Hardik Jigishbhai Desai v. DCIT, Circle-3, Surat
[Citation -2016-LL-1014-46]

Citation 2016-LL-1014-46
Appellant Name Hardik Jigishbhai Desai
Respondent Name DCIT, Circle-3, Surat
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 14/10/2016
Assessment Year 2009-10
Judgment View Judgment
Keyword Tags mercantile system of accounting • year of actual payment • industrial development • ascertained liability • deduct tax at source • contingent liability • commission payment • accounting method • interest accrued • legal obligation • mercantile basis • succeeding year • estimate basis • res judicata
Bot Summary: 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 is applicable on year end provisions of commission expense of Rs. 26 lacs as TDS is. 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. 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. 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. 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. Therefore whichever way we look at the issue, the amount of provision was not an admissible deduction during the year. 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. 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 No. 1084/Ahd/2013 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 it is shocking to note that the remainder provision was never written back in the profit and loss account.


IN INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER ITA No. 1084/Ahd/2013 Assessment Year : 2009-10 Hardik Jigishbhai Desai, DCIT, 1, Seema Row House, Vs Circle-3, Chod Dod Road, Surat Surat PAN : AAKPD 1044 M (Appellant) (Respondent) Assessee by : Shri Ketan Jagirdar, AR Revenue by : Smt. Sonia Kumar, Sr DR Date of Hearing : 05/10/2016 Date of Pronouncement: 14/10/2016 O R D E R This appeal by assessee is directed against order of 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 :- Id C.I.T.(Appeals) has erred in upholding decision of 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) assessee is following mercantile basis of 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 said year as per normally accepted accounting principles. SMC-ITA No. 1084/Ahd/2013 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 . 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 assessee TDS cannot be deducted in 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) assessee has provided full details of commission agents to whom such commission was paid in following years after deduction of TDS on sales of current year. 3. Brief facts are assessee claims to be following Mercantile System of Accounting. AO found that assessee had debited amount of Rs.26,99,355/- under head Commission Expenses without deducting applicable TDS from same. 3.1 assessee replied that provision of commission of Rs.26 lacs was made on estimate basis and following mercantile system of accounting; therefore same was allowable. Since names of payees were not known, TDS was not deducted as assessee did not know in whose account TDS was to be credited. 3.2 AO did not find reply of assessee to be tenable on grounds that assessee had debited 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. AO observed that as SMC-ITA No. 1084/Ahd/2013 Hardik Jigishbhai Desai vs. DCIT AY : 2009-10 3 per provisions of Section 194H, TDS should be made from commission amount likely to be credited if amount exceeded Rs. 2,500/- and as amount of commission debited by appellant was Rs.26,00,000/- which was in excess of amount stipulated in Section 194H, assessee should have done TDS on this commission amount. AO also observed that accounting practice of assessee of debiting amount of Rs.26,00,000/- at end of year and crediting same amount back on first day of next FY by passing reverse entry shows that assessee diverted his income which should have been taxed in year under consideration. AO invoked provisions of Section 40a(ia) for disallowing expenses of Rs.26,00,000/- under Income-tax Act. 3.3 Aggrieved, assessee preferred first appeal where it was contended that Hon ble Mumbai Tribunal in case of Industrial Development Bank of India V/s. ITO (2007) 293 ITR 267 has held that IDBI did not have any liability to deduct tax at source in respect of provision of interest accrued but not due if recipients were not identifiable. assessee submitted that similar decision was given by ITAT Mumbai, in case of Mahindra & Mahindra V/s. DCIT in ITA No. 8597/MUM/2010. assessee further pointed out that Hon'ble CBDT had also duly considered issue and had issued 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 party was not known, provisions of TDS was not applicable. 3.4 ld. CIT(A), however, upheld action of ld. AO by detailed finding as under:- 5.1 I have gone through assessment order, submissions of appellant and judicial decisions relied upon. It is fact that 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 31-03- 2009 and has been reversed on 1st day of next financial year. i.e. on SMC-ITA No. 1084/Ahd/2013 Hardik Jigishbhai Desai vs. DCIT AY : 2009-10 4 01-04-2009. This shows that liability has not crystallized in this year. Such contingent liability is inadmissible as deduction whatever accounting method appellant follows-mercantile or cash. This is so because even in mercantile system unless liability to pay crystallizes it cannot be claimed as deduction. very fact that appellant reverses whole of provision on 1st day of next F.Y. & then debits actual amount along with payees names and other details during next FY establishes that liabilities for which provision was made on 31st March had not crystallized. Therefore amount of provision made was non deductible expenditure. In case it is to be held that liability had crystallized in this year as sale and purchase had been made during year and therefore liability for commission was known, then by same logic it has to be held that name and address of person to whom commission is to be given along with amounts would be known to appellant as he is one conducting business. It is also worthwhile to mention that according to appellant, provision is made on basis of "about" 2% of sales which is stated as customary commission which only shows that provision amount is itself not justifiable or has not crystallized. Since TDS has to be made on credit or payment, whichever is earlier, liability to deduct tax would arise in hands of appellant at time of making provision i.e. on 31st of March itself and since no TDS has been made, appellant would be caught within mischief of sec 40 (ia). Therefore whichever way we look at issue, amount of provision was not