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TDS

kapil kumar agrawal (Chartered Accountant ) (169 Points)

16 September 2009

Dear Friends,,,

Please tell me that is there any case law in relation to following question????

If tax has not been deducted but paid by deductor from his own pocket. whether deduction of exp shall be alllowed of not

please quote related case law if available>>>>

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11 Replies

Dintakurthi Tirumala (CA FINAL) (15989 Points)
Replied 16 September 2009

No,deduction of expense not allowed,because deduction of tds is the obliligation of deductor if he fails to deduct the total amount will be added back to his income eventhough he pays tds his own pocket also treated as tds deduction made so expenditure of tds not allowed

For Example:

if A paid interest to B rs.15000/- then A will be deduct TDS rs.1545 @ 10.3% and paid to IT but A fails to deduct TDS then total interest paid rs.15000/- does not allowed as expenditure but A paid TDS rs.1545/- from his own pocket and paid to IT is also treated as TDS deducted from B so interest rs.15000/- allowed as expenditure but not TDS amount THE NATURE OF TDS DEDUCTION IS CURRENT LIABILITY NOT AN EXPENDITURE THANK YOU

dasari ramesh (Profession) (68 Points)
Replied 16 September 2009

Originally posted by :kapil kumar agrawal
"	Dear Friends,,, Please tell me that is there any case law in relation to following question???? If tax has not been deducted but paid by deductor from his own pocket. whether deduction of exp shall be alllowed of not please quote related case law if available>>>>	"

The actual TDS duductible amount is Rs 1722.41 because how much they paid is assumed to payment made after TDS Deducted means Rs 15000 is equal to 89.7% since on that 100% is 15000*100+89.7=16722.41 then the TDS amount is Rs 1722.41 But this TDS amount is not allowed as an expenditure but the actula amount can be allowed as an expenditure

Sumiti Jain (FP) (1364 Points)
Replied 19 September 2009

yes,actual amount is allowed as expenditure.

Rajeev (www.rkmco.com) (985 Points)
Replied 20 September 2009

As long as TDS is paid , i think the expense has to be allowed , (i think it will be deemed to be deducted and then paid ) i dont think there is any case law , which states that if tax is not deducted and paid out of assessee's pockets the expense is disallowed (atleast i am not aware of any such case law ) . .

Similar position is when the expense is just debited in the books and not paid , isnt the TDS in that case paid directly out of assesse's pockets ?

I also think that even TDS has to be allowed as expense in this case , cos the payment will be deemed to be NET of tax ( payment + tds = gross )

If anyone finds a case law on this , pls paste it here

Debashis Mandal (Business & Tax Consultancy) (341 Points)
Replied 20 September 2009

Dear friends

my qn is if deductor is paying TDS out of own resources then total expense becomes Rs.16722.41, then why only Rs.15000 is deductable why not 16722.41 ? because if u assume Rs.16722.41 is the total expenses of interest hen out of it Rs. 1722.41 is TDS which deducted & paid by deductor & balance rs.15000 is paid to the deductee ?

so is it depends on accounting entry that instade of debiting Rs.15000 as interest debit Rs.16722.41 as interest & have the full deduction.

Pls clarify

Thanks

Debashis

Deepak Sahni (CA in Practice) (65 Points)
Replied 18 October 2009

Ya, deduction will be allowed for tds amt also...

Sunil (Trader) (2611 Points)
Replied 19 October 2009

My view is TDS is not allowed even if grossed upand paid. I have come across a section 195 deduction many years back. For section 195 you do not have to be even an audited individual. It is applicable on all. I was helping a fellow exporter with recovering money from a foreign buyer in Australia and in the days of FERA it was a big problem if payment was not coming. We had to file the suit and we also had RBI permission to remit the money to lawyer to file suit etc. However,TDS had to be done under section 195. $2000 had to be remitted and the lawyer was refusing to proceed without that money coming in Therefore amount was grossed up and paid. For other sections of the TDS this rule has just come a couple of years back that expense is not allowed if TDS is not done. For section 195 it existed all the time. At the time of scrutiny that time the amount of TDS was disallowed that tax liability cannot be taken as expense. They allowed only the actual bill of lawyer.

Now this was more than 20 years back but I donot see any clarifications or notifications or ammendments for this. As the IT Act has evolved till now I have only seen this provision coming to other sections of TDS for Residents. Previously there was only penalties for non deduction / payment. Now there is disallowance as well.

