Appeal details
Counselvise Citation
[2022] 105 COUNSELVISE.COM (IT) 9545 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 5 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-01-2022
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Assessment Year
2013-2014
Appeal Filed On
15-08-2017
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA Nos. 1689 & 1690/Bang/2017 Assessment Years : 2012-13 & 2013-14 M/s. Robert Bosch Engineering and Business Solutions Pvt. Ltd., Hosur Road, Koramangala, Bangalore. PAN: AAACR7108R Vs. The Income Tax Officer (TDS)/(OSD) LTU, Bangalore. APPELLANT RESPONDENT Assessee by : Shri Percy Padiwala, Sr. Advocate Revenue by : Shri Sankarganesh K, JCIT (DR) Date of Hearing : 04-01-2022 Date of Pronouncement : 31-01-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against consolidated order dated 31/05/2017, passed by the Ld.CIT(A)-14 for assessment years 2012- 13 & 2013-14. We note that except for the difference in the addition the issue alleged in both these appeals are on identical facts. As common issue arises out of the impugned order and therefore these appeals are being disposed off by way of a common order. For sake of convenience, grounds pertaining to assessment year 2012-13 are reproduced as under. “1. The order of the learned CIT(A) LTU is opposed to facts of the case and is bad in law. 2. The learned CIT(A) and ITO have erred in facts and in law by failing to appreciate that the obligation to deduct Page 2 of 23 ITA Nos. 1689 & 1690/Bang/2017 tax at source did not arise in respect of the provisions created in the books of accounts on 31 March 2012 (i.e., year-end provisions), as the receipt of such amounts by the parties was not established as on 31 March 2012. 3. The learned CIT(A) and ITO have erred in facts and in law by failing to appreciate that the obligation to deduct tax at source did not arise in respect of those items provided for on 31 March 2012 (i.e., year-end provisions) and which were subsequently reversed. 4. The learned CIT(A) erred in upholding interest levy under section 201(1A) of the Income-tax Act, 1961 ['the Act]. 5. Without prejudice to the above, the learned CIT(A) and ITO have erred in levying interest under section 201(1A) of the Act until the date of passing the order under section 201(1) of the Act; whereas even if any interest is leviable, the same ought to have been levied: (a) until the date of deduction of taxes at source and credit to the account of the Central Government in those cases where invoices were subsequently received and paid; or (b) until the date of reversal of provisions in the books of accounts in those cases where provisions were later reversed. 6. The learned CIT(A) has not adjudicated on tax and interest levied by the learned ITO on ESI contribution payable to the Central Government at the rate of 10% even though there was no obligation to deduct tax under Chapter XVII-B of the Act. 7. The Appellant having suo-motto disallowed certain sums under section 40(a)(i) & 40(a)(ia) of the Act, the learned CIT(A) erred in holding that Appellant ought to have deducted tax at source on the said sums, since as per general legal principles an assessee cannot be subjected to a double disadvantage for a single failure. 8. The learned CIT(A) erred in holding that obligation for tax deduction at source as well as levy of interest under section 201(1 A) of the Act is applicable even to the extent of amount of provisions in excess of actual amount of invoice. 9. The Appellant craves leave to add, amend or alter any of the grounds herein. 10. For these and other grounds that may be urged at or before the time of hearing, the Appellant prays for appropriate relief.” 2. Brief facts of the case are as under: The Ld.ITO(TDS) noticed that for the assessment year 2012-13 the assessee made suo-motto disallowances u/s 40(a)(i)/(ia) of the Act. The Ld.ITO(TDS) vide letter dated 30-07-2013 called upon the assessee to Page 3 of 23 ITA Nos. 1689 & 1690/Bang/2017 furnish the details of payment made and the TDS deducted and remitted to the Central Government account. In response to this, the assessee company vide its letter 12-08-2013 submitted copies of Form 3CD. Subsequently, the Ld.ITO(TDS) called for party wise details of the disallowance made by assessee under section 40(a)(i)/(ia) of the Act. This was complied with by the authorized representative of assessee. The Ld.ITO(TDS) from the details observed assessee had disallowed Rs.7,08,24,466/- under section 40(a)(i)/(ia) of the Act. The assessee submitted that the entire amount disallowed u/s.40(a)(ia) consists of following categories: It was submitted by assessee that on Rs.2,44,31,822/- applicable taxes were deducted and remitted to the Government account after 31/03/2012 as indicated in the statement furnished before the Ld.ITO(TDS). It was further submitted that Rs.4,47,09,666/- was provision created on 31/03/2012 on which no TDS was deducted as the final amount was not ascertainable. It was submitted by the assessee that subsequently the same was reversed as on 31/12/2012, upon receipt of invoices from the parties and