WWW.TAXSCAN.IN - Simplifying Tax Laws IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER आयकर अपील सं./ ITA No. 1084/Ahd/2013 िनधारण वष/ Assessment Year : 2009-10
Hardik Jigishbhai Desai, 1, Seema Row House, Chod Dod Road, Surat PAN : AAKPD 1044 M
DCIT, Circle-3, Surat
Vs
अपीलाथ/ अपीलाथ (Appellant) Assessee by Revenue by
: :
यथ यथ/ थ (Respondent) Shri Ketan Jagirdar, AR Smt. Sonia Kumar, Sr DR
सुनवाई क तारीख/ Date of Hearing : घोषणा क तारीख / Date of Pronouncement:
05/10/2016 14/10/2016
आदेश/O R D E R
This appeal by the assessee is directed against the order of the Learned Commissioner of Income Tax (Appeals)-IV, Surat dated 28.02.2013 for Assessment Year 2009-10. 2.
One issue is raised by following grounds :The Id C.I.T.(Appeals) has erred in upholding the decision of the Assessing Officer that provision of section 40a (ia) is applicable on year end provisions of commission expense of Rs. 26 lacs as TDS is. not deducted inspite of following reasons: i) The assessee is following mercantile basis of a accounting. Therefore, he is required to follow matching principle i.e. All expenditures relevant to accounted sales/income should be accounted in same year and vice versa, whether bills of relevant parties are received or not. Where ever bills are received, it is credited to party's account and where ever bills are not received for such expenditure entry for provision of expenditure is passed. Expenditure a/c Dr To Provision to Expenditure a/c
Cr
This entry is required to arrive at true and fair figure of profit for the said year as per normally accepted accounting principles.
SMC-ITA 1084/Ahd/2013 WWW.TAXSCAN.IN - Simplifying Tax No. Laws Hardik Jigishbhai Desai vs. DCIT AY : 2009-10
2 ii) Entry for provision of earlier year is duly is reversed on 1st day of following year by crediting expenditure account and debiting income account. Provision for Expenditure a/c Dr To Expenditure a/c Cr . The assessee is regularly following such method of accounting. ii) As and when bills are received by assessee, expense account is debited and Income account is credited. TDS is also duly paid on behalf of billing party on that date. iv)As bills are not raised on the assessee TDS cannot be deducted in the name of unknown party and there is no corresponding income of any person for that relevant year 'therefore, provisions of TDS are not applicable for such year end provision. v) The assessee has provided full details of commission agents to whom such commission was paid in following years after deduction of TDS on the sales of current year. 3.
Brief facts are – the assessee claims to be following the Mercantile
System of Accounting. The AO found that the assessee had debited an amount of Rs.26,99,355/- under the head “Commission Expenses” without deducting applicable TDS from the same.
3.1
The assessee replied that the provision of commission of Rs.26 lacs
was made on estimate basis and following the mercantile system of accounting; therefore the same was allowable. Since the names of payees were not known, the TDS was not deducted as the assessee did not know in whose account the TDS was to be credited.
3.2
The AO did not find the reply of the assessee to be tenable on the
grounds that the assessee had debited the commission expenses to profit and loss account which had resulted in reduction of his profit and hence TDS should have been made from such expenses. The AO observed that as
SMC-ITA 1084/Ahd/2013 WWW.TAXSCAN.IN - Simplifying Tax No. Laws Hardik Jigishbhai Desai vs. DCIT AY : 2009-10
3 per the provisions of Section 194H, TDS should be made from the commission amount ‘likely to be credited’ if the amount exceeded Rs. 2,500/- and as the amount of commission debited by the appellant was Rs.26,00,000/- which was in excess of the amount stipulated in Section 194H, the assessee should have done TDS on this commission amount. The AO also observed that the accounting practice of the assessee of debiting the amount of Rs.26,00,000/- at the end of the year and crediting the same amount back on the first day of the next FY by passing reverse entry shows that the assessee diverted his income which should have been taxed in the year under consideration. The AO invoked the provisions of Section 40a(ia) for disallowing the expenses of Rs.26,00,000/- under the Income-tax Act.