Most of you are connected with the profession of CA here. First you must test the current accounting standards that are adopted / prescribed. Check whether the accounting standards are to charge the bill amount + grossed up TDS to the expenditure head in the P&L account or do you have to charge the TDS to a separate account.

As a taxpayer, I do not have such instances. Maybe the professionals will know better. You have to decide exactly how you treat each entry in the P&L account to decide the allowability.

Rajeev (www.rkmco.com) (985 Points)
Replied 19 October 2009

Dear Sunil ji , Wish u a very happy diwali and a prosperous new year.

There is a case law on same . Its allowed . The intention of the legislature is to protect the interest of the revenue . The gist of the same is produced for your reference :-

The main sub-clause (ia) as well as the proviso thereto makes deduction from the payee an essential condition for allowing expenditure as business deduction in the hands of the assessee. However, in a similar provision contained in sub-clause (i) of section 40(a) in respect of payments to non-residents and foreign companies, the Rajasthan High Court, in Addl. CIT v. Farasal Ltd. (1987) 163 ITR 364-371-2 (Raj), interpreted the word “paid” in that sub-clause to include involuntary payment of tax collected by the Revenue. In doing so, it took into account the fact that the object of section 40(a) (i) is to protect the interest of Revenue by ensuring that in respect of the amount chargeable under the Act and payable outside India, the tax is paid by the non-resident or deducted in cases where the non-resident does not have any agent in India from whom the tax can be recovered. From this point of view, it is immaterial whether the Revenue has received payment of the tax due either voluntarily or by initiation of recovery proceedings against him. Following the ratio of the said judgement of the Rajasthan High Court, the voluntary or involuntary payments of tax should be covered in the word “paid” used in section 40(a) (ia) also. Deduction of expenditure should be allowed to the assessee in case of involuntary payments. The word “paid” would also take in voluntary payments made by the assessee without deduction from the payee.

In my earlier post of 20/9/09 , i had requested for a case law on this , since no one else could find it , i did the exercise myself , hope this is beneficial to all .No one would generally bother unless the amount is big , but TDS liability is a credit , the debit goes to respective expense a/c and has to be allowed .

The concerned payee should be asked to modify the bill accordingly , since the payee is expected to claim the TDS , the debit should be given to his expense account in the payers book .

Now if the TDS is expected to be recovered from the payee (which will generally never be the case ) , it should be shown as a advance paid on behalf of the payee (current asset)

Case law is for expense disallowance (as requested by Kapil ji )and not for TDS allowed /disallowed as expenditure

Sunil (Trader) (2611 Points)
Replied 20 October 2009

Yes Rajeevji,

Thanks.

"the debit goes to respective expense a/c and has to be allowed"

Therefore it has to be allowed if the accounting treatment is as such. Maybe it was always allowed but when what was done over 20 yars back was wrong that they showed it seperately and ought to have increased the expense head itself with TDS amount. I do not know whether the assessee appealed or not.He may have. My intention of helping was to learn RBI procedure for closing a FERA case and also how to recover money from abroad. Therefore I helped until bankrupcy and distribution to creditors of the foreign buyer and after all that was over closure of file with RBI. About the income tax I was really not interested as that is what CAs usually handle and the repercussions were not as deadly as FERA.

CA Suri Kota (Assistant Manager @ EY) (955 Points)
Replied 20 October 2009

The only thing is...here the deductor is claiming the total amount including TDS paid by himself......as expenses....but the other party ..considers only the amount excluding TDS padi by the dedutor. There should be matching principle....so as far as law is concerned the deductor can not claim the TDS paid on behalf of the other party as Expenses as it is his reponsilbility to pay the net of TDS amountt to the party.

so no where it is allowable as expense unless the other party agrees to record the total gross amount including TDS.

Rajeev (www.rkmco.com) (985 Points)
Replied 20 October 2009

Yes Sunilji i get your point . Do u still practise FEMA ?

Dear Suri ,

The payee will have to record TDS as income if they want to claim the TDS in the ITR . Income and expense are both to be recorded as gross inclusive TDS , it has to be understood that TDS is a part & parcel of such income /expense .

As regards allowability of expenditure , on what basis will it be disallowed , just cos the payee doesnt record such TDS in his income ? If the payee doesnt follow proper accounting poilcy , i dont think its payers headache .

In case if the expense is shown in the current asset side as "expense advanced on behalf of the payee " , if the amount is not recovered in a reasonable time , it can be written off according to the commercial wisdom of the payer.