Court sends back TDS case on provisions - Tribunal failed to consider key facts properly

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Case Name

M/s Volvo India Pvt. Ltd. (Rep by its Managing Director Sri Kamal Bali) vs Income Tax Officer (TDS) (High Court of Karnataka)

ITA No. 369 of 2018

Date: 15th November 2021

Key Takeaways

• Provisions without identified payees may not attract TDS obligations - When companies create general provisions without identifying specific parties, the TDS requirements under Sections 194C, 194-I, 194-J and 194-H may not apply
• Income accrual is key for TDS liability - If no income has actually accrued to any payee, there’s no obligation to deduct tax at source
• Proper reasoning required in tribunal orders - Courts emphasized that tribunals must provide adequate reasoning for their decisions, not just cryptic observations
• Reversal of provisions matters - When provisions are subsequently reversed and no actual payments are made, this supports the argument against TDS liability

Issue

The central legal question was: Whether the tribunal was wrong in law when it failed to appreciate that the provisions were created on head-wise expenses without reference to any particular party, and consequently such provisions did not attract TDS under Sections 194C, 194-I, 194-J and 194-H of the Income Tax Act?

Facts

Volvo India is in the business of manufacturing tractors, trailers, bus chassis, and providing various support services. At the end of their financial years (2012-13 and 2013-14), they created provisions in their books for various expenses on an “adhoc basis” - basically, they estimated what they might owe for different services to help close their books properly.

These provisions were made “head-wise” (by category of expense) but without reference to any particular party. Think of it like setting aside money for “legal fees” or “consulting charges” without knowing exactly which lawyer or consultant you’ll pay. These excess provisions were later reversed when the actual bills came in.

The Income Tax Officer noticed these provisions and said, “Hey, you should have deducted TDS on these amounts!” They initiated proceedings under Sections 201(1)/201(1A) treating Volvo as being “in default” for not deducting tax at source. Both the Commissioner of Income Tax (Appeals) and the Tribunal agreed with the tax officer and dismissed Volvo’s appeals.

Arguments

Volvo’s Arguments:

• The provisions were not identifiable with respect to specific parties - they were just general estimates
• When actual bills came in the next year, they properly deducted TDS and paid it to the department
• They didn’t claim any tax deduction for these provisions in their returns
• They cited similar cases where courts ruled in favor of companies in identical situations

Income Tax Department’s Arguments:

• They relied on the Supreme Court case Shree Choudhary Transport Company V/s. Income Tax Officer
• They argued that the interplay of Section 40(a)(ia) and Section 194C makes it clear that when TDS obligations aren’t met, consequences follow
• They tried to distinguish this case from the favorable precedents cited by Volvo
• They pointed out that deductions were initially claimed under Section 37 but later disallowed under Section 40(a)(ia) for not deducting TDS

Key Legal Precedents

The court relied heavily on several important precedents:

1. Karnataka Power Transmission Corporation Ltd., V/s. Deputy Commissioner of Income Tax (TDS) - This was a crucial case with very similar facts. The court noted that in this case, provisions were made in profit and loss accounts but no expenditure was claimed in tax returns, and the provisions were later reversed. The court 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.”
2. M/s. TE Connectivity India Pvt. Ltd., V/s. Income-tax Officer (LTU)(TDS), Bangalore - Another similar case where the Tribunal held that when provisions are made at year-end, reversed at the beginning of next year, no payees are identified, and exact liability cannot be quantified, there’s no TDS liability. The court noted: “liability to deduct tax at source does not arise.”
3. M/s. Toyota Kirloskar Motor § Ltd., V/s. Income Tax Officer - Referenced as supporting precedent
4. Shree Choudhary Transport Company V/s. Income Tax Officer - Cited by the Revenue but the court noted this wouldn’t help the tax department unless material aspects regarding Section 40(a)(ia) read with Sections 194C, 194H, 194I, 194J are properly considered

Judgement

Volvo won! The High Court allowed the appeal and sent the case back to the Tribunal for fresh consideration. Here’s the court’s reasoning:

The court found that the Tribunal’s reasoning was “wholly unjustifiable” and “cryptic.” The Tribunal had tried to distinguish the TE Connectivity case by saying that in Volvo’s case, “payees were identified” and it wasn’t an “adhoc provision” because the provisions contained “odd figures.” The court called this reasoning insufficient, noting that “payees were not identified” and "the genuineness of the provision cannot be determined on the basis of the figures."