3.3
Aggrieved, the assessee preferred first appeal where it was contended
that the Hon’ble Mumbai Tribunal in case of Industrial Development Bank of India V/s. ITO (2007) 293 ITR 267 has held that the IDBI did not have any liability to deduct tax at source in respect of provision of interest accrued but not due if the recipients were not identifiable. The assessee submitted that similar decision was given by ITAT Mumbai, in the case of Mahindra & Mahindra V/s. DCIT in ITA No. 8597/MUM/2010. The assessee further pointed out that the Hon'ble CBDT had also duly considered the issue and had issued a clarification to Tata Iron and Steel Co. Ltd. 275/126/96-17(6) Dt. 05.07.1996 that in case of year end provision where the party was not known, provisions of TDS was not applicable. 3.4
The ld. CIT(A), however, upheld the action of the ld. AO by detailed
finding as under:“5.1 I have gone through the assessment order, submissions of the appellant and the judicial decisions relied upon. It is a fact that the appellant has created "provision for commission payable" on which no TDS has been done. This provision for commission payable this year has been created on 31-032009 and has been reversed on the 1st day of the next financial year. i.e. on
SMC-ITA 1084/Ahd/2013 WWW.TAXSCAN.IN - Simplifying Tax No. Laws Hardik Jigishbhai Desai vs. DCIT AY : 2009-10
4 01-04-2009. This shows that the liability has not crystallized in this year. Such contingent liability is inadmissible as a deduction whatever accounting method the appellant follows-mercantile or cash. This is so because even in mercantile system unless the liability to pay crystallizes it cannot be claimed as a deduction. The very fact that the appellant reverses the whole of the provision on the 1st day of the next F.Y. & then debits the actual amount along with the payees names and other details during the next FY establishes that the liabilities for which provision was made on 31st March had not crystallized. Therefore the amount of provision made was a non deductible expenditure. In case it is to be held that the liability had crystallized in this year as the sale and purchase had been made during the year and therefore the liability for commission was known, then by the same logic it has to be held that name and address of the person to whom commission is to be given along with the amounts would be known to the appellant as he is the one conducting the business. It is also worthwhile to mention that according to the appellant, provision is made on the basis of "about" 2% of sales which is stated as customary commission which only shows that the provision amount is itself not justifiable or has not crystallized. Since TDS has to be made on credit or payment, whichever is earlier, the liability to deduct tax would arise in the hands of the appellant at the time of making the provision i.e. on 31st of March itself and since no TDS has been made, the appellant would be caught within the mischief of sec 40 a (ia). Therefore whichever way we look at the issue, the amount of provision was not an admissible deduction during the year. 5.2. The case laws relied upon by the appellant in support of his contention that provision of sec. 40a(ia) was not attracted in his case as the identity of the parties to whom payments had to be made was not known to him does not help his cause. In the cases relied upon by the appellant, the issue pertained to provisions made for interest expense incurred for the year which was quantifiable but only provisions could be made as these had not fallen due for payment and therefore neither paid nor credited to the account of the receiver. It was under those circumstances that the Courts held that there was no liability to deduct tax. The letter to TISCO given by CBDT is also in respect of Interest on Deep Discount Bonds. As against this, in the case of the appellant the expense is neither accrued nor quantifiable and hence the provision itself is inadmissible for deduction - whether TDS made or not. If, as has been mentioned earlier, it is argued that the amount is quantifiable and accrued, then the details would be known to the appellant and the same should be credited to the commission agent's account and TDS made. 5.3 During the course of appeal proceedings, a reconciliation of current year sales/purchases with the payments in subsequent years to the commission agents through whom the transactions were made were called for and this shows that though the provisions of Rs.26,00,000/- were claimed as expenses
SMC-ITA 1084/Ahd/2013 WWW.TAXSCAN.IN - Simplifying Tax No. Laws Hardik Jigishbhai Desai vs. DCIT AY : 2009-10
5 in the AY 2009-10, payments were actually made for only Rs.19,57,030/(and that too through FY 2010-2011) and it is shocking to note that the remainder provision was never written back in the profit and loss account. Even out of this Rs.19,57,030/-, only Rs.3,01,120/- and Rs.23,175/- have been stated to have been paid in the immediately succeeding year and again a new provision of Rs.25,46,524/- has been made in FY 09-10 in the books of proprietorship concern and claimed as expense for immediately subsequent year which is evident from the ledger account of the proprietorship concern for AY 2010-11 furnished by the appellant. This proves that the provisions are made according to the whims and fancies of the appellant without any proper basis and liability to pay. This is further corroborated by the fact that the appellant has not made a single purchase/sale transaction after October 2008 through the brokers but still has made only provisions and not quantified actual amounts. Therefore at best the appellant can be allowed Rs.19,57,030/- and that too in the year of actual payment provided the genuineness is established and TDS has been made on these payments. The reason I have mentioned that genuineness of expenses should also be verified is that in different submissions before me the appellant has stated different amounts of commission paid for the year none of which match with the provisions made. Furthermore, the appellant failed to furnish the details of transactions done through commission agents appearing at serial no 11 to 17 in the detail furnished by it before me which raises serious doubts about the genuineness of these payments. Similarly, the actual payments made on account of commission for sales/purchases in subsequent periods are different in different submissions. However, as far as this year is concerned, the provisions are contingent in nature, not quantifiable or accrued, and therefore inadmissible as a deduction. Therefore, in my considered opinion, the amount of provision of Rs.26,00,000/- made towards commission was an inadmissible deduction. In view of these facts, the disallowance of "Provision for commission payable" of Rs.26,00,000/- made by the AO is, therefore, upheld. 4.
