ITAT deletes the TDS payment at the year’s end from the income of the legal firm

Facts and Issues of the Case

The assessee is a firm Legal Professionals. Return of income was filed declaring income of Rs. 23,01,41,110/- and the case was selected under compulsory Manual Scrutiny. Apart from disallowance of Rs. 69,76,701/- shown in the balance sheet as statutory liability on account of TDS payable certain other additions by way of disallowances of expenditure were made by Ld. AO and in appeal the Ld. CIT(A) has sustained the disallowance Rs. 69,76,701/-, which has been challenged before this Tribunal by raising following grounds of appeal :-

“1. That the Authorities below erred in making an addition of Rs. 69,76,701/- to the returned income on account of TDS payable as on 31.03.2015, contrary to the facts of the case and law.

2. That the authorities below erred in not holding that the provisions relating to the assessee’s responsibility for deduction and deposit of tax at source were part of provision for collection and recovery of tax and not of computing sections of total income and therefore out of preview of section 145 of the Income Tax Act, 1961.

3. That the Authorities below having accepted the expenses incurred and debited to Profit and Loss Account as Professional expenditure, erred in disallowing the portion thereof taken to liability towards taxes collected at source in respect of such expenses.”

Observation by the Court

The court had heard and persued the record. On behalf of the assessee it was submitted that Ld. Tax Authorities below have fallen in error in considering the provisions made for TDS to be disallowable payment as provisions of Section 145 of the Act were wrongly invoked. It was submitted that TDS payable is statutory liability and whether the account are maintained on cash or mercantile basis do not have bearing in allowing the same. Reliance was placed on co-ordinate Bench decision in M/s. Deloitte Haskins & Sells vs. ACIT, wherein in regard to similar disallowance, the Co-ordinate bench had deleted the addition.

The grounds raised are based on common facts and law, accordingly are taken up together for determination. In regard to these grounds, it can be observed that the Ld. Tax Authorities below have not discussed as to what were the payments which were made giving rise to TDS. It appears that Ld. AO was carried by the fact that the assessee is following cash system of accounting, therefore, the TDS being one part of expenses debited in P&L Account therefore, to the extent of TDS the expenses being not actually incurred and paid in the relevant financial year, have to be disallowed.

The Bench is of considered opinion that such an opinion of Tax Authorities below is not sustainable because the assessee has shown the expenditure as a whole in his accounts having been paid. What remains in the hands of assessee is not on account of any payment due to such persons but the tax deducted at source is left to be deposited to the Government in accordance with the relevant provisions. It was for the purpose of accounting that the amount has been shown in the form of provision not as ‘payable’ on any account to any creditor or on a contingency but held merely to be ‘deposited’ in due course. Even otherwise, the heads of expenses against which the payments were made when stand allowed through P&L account, some part of it, being TDS, cannot be left standing alone, by holding it as still ‘payable.