applicable TDS was deducted, that stood deposited in the Government account. The assessee also submitted that one payment made to TATA Communications there was short deduction. It was submitted that there was one another payment pertaining to ESI corporation on which there was no liability to deduct any tax at source. The Ld.ITO(TDS) observed and held as under: “In response to notice the assessee's Authorized Representative Sri. Ananth CA appeared before the undersigned and furnished the details of subsequent payments made in respect of disallowances U/s 40(a) (ia) and 40(a) (i) of the IT Act and the case was discussed. It is Page 4 of 23 ITA Nos. 1689 & 1690/Bang/2017 noticed from the computation of income that Rs.7,08,24,466/- was disallowed u/s 40(a) (ia) of the IT Act. The assessee company has utilized the provision of Rs.2,44,31,822/- for further payments and it was told that the balance of Rs. 4,63,92,644/- of provision was reversed.subsequently. The details produced by the Assessee Company is virtually impossible to verify the accuracy of the amounts booked, subsequent payments and TDS details made in subsequent years. However the entire process of booking expenditure and charging of the same to the P&L A/c and its subsequent reversal was against the basic tenets of accountancy. Such accounting treatment not only virtually impossible to verify the accuracy of the amounts booked at the first instance vis-à- vis, reversal entries and subsequent booking as to whether the amounts are the same. From the above it is clear that the expenditure disallowed u/s 40 (a)(i) and 40 (a) (ia) is not crystallized expenditure. However column 17k of the 3CD report the assessee has not furnished any particulars of liability of a contingent nature. As the assessee has not furnished the party wise details with regards to the disallowance of Rs 4,63,92,644/- the undersigned is constrained to pass order u/s 201 (1)/201(1A) for the default of non deduction of tax at source. It is once again reiterated that the expenditure was not disallowed u/s 37 on provision and rather it was identified and disallowed u/s 40(a) & 40(a) (ia) by the tax auditor. Hence the assessee was considered as assessee in default in respect of non-deduction of tax U/s 201of IT Act. Accordingly the default continues and it is a fit case for levy of interest. TDS deductible 57,47,112/- Interest 13,79,307/- Interest on delay payment 4.71.297 Payable 75,97,716/- Aggrieved by the order of the Ld.ITO(TDS), the assessee filed appeal before the Ld.CIT(A). 3. Before the Ld.CIT(A), assessee contended that the amount on which TDS has been computed by the Ld.ITO(TDS) includes such amount on which TDS has been deducted deposited with Government account on various dates. Page 5 of 23 ITA Nos. 1689 & 1690/Bang/2017 The Ld.CIT(A) restricted the levy to such amount on which no TDS could be done and even later invoices could not be received and the amount were reversed. The Ld.CIT(A) thus directed the Ld.AO(TDS) to exclude those amounts in respect of which TDS has been made on the dates on which invoices have been raised. The Ld.CIT(A) observed as under: “15. With regard to the levy interest u/s. 201(1A) the appellant has strongly contested the levy. It has been submitted that at best the interest could be charged only upto the date of actual payment of TDS. However, the appellant's arguments do not take into account the fact that there has been shifting or postponement of the period of tax deduction in the method followed by the appellant in accounting for services received as a provision (without TDS) followed by payment as per invoices (with TDS). This aspect has been noted by the Hon'ble ITAT, Bangalore also in the IBM India judgment referred to supra. The Hon'ble ITAT has upheld the levy of interest u/s. 201(1A) made upto the date of passing of the impugned orders by the AO. I find no reason, therefore, to interfere with the AO's method of computation of interest. 16. For AY 2012-13 the company deducted taxes at source (albeit in the next financial year) in respect of Rs.3,25,21,444 included in the total provision of Rs. 4,48,04,866 since invoices pertaining to this amount were received in the subsequent financial year and payments released after TDS. For the remaining provision of Rs. 1,22,83,222 no TDS could be done even later since the invoices pertaining to it were not received and the amount was merely reversed. This amount is liable to Sec.201(1) and interest u/s. 201(1A). 17. For AY 2013-14 the appellant has provided break-up and details of provisions amounting to Rs. 1,65,77,388 in respect of Bosch Ltd., which includes Rs.1,01,59,588 in 12 number of purchase orders where the provision was inadvertently created although the invoice was received during the concerned financial year and TDS was also deducted and remitted during FY 2012-13 itself. Upon noticing the error, the provision was reversed subsequently on 31.03.2014. The invoice dates and TDS challans in respect of these purchase orders appear to be prima facie correct and the appellant's claim is to be admitted after verification since the provision was ab inito erroneous and the transactions had already suffered TDS during the Page 6 of 23 ITA Nos. 1689 & 1690/Bang/2017 financial year itself. The AO is directed to verify and re- compute the matter accordingly.” Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before us. Common arguments are advanced by the Ld.Counsel for both assessment years under consideration. 4. At the outset, it is submitted that the entire provision has been disallowed u/s. 40(a)(ia) of the Act in Return of Income filed by assessee for years under consideration. Ld.Counsel submitted that the procedure adopted by assessee in the books of accounts, for accounting the expenditure which are outstanding as on 31st March of every financial year is on a scientific basis. It was submitted that the assessee incurred certain expenditure where invoices have been raised by service provider and are acknowledged by the assessee, were accounted in the books of accounts and the payments are made after duly complaining the provisions of TDS under Chapter XVII-B of the Act. 5. As regards the expenses for which the service provider or vendor had not raised any invoices nor acknowledgement by the assessee made a provision for such expenses on a scientific basis and such provision was debited to its P&L account, on conformity with the provisions of AS-29 pertaining to provisions, contingent liabilities and contingent assets issued by the Institute of Chartered Accountant of India (CAI) and such provision was reversed in the beginning of the next accounting year. It was further submitted that it is mandatory to provide such provisions in terms of AS-29 issued by the CAI. The Ld.Counsel for the assessee submitted as under: a) That no income accrued to the payees and a mere provision was made in the books of accounts at the year end. The existence/accrual of income in the hands of payee is a pre- Page 7 of 23 ITA Nos. 1689 & 1690/Bang/2017 condition to fasten the liability of tax deduction at source in the hands of the payer. b) That though the provision was debited to the P& L Account, assessee while filing the return of Income had suo moto disallowed the entire provision under section 40(a)(i)/(ia) of the Act. 6. In support he placed reliance on following decisions: Decision of Hon’ble Tribunal in case of Pfizer Ltd vs.ITO(TDS)(OSD) reported in (2012) 28 taxmann.com 17; Decision of Hon’ble Tribunal in case of IDBI v. ITO reported in (2007) 107 ITD 45; 7. On the contrary, the Ld.CIT DR placed reliance on following decisions: Decision of coordinate bench of this Tribunal in case of IBM India (P).Ltd. vs.ITO(TDS) reported in (2015) 59 taxmann.com 107 Decision of Hon’ble Cochin Tribunal in case of Agreenco Fiber Foam (P.) Ltd., vs.ITO (TDS) reported in (2013) 61 taxmann.com 155 The Ld.CIT DR submitted that suo moto disallowance of the provision under section 40(a)(i)/(ia) of the Act arises only when there exists a liability to deduct tax at source under chapter XVII-B of the Act. The assessee having on its own disallowed the expenditure cannot now turn around and say that there was no liability to deduct tax at source. 8. He thus submitted that the disability under section 40(a)(i)/(ia) and the liability under section 201(1) of the Act cannot be different and both arise out of the same default. 9. We have perused the submissions advance by both sides in light of records placed before us. 9.1. Before us the assessee concerned is the deductor of TDS. For AY 2012-13: Total Provision created : Rs.4,48,04,866/- Page 8 of 23 ITA Nos. 1689 & 1690/Bang/2017 TDS deducted on receipt of Invoice and paid in the FY:2013-14 :Rs.3,25,21,444/- Balance on which no TDS effectuated :Rs.1,22,83,222/- For AY:2013-14: Total Provision :Rs.1,65,77,388/- TDS deducted and paid in the same year : Rs.1,01,59,588/- Balance on which no TDS effectuated : The amount of Rs.1,01,59,588/-, inadvertently was retained in the provision. However upon noticing the error, it was reversed as on 31/03/2014. Before we advert to the main issue of levy of interest, under section 201(1)/(1A) of the Act, there is a direction by the Ld.CIT(A) for both the years under consideration to exclude such payments which has suffered TDS. We also note that for financial year 2011-12, there is payment made by assessee to ESI corporation for which TDS liability does not arise which also needs to be ignored from the alledged quantum. 10. It is the submission of the Ld.Counsel that the entire provision stands disallowed under section 40(a)/(i)/(ia) while filing the return of income and therefore for non deduction of TDS. What needs to be ascertained is, under such circumstances; whether the assessee(deductor) could be treated to be “assessee in default” under the provisions of Sec.201(1) of the Act ? Whether interest under section 201(1A) deserves to be levied? 