The ld. Counsel for the assessee relied on the judgments of IDBI
(supra), Mahindra & Mahindra (supra) and CBDT clarification dated 05.07.1996 and contends that the practice followed by the assessee has been accepted by the Department in past year; therefore, making a provision on the estimate basis on the sales effected by the assessee, the commission become an ascertained liability and was allowable as business expenditure. The deduction of TDS become impossible as the exact names, amount of commission and TDS payable to each party was not known. Therefore, the
SMC-ITA 1084/Ahd/2013 WWW.TAXSCAN.IN - Simplifying Tax No. Laws Hardik Jigishbhai Desai vs. DCIT AY : 2009-10
6 assessee was not in a position to pay the TDS. This situation of impossible cannot be held against assessee to deny the claim of expenditure. Once the Department has accepted this methodology, there is no justification in the disallowance of expenditure. 5.
The ld. Sr. DR, on the other hand, vehemently contends that the
assessee himself has admitted that the liability in question was unascertainable as the names, amount of commission and TDS payable thereon was not known to the assessee. Unless the assessee ascertains these details, it cannot be said that the liability had crystallized in effective terms and was an ascertained liability. Merely because the assessee’s practice was accepted in past does not apply as res judicata inasmuch as the provision of law will take precedence over an untenable practice adopted by the assessee. Besides, Section 40a(ia) provides that as and when the assessee makes the payment of relevant TDS, the expenditure will be allowed in the year of payment. Besides, the ld. CIT(A) has given clear findings that the provision was made on whims and fancies of the assessee without any proper basis and even the genuineness of the expenditure; therefore, the ld. CIT(A) has disallowed the expenditure. The facts in the cases of IDBI and Mahindra and Mahindra (supra) are on different footings and the CBDT circular is also in a different context.
In this case, the simple question is
non-crystallization and liability being unascertained entry in the books at the whims and fancies of the assessee, which cannot be an allowable expenditure and having made book entries claiming the expenditure it was legal obligation of the assessee to deduct the TDS and failure thereof will render the expenditure disallowable in clear terms of Section 40a(ia). The order of the ld. CIT(A) is relied on. 6.
I have heard the rival contentions, perused the material available on
record and gone through the orders of the authorities below. I find merit in
SMC-ITA 1084/Ahd/2013 WWW.TAXSCAN.IN - Simplifying Tax No. Laws Hardik Jigishbhai Desai vs. DCIT AY : 2009-10
7 the contentions of the ld. Sr. DR. The findings of the ld. CIT(A) are very elaborated and demonstrated that the provision of commission payment claim by the assessee is totally unascertainable, uncrystallized and fanciful. It does not assume the character of ascertained mercantile liability. Even in case of mercantile liability, Section 40a(ia) clearly mandates that the expenditure cannot be allowed in the absence of corresponding TDS payment in Government treasury. In view thereof, I find no infirmity in the order of the ld. CIT(A) which is upheld and the appeal of the assessee is thus dismissed. 7.
In the result, assessee’s appeal is dismissed. Order pronounced in the Court on 14th October, 2016 at Ahmedabad. Sd/-
R.P. TOLANI (JUDICIAL MEMBER) Ahmedabad;
Dated 14/10/2016
*Biju T.
आदेश क ितिलिप अेिषत/Copy of the Order forwarded
to :
1.
अपीलाथ / The Appellant
2.
यथ / The Respondent.
3.
संबंिधत आयकर आयु / Concerned CIT
4. 5.
आयकर आयु(अपील) / The CIT(A) िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6.
गाड फाईल / Guard file.
/ BY ORDER,
आदेशानुसार
TRUE COPY /
उप सहायक पंजीकार
(Dy./Asstt.Registrar) , अहमदाबाद / ITAT, Ahmedabad
आयकर अपीलीय अिधकरण