admissible deduction during year. 5.2. case laws relied upon by appellant in support of his contention that provision of sec. 40a(ia) was not attracted in his case as identity of parties to whom payments had to be made was not known to him does not help his cause. In cases relied upon by appellant, issue pertained to provisions made for interest expense incurred for 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 account of receiver. It was under those circumstances that Courts held that there was no liability to deduct tax. letter to TISCO given by CBDT is also in respect of Interest on Deep Discount Bonds. As against this, in case of appellant expense is neither accrued nor quantifiable and hence provision itself is inadmissible for deduction - whether TDS made or not. If, as has been mentioned earlier, it is argued that amount is quantifiable and accrued, then details would be known to appellant and same should be credited to commission agent's account and TDS made. 5.3 During course of appeal proceedings, reconciliation of current year sales/purchases with payments in subsequent years to commission agents through whom transactions were made were called for and this shows that though provisions of Rs.26,00,000/- were claimed as expenses SMC-ITA No. 1084/Ahd/2013 Hardik Jigishbhai Desai vs. DCIT AY : 2009-10 5 in 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 remainder provision was never written back in 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 immediately succeeding year and again new provision of Rs.25,46,524/- has been made in FY 09-10 in books of proprietorship concern and claimed as expense for immediately subsequent year which is evident from ledger account of proprietorship concern for AY 2010-11 furnished by appellant. This proves that provisions are made according to whims and fancies of appellant without any proper basis and liability to pay. This is further corroborated by fact that appellant has not made single purchase/sale transaction after October 2008 through brokers but still has made only provisions and not quantified actual amounts. Therefore at best appellant can be allowed Rs.19,57,030/- and that too in year of actual payment provided genuineness is established and TDS has been made on these payments. reason I have mentioned that genuineness of expenses should also be verified is that in different submissions before me appellant has stated different amounts of commission paid for year none of which match with provisions made. Furthermore, appellant failed to furnish details of transactions done through commission agents appearing at serial no 11 to 17 in detail furnished by it before me which raises serious doubts about genuineness of these payments. Similarly, 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, provisions are contingent in nature, not quantifiable or accrued, and therefore inadmissible as deduction. Therefore, in my considered opinion, amount of provision of Rs.26,00,000/- made towards commission was inadmissible deduction. In view of these facts, disallowance of "Provision for commission payable" of Rs.26,00,000/- made by AO is, therefore, upheld. 4. ld. Counsel for assessee relied on judgments of IDBI (supra), Mahindra & Mahindra (supra) and CBDT clarification dated 05.07.1996 and contends that practice followed by assessee has been accepted by Department in past year; therefore, making provision on estimate basis on sales effected by assessee, commission become ascertained liability and was allowable as business expenditure. deduction of TDS become impossible as exact names, amount of commission and TDS payable to each party was not known. Therefore, SMC-ITA No. 1084/Ahd/2013 Hardik Jigishbhai Desai vs. DCIT AY : 2009-10 6 assessee was not in position to pay TDS. This situation of impossible cannot be held against assessee to deny claim of expenditure. Once Department has accepted this methodology, there is no justification in disallowance of expenditure. 5. ld. Sr. DR, on other hand, vehemently contends that assessee himself has admitted that liability in question was unascertainable as names, amount of commission and TDS payable thereon was not known to assessee. Unless assessee ascertains these details, it cannot be said that liability had crystallized in effective terms and was ascertained liability. Merely because assessee s practice was accepted in past does not apply as res judicata inasmuch as provision of law will take precedence over untenable practice adopted by assessee. Besides, Section 40a(ia) provides that as and when assessee makes payment of relevant TDS, expenditure will be allowed in year of payment. Besides, ld. CIT(A) has given clear findings that provision was made on whims and fancies of assessee without any proper basis and even genuineness of expenditure; therefore, ld. CIT(A) has disallowed expenditure. facts in cases of IDBI and Mahindra and Mahindra (supra) are on different footings and CBDT circular is also in different context. In this case, simple question is non-crystallization and liability being unascertained entry in books at whims and fancies of assessee, which cannot be allowable expenditure and having made book entries claiming expenditure it was legal obligation of assessee to deduct TDS and failure thereof will render expenditure disallowable in clear terms of Section 40a(ia). order of ld. CIT(A) is relied on. 6. I have heard rival contentions, perused material available on record and gone through orders of authorities below. I find merit in SMC-ITA No. 1084/Ahd/2013 Hardik Jigishbhai Desai vs. DCIT AY : 2009-10 7 contentions of ld. Sr. DR. findings of ld. CIT(A) are very elaborated and demonstrated that provision of commission payment claim by assessee is totally unascertainable, uncrystallized and fanciful. It does not assume character of ascertained mercantile liability. Even in case of mercantile liability, Section 40a(ia) clearly mandates that expenditure cannot be allowed in absence of corresponding TDS payment in Government treasury. In view thereof, I find no infirmity in order of ld. CIT(A) which is upheld and appeal of assessee is thus dismissed. 7. In result, assessee s appeal is dismissed. Order pronounced in Court on 14th October, 2016 at Ahmedabad. Sd/- R.P. TOLANI (JUDICIAL MEMBER) Ahmedabad; Dated 14/10/2016 *Biju T. Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. Concerned CIT 4. CIT(A) 5. DR, ITAT, Ahmedabad 6. Guard file. BY ORDER, TRUE COPY (Dy./Asstt.Registrar) ITAT, Ahmedabad Hardik Jigishbhai Desai v. DCIT, Circle-3, Surat
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