The court emphasized that “proper reason is the essential ingredient of a valid order” and found that the Tribunal failed to properly appreciate that:

• The payees were not identified in the provisions
• The deduction of expenditure was disallowed under Section 40(a)(ia)
• The key question is whether income has accrued to payees to require TDS deduction

Final Orders:

1. Appeal allowed
2. The Tribunal’s order dated 17.01.2018 was set aside
3. Matter sent back to Tribunal for fresh consideration
4. All rights and contentions of parties kept open
5. Tribunal directed to decide expeditiously keeping in mind the court’s observations

FAQs

Q1: What does this mean for companies making similar provisions?

A: Companies can take comfort that if they make general provisions without identifying specific payees, and these provisions are later reversed, they may not need to deduct TDS. However, each case depends on its specific facts.

Q2: Does this mean companies never need to deduct TDS on provisions?

A: Not necessarily. The key factors are: (1) whether specific payees are identified, (2) whether the provisions are actually paid out, (3) whether income accrues to any payee, and (4) whether the provisions are reversed.

Q3: Why did the court send it back instead of deciding the case?

A: The court found that the Tribunal didn’t properly consider the key facts and legal principles. Rather than decide the case itself, the court wanted the Tribunal to reconsider with proper reasoning, keeping in mind the court’s observations.

Q4: What should companies do now?

A: Companies should carefully document their provision-making process, ensure proper reversal entries, and consider whether TDS applies based on whether specific payees are identified and whether actual income accrues to anyone.

Q5: Is this decision final?

A: This High Court decision sends the matter back to the Tribunal. The Tribunal will now reconsider the case, and depending on their decision, there could be further appeals.

This appeal is filed by the assessee under Section 260A of the Income Tax Act, 1961 [‘Act’ for short] challenging the order dated 17.01.2018 passed in ITA Nos.1195/Bang/2014 and 474/Bang/2016 by the Income Tax Appellate Tribunal, ‘C’ Bench, Bengaluru [‘Tribunal’ for short] relating to the assessment years 2012-13 and 2013-14.

2. The appeal was admitted by this Court to consider the following substantial question of law:

“Whether the order of the Tribunal is perverse in law as it failed to appreciate that the provisions were created on head-wise expenses and not with reference to any particular party and consequently such amounts of provisions did not attract the provisions of Section 194C, 194-I, 194-J and 194-H of the Act?”

3. The assessee is engaged in the business of manufacturing/dealing in tractors, trailers, bus chasis, road machinery and trading in construction equipment and also provides software, product design and other support services. The assessee created provisions of expenses, head wise, on adhoc basis in respect of various services received to facilitate closing of the

books without reference to any particular party. Such excess amounts of provisions created got reversed subsequently. No tax deduction at source was made in respect of such provisions. The Income Tax Officer after noticing the said provisions disallowed by the appellant itself to be deducted from the expenditure while calculating for the purpose of taxation, which reflected in the statement of “Computation of Total Income Tax Liability as at 31st March 2012”, initiated proceedings under Section 201[1]/201[1A] of the Act considering the appellant to be an assessee in default in respect of the amount of tax which was not deducted at source on such provisions. Being aggrieved by the same, the assessee preferred appeals before the Commissioner of Income Tax [Appeals], Bangalore which came to be dismissed for both the assessment years under consideration. On further appeal before the Tribunal, by a common order dated 17.01.2018, both the appeals were dismissed. Hence, this appeal by the assessee.

4. Learned counsel appearing for the assessee

submitted that the Tribunal as well as the Authorities

failed to appreciate that the provisions made by the

assessee was not identifiable with respect to the parties.

On the bills/invoices raised by the parties during the

subsequent assessment year, TDS was deducted and

remitted to the Department. No deduction towards the

expenditure was claimed by the assessee during the

relevant assessment years under these provisions.