11. The said section reads as under: Section 201 (1) Where any person, including the principal officer of a company,— (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, Page 9 of 23 ITA Nos. 1689 & 1690/Bang/2017 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: Provided that 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 resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident— (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) The recipient has paid the tax due on the income declared by him in such return of income; And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed." As the section 201(1) is to be read, one must keep in mind that these provisions seeks to make good any loss of revenue, from an assessee who is the payee, on account of any lapse by the recipient of such income. We draw our support from the decision of Hon’ble Kolkata Tribunal in case of Ramkrishna Vedanta Math vs. ITO reported in (2012) 24 taxmann.com 29. Hon’ble Kolkata Tribunal also held as under: “9. It is important to bear in mind that the lapse on account of non deduction of tax at source is to be visited with three different consequences - penal provisions, interest provisions and recovery provisions. The penal provisions in respect of such a lapse are set out in Section 271C. So far as penal provisions are concerned, the penalty is for lapse on the part of the assessee and it has nothing to do with whether or not the taxes were ultimately recovered through other means. The provisions regarding interest in delay in depositing the taxes are set out in Section 201(1A). These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned, these provisions are set out in Section 201(1) which seeks to make good any loss to revenue on account of lapse by the assessee tax deductor. However, the question of making good the loss of revenue arises only when there is indeed a loss of revenue and the loss of revenue can be there only when recipient of income has not paid tax. Therefore, recovery provisions under section 201(1) can be invoked only when loss to revenue is established, and that can only be established when it is demonstrated that Page 10 of 23 ITA Nos. 1689 & 1690/Bang/2017 the recipient of income has not paid due taxes thereon. In the absence of the statutory powers to requisition any information from the recipient of income, the assessee is indeed not always able to obtain the same. The provisions to make good the shortfall in collection of taxes may thus end up being invoked even when there is no shortfall in fact. ........” Emphasis supplied 13. In the present facts of the case we note that present assessee filed details of bifurcation of amount estimated in respect of each payee, the month in which the actual invoice was received and the TDS deducted coupled with details of it being deposited with the Government account. The Ld.ITO(TDS) did not consider the same by observing that it is voluminous and impossible to be verified. On verification of the list of payees placed in the paper book at pages 75-80, we note that assessee has deducted TDS between May 2012 to December 2012 (F.Y: 2012-13). Thus it is an admitted fact that TDS has been deducted at the time of making payment in respect of the provision amounting to Rs.3,25,21,444/- made as on 31/03/2012 and the same has been deposited to the Government account. On identical facts and similar circumstances this Tribunal in case of IBM ltd.(supra), appreciated the arguments advanced by assessee therein to discharge assessee from the from being called as, ‘assessee in default”, under section 201(1) of the Act to the extent the TDS was effectuated. This Tribunal in case of IBM(supra) observed and held as under: “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 Page 11 of 23 ITA Nos. 1689 & 1690/Bang/2017 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 Page 12 of 23 ITA Nos. 1689 & 1690/Bang/2017 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.” Respectfully following the same we also hold the present assessee cannot be treated to be an “assessee in default” to the extent TDS has been effectuated though in subsequent financial year. 14. Now the issue that needs to be considered is in a situation where the assessee has not been treated to be an assessee in default, interest under section 201(1A) deserves be levied. In our humble opinion, the provision of TDS provisions cannot applicable where there is no claim of expenditure made by the assessee. In the present facts assessee made suo motu disallowance of the entire provision under Section 40(a)(i)/(ia) of the Act. Once the amount is disallowed u/s. 40(a)(i)/(ia) for non- deduction of tax, it cannot be subject to TDS provisions again so as to make the assessee liable to interest u/s. 201(1A). In our considerate view, the assessee(deductor) gets exonerated from the applicability of TDS provisions on disallowance of the expenditure in question under section 40(a)(i)/(ia) of the Act. This rational is based on the scheme of Section 40(a)(i)/(ia), which is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee(deductor) in a situation in which income embedded in such expenditure remained untaxed due to tax withholding lapses by such assessee(deductor). Page 13 of 23 ITA Nos. 1689 & 1690/Bang/2017 A legal fiction has been appreciated by Hon’ble Delhi High Court in case of CIT vs.Ansal Landmark Township Pvt.Ltd reported