Non-Deduction of TDS At The Year End As The Amount Payable Was Not Identifiable: Penalty not justifiable- ITAT

The respondent/assessee is in the business of providing engineering consultancy services and supply of manpower services to the Indian power sector and infrastructure sector and providing multidisciplinary consultancy services for power and infrastructure projects outside India.

The assessee received a reference from the Deputy Commissioner of Income Tax, which indicated failure on the part of the assessee company to deduct tax at source as required under the provisions of Chapter XVII-B of the Income Tax Act.

The JCIT issued a show cause notice asking the assessee as to why the penalty under section 271C read with section 274(1) of the Income Tax Act should not be imposed.

It was explained by the assessee that it was not a case of non-deduction of tax at all. The assessee had duly deducted and deposited the taxes with the government treasury in the subsequent years, when the liability to pay such expenses was crystallised on receipt of invoices.

The JCIT alleged that the argument made by the assessee was not tenable in law and stated that under the mercantile system of accounting, the accrual of liability for any expenditure was not dependent on the receipt of invoices.

The JCIT negated the arguments of the assessee and imposed the penalty, alleging that the assessee did not bring on record any material facts or evidence which could prove that the circumstances leading to the non-deduction of tax at source were beyond the control of the assessee. He alleged that there was no reasonable cause within the meaning of section 273B of the Act for the non-deduction of taxes at source.

Aggrieved by the findings of the JCIT, the assessee appealed before the CIT(A). The CIT (A) deleted the penalty levied by the JCIT by observing that no income had accrued to the payees and a mere ad-hoc provision was made in the books of accounts at the year end. The existence of income in the hands of the payee is a precondition to the liability of tax deduction at source in the hands of the payer. The exact amount payable to the payees was not identifiable, and therefore, there was no liability to deduct tax at source.

Aggrieved by the order of the CIT (A), the appellant/department appealed against the order before the ITAT and contended that CIT (A) was not right in holding that a penalty was not leviable under section 271C of the Income Tax Act without appreciating the fact that the deductor assessee has failed to comply with the statutory provisions under sections 194C and 194J of the Income Tax Act, 1961 by not deducting TDS on credit/payment of expenses.

In the lack of invoices and resultant duty to make the payment, the ITAT upheld the order of the CIT (A) cancelling the penalty on the basis that the assessee did not withhold taxes on the year-end provision for expenses under section 40(a)(i)/40(a)(ia) of the Income Tax Act.

The Tribunal relied on the decision of the coordinate Bench of the Tribunal in the case of ITO vs. DLF Southern Homes Pvt. Ltd. In that case, it was held that at the time of creation of the provision for brokerage expenses, neither the names of the brokers nor the amounts to be paid to them on account of brokerage were determinable owing to the fluid situation, due to which TDS was not practically feasible to be deducted by the assessee, and more particularly, in view of the fact that the assessee neither claimed nor availed any benefit of the provision made for expenses and paid due tax in full, so there was neither any tax evasion nor loss of revenue to the government.

Case Title: Asst. Commissioner of Income Tax Versus M/s Parsons Brinckershoff India Pvt. Ltd.

Citation: ITA No.2207/DEL/2018

Counsel For Appellant: Advocate Divyanshu Agarwal

Counsel For Respondent: Sr. D.R. Parikshit Singh

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