Returns filed by the assessee for the assessment years

in question and the audit report in Form No.3C were

referred. Further referring to the order of the Tribunal in

M/s. TE Connectivity India Pvt. Ltd., V/s. Income-tax

Officer (LTU)(TDS), Bangalore1, it was argued that in

identical circumstances, the Tribunal placing reliance

on the ruling of this Court in the case of Karnataka

Power Transmission Corporation Ltd., V/s. Deputy

Commissioner of Income Tax [TDS]2, has categorically

held that the assessee-company therein is not liable to

deduct tax in the hands of the payee. However, the said

order was not followed in the present case. Reliance was

placed on the following judgments:

1. Karnataka Power Transmission Corporation Ltd.,2.

2. M/s. Toyota Kirloskar Motor [P] Ltd., V/s. Income

Tax Officer3

5. Learned counsel for the Revenue placing

reliance on the judgment of the Hon'ble Apex Court in

the case of Shree Choudhary Transport Company V/s. Income Tax Officer4

, argued that the 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-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. Learned counsel made an

endeavor to distinguish the ruling of Karnataka Power

Transmission Corporation Ltd.,2 and M/s. Toyota

Kirloskar Motor [P] Ltd.,3 and further argued that the

deduction was claimed under Section 37 of the Act,

however on audit made, the same was disallowed under

Section 40[a][ia] for not deducting TDS.

6. We have carefully considered the rival

submissions of the learned counsel appearing for the

parties and perused the material on record.

7. The material placed before us would indicate

that the provision made by the assessee was not

identifiable with the parties. It gives the description of

various services to which charges are payable which

attracts TDS under Sections 194C, 194H, 194I and

194J. The Co-ordinate Bench of this Court in the case

of Karnataka Power Transmission Corporation

Ltd.,2 has considered similar issue wherein the

appellants therein 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 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.

8. In the case of M/s. TE Connectivity India

Pvt. Ltd.,1 referred to by the learned counsel

appellant/assessee, in para 6 it is observed thus:

“We heard the rival submissions and

perused material on record. The issue in appeal

relates to the liability of the assessee – company

to deduct tax at source on provisions made as at

the end of the accounting year. The undisputed

fact is that the provisions, made at the end of the

accounting year are reversed in the beginning of

the next year. No payees are identified. The

exact amount of liability also cannot be

quantified. The provisions are made merely on

for Management Information System. In our

considered opinion, liability to deduct tax at

source does not arise. In identical circumstances,

the Hon’ble Tribunal in the case of M/s. Bosch

Ltd., vs. ITO in ITA No.1583/Bang/2014 dated

01.03.2016, to which one of us i.e., the

Accountant Member is the author of the order,

held as follows:-

9. The facts of the said case would indicate that

the provisions made at the end of the accounting year

were reversed in the beginning of the next year and no

payees were identified including the exact amount of

liability. In such circumstances, the Tribunal following

Karnataka Power Transmission Corporation Ltd.,2

held that the assessee company – M/s. TE Connectivity

India Pvt. Ltd., was not liable to deduct tax at source as

no income has accrued in the hands of the payee while

allowing the appeal. Despite citing the said judgments

the appeal filed by the assessee came to be dismissed by

the Tribunal observing that the facts of the case of M/s.

TE Connectivity India Pvt. Ltd.,1 are clearly

distinguishable. The reasoning recorded by the Tribunal

is that in the case on hand, the payees were identified

and it is not an adhoc provision as the provisions

contained odd figure also. The said reasoning is wholly

unjustifiable, as could be seen from the material

available on record, in the provisions made, payees were

not identified. The genuiness of the provision cannot be

determined on the basis of the figures. The cryptic

reasoning of the Tribunal is not suffice to support the

findings arrived at. It is trite that proper reason is the

essential ingredient of a valid order.

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 Company4 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, 194I,

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.

11. Hence, the following

ORDER

i) Appeal is allowed.

ii) The impugned common order dated

17.01.2018 passed in ITA

Nos.1195/Bang/2014 and 474/Bang/2016

by the Income Tax Appellate Tribunal, ‘C’

Bench, Bengaluru relating to the assessment

years 2012-13 and 2013-14 is set aside and

the matter is restored to the file of the

Tribunal to reconsider the matter afresh in

accordance with law.

iii) All the rights and contentions of the parties

are left open. The Tribunal shall decide the

matter keeping in mind the observations

made hereinabove, in an expedite manner.

SD/-

JUDGE

SD/-

JUDGE