in (2013) 61 Taxmann.com 45. Hon’ble Court referred to a decision of Hon’ble Agra bench of this Tribunal in case of Rajiv Kumar Agarwal vs.ACIT in ITA No.337/Agra/2013. The issue for consideration before the Tribunal was in respect of retrospective application of second proviso to section 40(a)(ia) of the Act. Hon’ble Delhi High Court while deciding the case of CIT vs. Ansal Landmark Township Pvt. Ltd(supra), observed as under: “9. It is seen that the second proviso to Section 40(a) (ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-Section (1) of Section 201 of the Act, then, in such event, “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 resident payee referred to in the said proviso” 15. Hon’ble Delhi High Court after referring to section 201(1) of the Act, held as under: “11. The first proviso to Section 210 (1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfilment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a) (ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies. 12. Relevant to the case in hand, what is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the Page 14 of 23 ITA Nos. 1689 & 1690/Bang/2017 present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax. 13. Turning to the decision of the Agra Bench of ITAT in Rajiv Kumar Agarwal v. ACIT (supra ), the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under: “On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these Page 15 of 23 ITA Nos. 1689 & 1690/Bang/2017 shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an "intended consequence" to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.” Emphasis supplied 16. We place reliance on the above decision to emphasize on the interpretation of the scheme under section 40(a)(i)/(ia) of the Act. Hon’ble Delhi High Court also explains that the intention of the legislature is not to obviate unintended hardship. It also appreciated the object of scheme under section 40(a)(ia), as on the statute, to examine the provisions on a "fair, just and equitable" interpretation of law. The Hon’ble Karnataka High Court in some of its decisions opined regarding on year end provisions that were reversed in the next accounting year. 16.1. In case of Karnataka Power transmission corporation Ltd., vs. DCIT(TDS) reported in (2016) 383 ITR 59 In this case Hon’ble Court observed that the assessee was the deductor and in their profit and loss account treated the amount of provision as expenditure to arrive at profit. However, in the returns of income filed for the said assessment years, no expenditure was claimed, corresponding reversal entries were Page 16 of 23 ITA Nos. 1689 & 1690/Bang/2017 made in the books of accounts during the financial year 2007 for the assessment years 2005-06 and 2006-07 indicating that the subject amounts of provision towards contingent interest would never be paid. Similarly for the financial year ending on 31.03.2007, a similar provision towards contingent interest payable on belated payments were created but at the end of the year, the said amount treated as expenditure in the profit and loss account was not excluded to arrive at the taxable income in the return of income filed for the assessment year 2007-08. Further, the said entry was reversed. In that context, this Court has held that the existence or absence of entries in the books of accounts is not decisive or conclusive factor in deciding the right of the assessee claiming deduction. The reasoning of the Tribunal that the deductor nor the deductee had paid the tax on the provision amount and the provisions of Sections 201 and 201(1) of the Act are attracted is held to be not acceptable. Thus, it has been held that if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. The interest being not paid to the payees/suppliers and the same having been reversed in the books of accounts, it was categorically observed that there would be no liability to deduct tax as no income accrued to the payees. 16.2. In a recent decision on similar facts before Hon’ble Karnataka High Court in case of Volvo India Pvt.Ltd vs. ITO(TDS), in ITA no. 369/2018 by order dated 15/11/2021, the Revenue argued regarding interplay of Section 40(a)(ia) and 194C would make it clear that the default by a person in compliance of the requirements of the provisions contained in Part B of Chapter- Page 17 of 23 ITA Nos. 1689 & 1690/Bang/2017 XVII of the Act leads, that when the obligation of Section 194C of the Act is not complied with, the consequences under Section 40[a][ia] will operate. The Revenue sought to rely on the decision of Hon’ble Supreme Court in case of Shree Choudhary Transport Company vs.ITO reported in (2021) 118 taxmann.com 47. Hon’ble Karnataka High Court considered the decision of Hon’ble Supreme Court in favour of assessee by observing as under: “10. It is ex-facie apparent that the contention of the assessee inasmuch as non-identification of the payees in the provisions and the disallowance of deduction expenditure under Section 40(a)(ia) of the Act has not been rightly appreciated by the Tribunal. In this scenario, the judgment of the Hon'ble Apex Court