One of the important aspect during the tax audit is whether payments made towards specified expenditure attracts disqualification u/s 40(a) (ia) and applicability of this section to provisions made at the year end and its implications.
Applicability of Sec 40(a) (ia) to year end provisions :
TDS is even required to be made on year end provisions but whereas the time limit for remittances of such TDS made is varied.
Section 40(a) (ia) of the Income Tax Act, 1961:
v Section 40(a)(ia) of the Income Tax Act 1961 says that expenditure covered under the below mentioned TDS sections paid to resident and debited Profit & Loss Account will not be allowed as deduction while computing the income under the head “Profit and Gains of Business or Profession” if
a) Tax has not been deducted at source,
b) Tax deducted at source and the same is not remitted, or
c) If expenditure is debited and Tax deducted at source during the previous year, tax is not remitted with in the time limits mentioned in section 200 such expenditure will be allowed as deduction in the year of remittance of the tax.
v The following payments are covered under Section 40(a)(ia):
a) Interest U/s 194A
b) Commission or brokerage U/s 194H
c) Professional or Technical Fee U/s 194J and
d) Contractors & Sub Contractors U/s 194C
v The provisions of the above mentioned TDS sections requires that Tax has to be deducted at source when amount is paid or credited to the account of the Payee which ever is earlier. When the amount is credited to suspense account or any account by what ever name it is called, then it is treated as amount is credited to the account of the payee and tax has to be deducted at source. Hence Tax has to be deducted at source even on provisions made in the books of accounts to which TDS provisions are applicable.
Method of accounting generally followed by the client for provisions made for expenses:
1) At the yearend it is the common practice of a company or other individual to provide provisions for various expenses like Telephone, Electricity, Travel Claims, Conveyance reimbursements, Commission on sales to employees. Commission on sales to C&F Agent, Lunch Expenses, Rent of Office premises and guesthouse, AMC charges payable……..
2) Entries for Provision for expenses are passed at the yearend based on previous month expenditure or on some other relevant basis.
3) The above provisions are reversed 1st day of the subsequent year.
4) The assessee generally books expenditure only at the time of payment of the expenditure.
Method of Verification/ Audit:
a) We have to extract the provisions made on 31st March XXXX from the Audit Report and its enclosed Annexure
b) We have to segregate the whole provisions into the below mentioned categories:
i) Provision for expenses made in the books of accounts to which the provisions of Section 40(a)(ia) and 194A, 194J, 194C and 194H are applicable and liable for Tax Deduction.
ii) Provision for expenses made in the books of accounts to which the provisions of Section 40(a)(ia) and 194A, 194J, 194C and 194H are applicable and not liable for Tax Deduction as they are below the limits mentioned in the above TDS sections or NIL/Lower deduction certificates are obtained.
iii) Provision for expenses made in the books of accounts to which the provisions of Section 40(a)(ia) and 194A, 194J, 194C and 194H are not applicable.
c) We have to verify the payment of bills against the provision for expenses made on or after 01st April XXXX, Tax Deducted and remittance of the TDS with the respective to General Ledger Accounts and TDS remittance challans. ( It is possible only if the payments were made before 31st May or on or before time limit prescribed u/s 139(1))
d) The last date for payment of TDS on the provisions made was 31st May and even the same can be made on or before due date of filing of ROI under the time limit prescribed u/s 139(1) with interest @1% per month without attracting the provisions of section 40(a)(ia).
Other important points:
a) Most of the assesses books the bills only at the time of payment of the bills.
b) They deduct tax at source only when the bill is booked i.e. at the time of payment.
c) The assessee applies TDS rates applicable for the Financial Year in which the payments were made and not the rates applicable for the Financial Year in which the provision was made as the payments are made in the subsequent Financial Year.
d) Due to the procedure followed in points a, b and c, still payments have to be made against which provisions are made on 31st March XXXX are pending and TDS not deducted at source.
e) Some payments relating to the expenses provided on 31st March XXXX are made in the month of May and June XXXX and the TDS is remitted in the month of June and July XXXX and attracts interest provisions.
f) So care must be taken in matching the TDS remittances against the payments made and ensure that they are remitted within the prescribed time limit or else the same must be disallowed and disclosed in the tax audit report as required.