identifiable.

Assessee cannot be treated as an assessee in default under section 201(1) of the Act, if the amounts are disallowed under section 40(a)(i)/40(a)(ia) of the Act.

 

Source: Pfizer Limited v. ITO (TDS) (ITA No. 1667/Mum/2010) (Mum) dated 31 October 2012