in the case of Shree Choudhary Transport Company': would not be of any assistance to the Revenue unless the material aspects are considered with respect to Section 40(a)(ia) of the Act read with Sections 194C, 194H, 1941, 194J — relevant Sections under which TDS was required to be deducted by the assessee. These factors necessarily requires to be addressed by the Tribunal keeping in mind the provisions of the Act as well as the legal principles enunciated by the Hon’ble Courts. If the deduction is not claimed for the expenditures made in the provision even in the return submitted and the same is offered to tax in the subsequent year after reversing the entries pursuant to the receipt of the bills/invoices by the payees, the matter has to be analysed having regard to, whether income has accrued to the payees to deduct tax at source. In the given circumstances, we deem it appropriate to set aside the impugned order and remand the matter for fresh consideration by the Tribunal.” 17. At this juncture it is relevant to note the analysys of provisions of section 40(a)(i)/(ia) by Hon’ble Supreme Court in case of Shree Choudhary Transport Company(supra) observed as under: “16. While taking up the question of interpretation of section 40(a)(ia), it may be usefully noticed that section 194C is placed in Chapter XVII of the Act on the subject "Collection and Recovery of Tax"; and specific provisions are made in the Act to ensure that the requirements of section 194C are met and complied with, while also providing for the consequences of default. As noticed, section 200 specifically provides for the duties of the person deducting tax to deposit and submit the Page 18 of 23 ITA Nos. 1689 & 1690/Bang/2017 statement to that effect. The consequences of failure to deduct or pay the tax are then provided in section 201 of the Act which, as noticed, puts such defaulting person in the category of "the assessee in default in respect of the tax" apart from other consequences which he or it may incur. The aspect relevant for the present purpose is that section 40 of the Act, and particularly the provision contained in sub- clause (ia) of clause (a) thereof, indeed provides for one of such consequences. 16.1 section 40(a)(ia) provides for the consequences of default in the case where tax is deductible at source on any interest, commission, brokerage or fees but had not been so deducted, or had not been paid after deduction (during the previous year or in the subsequent year before expiry of the prescribed time) in the manner that the amount of such interest, commission, brokerage or fees shall not be deducted in computing the income chargeable under "profits and gains of business or profession". In other words, it shall be computed as income of the assessee because of his default in not deducting the tax at source. 16.2 In the overall scheme of the provisions relating to collection and recovery of tax, it is evident that the object of legislature in introduction of the provisions like sub-clause (ia) of clause (a) of section 40 had been to ensure strict and punctual compliance of the requirement of deducting tax at source. In other words, the consequences, as provided therein, had the underlying objective of ensuring compliance of the requirements of TDS. It is also noteworthy that in the proviso added to clause (ia) of section 40(a) of the Act, it was provided that where in respect of the sum referable to TDS requirement, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid in any subsequent year after the expiry of the time prescribed in section 200(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. 16.3 The purpose and coverage of this provision as also protection therein have been tersely explained by this Court in the case of Calcutta Export Co. (supra), which has been cited by learned counsel for the appellant in support of another limb of submissions which we shall be dealing with in the next question. For the present purpose, we may notice the relevant observations of this Court in Calcutta Export Company as regards section 40(a)(ia) of the Act as follows (at p. 662 of ITR):- "16. The purpose is very much clear from the above referred explanation by the Memorandum that it came with a purpose to ensure tax compliance. The fact that the intention of the Legislature was not to punish the assessee is further reflected from a bare reading of the provisions of section 40(a)(ia) of the Income-tax Act. It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the tax deducted at source was duly deposited with the Government within the prescribed time, the said amount can be claimed as a Page 19 of 23 ITA Nos. 1689 & 1690/Bang/2017 deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the Government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the Government." We note that the above decisions by Hon’ble Supreme Court and Hon’ble Karnataka High Court were not available before this Tribunal while considering similar issue on identical facts in case of IBM India Pvt.Ltd vs. ITO (TDS)(LTU) (supra) and Agreenco Fiber Foam (p.) Ltd vs. ITO(TDS) (supra) relied by the Ld.Sr.DR. 18. Further Hon’ble Kolkata Tribunal in case of Ramkrishna Vedanta Math vs. ITO reported in (2013) 55 SOT 417 decided an issue whether, a demand under section 201(1A) r.w.s. 194 C can be enforced even in a situation in which the recipient of income embedded in the payments has paid due taxes thereon, and, if not, who has the onus to demonstrate that status about payment of such taxes. Relying on decision of Hon’ble Allahabad High Court’s judgment in the case of Jagran Prakashan Ltd Vs DCIT reported in (2012) 21 taxmann.com 489, the Counsel for the assessee argued that the onus is on the revenue to demonstrate that the taxes have not been recovered from the person who had the primary liability to pay tax, and it is only when the primary liability is not discharged that vicarious recovery liability can be invoked. Ld.Counsel therein contended that once all the details of the persons to whom payments have been made, it is for the Assessing Officer, who has all the powers to requisition the information from such payers and from the income tax authorities, to ascertain whether or not taxes have been paid by Page 20 of 23 ITA Nos. 1689 & 1690/Bang/2017 the persons in receipt of the amounts from which taxes have not been withheld. It was the submission of the Ld.Counsel therein that, as a result of decision of Hon’ble Allahabad High Court’s judgment in the case of Jagaran Prakashan (supra), there is a paradigm shift in the interpretation of Section 201(1). Hon’ble Kolkata Tribunal observed as under: “8. The plea is indeed well taken. Learned counsel is quite right in his submission that, as a result of the judgment of Hon’ble Allahabad High Court in Jagran Prakashan’s case (supra) and in the absence of anything contrary thereto from Hon’ble jurisdictional High Court, there is a paradigm shift in the manner in which recovery provisions under section 201(1) can be invoked. As observed by Their Lordships, the provisions of Section 201(1) cannot be invoked and the “tax deductor cannot be treated an assessee in default till it is found that assessee has also failed to pay such tax directly”. Once this finding about the non payment of taxes by the recipient is held to a condition precedent to invoking Section 201(1), the onus is on the Assessing Officer to demonstrate that the condition is satisfied. No doubt the assessee has to submit all such information about the recipient as he is obliged to maintain under the law, once this information is submitted, it is for the Assessing Officer to ascertain whether or not the taxes have been paid by the recipient of income. This approach, in our humble understanding, is in consonance with the law laid down by Hon’ble Allahabad High Court. 9. It is important to bear in mind that the lapse on account of non deduction of tax at source is to be visited with three different consequences–penal provisions, interest provisions and recovery provisions. The penal provisions in respect of such a lapse are set out in Section 271 C. So far as penal provisions are concerned, the penalty is for lapse on the part of the assessee and it has nothing to do with whether or not the taxes were ultimately recovered through other means. The provisions regarding interest in delay in depositing the taxes are set out in Section 201(1A). These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned, these provisions are set out in Section 201(1) which seeks to make good any loss to revenue on account of lapse by the assessee tax deductor. However, the question of making good the loss of revenue arises only when there is indeed a loss of revenue and the loss of revenue can be there only when recipient of income has not paid tax. Therefore, recovery provisions under section 201(1) can be invoked only when loss to revenue is established, and that can only be established when it Page 21 of 23 ITA Nos. 1689 & 1690/Bang/2017 is demonstrated that the recipient of income has not paid due taxes thereon. In the absence of the statutory powers to requisition any information from the recipient of income, the assessee is indeed not always able to obtain the same. The provisions to make good the shortfall in collection of taxes may thus end up being invoked even when there is n o shortfall in fact. On the other hand, once assessee furnishes the requisite basic information, the Assessing Officer can very well ascertain the related facts about payment of taxes on income of the recipient directly from the recipients of income. It is not the revenue’s case before us that, on the facts of this case, such an exercise by the Assessing Officer is not possible. It does put an additional burden on the Assessing Officer before he can invoke Section 201(1) but that’s how Hon’ble High Court has visualized the scheme of Act and that’s how, therefore, it meets the end of justice.” 18. Hon’ble Mumbai Tribunal in case of Pfizer Ltd vs.ITO(TDS)(OSD)(supra) on identical issue and similar facts held as under: “12. As already explained and evidenced from the computation of income as well as the orders of AO in the assessment proceedings, the entire provision has been disallowed under section 40(a)(ia) and section 40(a)(i). Once the amount has been disallowed under the provisions of section 40(a)(i) on the reason that tax has not been deducted, it is surprising that AO holds that the said amounts are subject to TDS provisions again so as to demand the tax under the provisions of section 201 and also levy interest under section 201(1A). We are unable to understand the logic of AO in considering the same as covered by the provisions of section 194C to 194J. Assessee as stated has already disallowed the entire amount in the computation of income as no TDS has been made. Once an amount was disallowed under section 40(a)(i)/(ia) on the basis of the audit report of the Chartered Accountant, the same amount cannot be subject to the provisions of TDS under section 201(1) on the reason that assessee should have deducted the tax. If the order of AO were to be accepted then disallowance under section 40(a)(i) and 40(a)(ia) cannot be made and provisions to that extent may become otiose. In view of the actual disallowance under section 40(a)(i) by assessee having been accepted by AO, we are of the opinion that the same amount cannot be considered as amount covered by the provisions of section 194C to 194J so as to raise TDS demand again under section 201 and levy of interest under section 201(1A). Therefore, assessee's ground on this issue are to be allowed as the entire amount has been disallowed under the provisions of section 40(a)(i)/(ia) in the computation of income on the reason that TDS was not made. For this reason alone assessee's grounds can to be allowed. Considering the facts and reasons stated above assessee's grounds are allowed. Page 22 of 23 ITA Nos. 1689 & 1690/Bang/2017 13. Assessee has raised one more contention that interest under section 201(1A) should be levied till the date of payment and not till the date of order. Anyhow this issue became academic in nature, as we have already held that demand under section 201 cannot be raised once the entire amount has been disallowed in the computation of income under section 40(a)(i) and 40(a)(ia). In view of this even though the contention is correct being a legal issue, there is no need for adjudicating the matter as the grounds raised have been held in favour of assessee. AO is directed to delete the said demand so raised. Appeal is accordingly allowed.” In the present facts, there is no loss to the revenue in the year in which provision is created, since the assessee before us is stated to have disallowed the entire provision under section 40(a)(i)/(ia) of the Act on which TDS could not be effectuated. All details of payee and the details regarding when subsequently the actual payments were effectuated on receipt of Invoice/bill, was submitted before the Ld.AO. The Ld.AO without verifying the same levied interest under section 201(1A) of the Act. Then, the question that arises to our minds that, is it logical to put such assessee(deductor) into double jeopardy by casting the liability under chapter XVII-B on an assumption of non payment of taxes on income embedded in the receipt by an assessee(payee) ? We answer this question in negative. 20. On the amount on which TDS could not be effectuated due to non receipt of invoices, the Ld.AO will first have to ascertain if the payee has paid taxes on the income embedded therein. This is the pre condition for levying interest u/s. 201(1A) of the Act. 21. In our considered opinion applicability of section 201(1A) needs verification of payment of tax by the recipient (payee) at the end of the Ld.AO since the Ld.AO failed to carry out necessary verification in respect of the payees, the details of which were provided by assessee. In the interest of justice, we direct the Ld.AO to verify the details filed by assessee in respect of the payee in accordance with the principles laid down by Hon’ble Supreme Court in case of Hindustan Coco Cola reported in (2007) 163 Taxman 355 and keeping in view the intention Page 23 of 23 ITA Nos. 1689 & 1690/Bang/2017 of the legislature envisaged under section 40(a)(i)/(ia) of the Act. Assessee is directed to file all the relevant details once again, details of TDS deducted and paid to the Government account on payment being made in the subsequent year on reversal of the provision. At this juncture we caution the Ld.AO provisions of section 201(1) cannot be invoked, in view of the fact that there is no loss to the revenue in the present facts of the case as observed by us in the preceding paras. 22. In case the assessee has not added back the provision created towards the expenditure to the total income in the statement of income and took advantage of provision by reducing the income of assessee then assessee is liable for interest u/s. 201(1)&(1A) of the Act. Accordingly, the grounds raised by assessee in both the appeals stands allowed for statistical purposes. In the result, both the appeals filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 31 st January, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 31 st January, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore
