Timing of TDS u/s 194J & cost audit
This query is : Resolved
11 September 2008
Background:
In 2007-08 X & Co appoints a cost auditor under S 233B of the companies act for audit of cost accounts maintained for FY 2007-08 under S 209 (1) (d) and gets the approval of the Govt.
As per cost audit report rules 2001, X & Co has to produce the cost accounts to the cost auditor within 135 days after the close of the Financial Year and Cost auditor has 45 days to audit and submit the cost audit report to the Govt.
Accordingly the company produces the cost accounts for year 2007-08 and the auditor completes the audit in FY 2008-09 within the prescribed time limits. Bill raised and paid after the completion of the audit report, in FY 2008-2009
The following questions arise for clarification:
1. When should the company credit the account of the auditor and deduct the TDS under S 194J? (FY 2007-08 or FY 2008-09)?
2. What period should be mentioned in the TDS certificate (sec 203 ) and Form No 26 AS (Sec 203 AA...)?
3. When does the audit fee become income of the auditor (whether under mercantile system or Cash basis accounting)? (and when can he successfully claim the TDS in the return ( AY 2008-09 or AY 2009-10)?
In 2007-08 X & Co appoints a cost auditor under S 233B of the companies act for audit of cost accounts maintained for FY 2007-08 under S 209 (1) (d) and gets the approval of the Govt.
As per cost audit report rules 2001, X & Co has to produce the cost accounts to the cost auditor within 135 days after the close of the Financial Year and Cost auditor has 45 days to audit and submit the cost audit report to the Govt.
Accordingly the company produces the cost accounts for year 2007-08 and the auditor completes the audit in FY 2008-09 within the prescribed time limits. Bill raised and paid after the completion of the audit report, in FY 2008-2009
The following questions arise for clarification:
1. When should the company credit the account of the auditor and deduct the TDS under S 194J? (FY 2007-08 or FY 2008-09)?
2. What period should be mentioned in the TDS certificate (sec 203 ) and Form No 26 AS (Sec 203 AA...)?
3. When does the audit fee become income of the auditor (whether under mercantile system or Cash basis accounting)? (and when can he successfully claim the TDS in the return ( AY 2008-09 or AY 2009-10)?
11 September 2008
Answers are as below:
1.Even though the Cost Audit Report is submitted after closure of the financial year 2007-08, the fee of the Cost Auditor must have taken into account on accural basis by the Company during the financial year 2007-08 and the Company must have deducted TDS during 2007-08 and paid to Government Account. Thus the TDS relates to financial year 2007-08 relevant to assessment year 2008-09.
2.The TDS Certificate should mention 2007-08 as the financial year and Form No:26AS submitted by the Company for the 4th. Quarter should mention the payment of Audit Fee.
3.If the Auditor follows Mercantile System of Accounting, the fees shall become income for the previous year 2007-08 relevant to assessment year 2008-09. If cash system followed, the income shall realte to assessment year 2009-10.He can claim in either of the assessment year.
1.Even though the Cost Audit Report is submitted after closure of the financial year 2007-08, the fee of the Cost Auditor must have taken into account on accural basis by the Company during the financial year 2007-08 and the Company must have deducted TDS during 2007-08 and paid to Government Account. Thus the TDS relates to financial year 2007-08 relevant to assessment year 2008-09.
2.The TDS Certificate should mention 2007-08 as the financial year and Form No:26AS submitted by the Company for the 4th. Quarter should mention the payment of Audit Fee.
3.If the Auditor follows Mercantile System of Accounting, the fees shall become income for the previous year 2007-08 relevant to assessment year 2008-09. If cash system followed, the income shall realte to assessment year 2009-10.He can claim in either of the assessment year.
11 September 2008
1. Yes, the company follows mercantile system. Even then, can an entry for a transaction (viz; the audit) be made BEFORE the transaction actually happens? First a transaction should happen and THEN an accounting entry should be passed for that transaction according to basic principle of book-keeping.
For example,If the company enters into a contract with a contractor to construct a building in 07-08, but the actual building work starts in 08-09, will the company account, based on mercantile system of accounting for this transaction in 07-08 and deduct the TDS from the contractor even before the work starts?
2A. As per this answer,The tax return (income and TDS) may not match with Form 26AS as the Assessment years will be different and it can cause problem of refund in the new annexureless regime. (Even otherwise).In fact this has actually happened in the past. Is there any case law/notification to allow this mismatch?
2B. If for some reason, the audit was not done by this auditor, who will claim the TDS deducted?
3. Now what is the basis for the auditor (who is following Mercantile system)for accounting an income for a job not done by him? Unless the audit is done in a year, how can one say that he has earned the income during that year?
For example,If the company enters into a contract with a contractor to construct a building in 07-08, but the actual building work starts in 08-09, will the company account, based on mercantile system of accounting for this transaction in 07-08 and deduct the TDS from the contractor even before the work starts?
2A. As per this answer,The tax return (income and TDS) may not match with Form 26AS as the Assessment years will be different and it can cause problem of refund in the new annexureless regime. (Even otherwise).In fact this has actually happened in the past. Is there any case law/notification to allow this mismatch?
2B. If for some reason, the audit was not done by this auditor, who will claim the TDS deducted?
3. Now what is the basis for the auditor (who is following Mercantile system)for accounting an income for a job not done by him? Unless the audit is done in a year, how can one say that he has earned the income during that year?
11 September 2008
1.Answer: No option, the Company has to follow Mercantile or accural System of Accounting as per Section 209 of the Companies Act. You have to create provision for tax Audit Fee like any other provision made as on 31st. March at the time of closure of accounts.
2.If actual payment is made to the contractor on account of the execution of contract work or as advance for mobilisation of materials, TDS should be deducted at source.
3.No question of mismatch as apprehended by you in paperless return form. You can refer ITR-4,SCHEDULE TDS-2 for TDS on other Income, Column-6, 7. Your query can be resolved.
4. This is a hypothetical question.
5.The auditor normally follows Cash System of Accounting. Further he can transfer the TDS in Schedule TDS-2 to subsequent assessment year on receipt of TDS certificate for 2007-08 financial year, since income is not recognised.
2.If actual payment is made to the contractor on account of the execution of contract work or as advance for mobilisation of materials, TDS should be deducted at source.
3.No question of mismatch as apprehended by you in paperless return form. You can refer ITR-4,SCHEDULE TDS-2 for TDS on other Income, Column-6, 7. Your query can be resolved.
4. This is a hypothetical question.
5.The auditor normally follows Cash System of Accounting. Further he can transfer the TDS in Schedule TDS-2 to subsequent assessment year on receipt of TDS certificate for 2007-08 financial year, since income is not recognised.
12 September 2008
1. Many thanks sri Panda for your patience and guidance.
2. I have referred to the 'contractor' case as a parallel to the main case in my original question. your para 2 does not, in my view, address the fact mentioned by me-I have NOT stated that ANY payment is made. The example refers to a case where apart from JUST entering into a contract there was no work; no payment in 07-08.
It is parallel to the original question where just an appointment of the auditor is done in 07-08 and No work begun or ended in FY 07-08. From the 'background' section, it is clear that even if the company and the auditor want to do the audit in 07-08 itself, it is JUST NOT possible, as the cost accounts for 07-08 will be ready and will be presented for audit ONLY in FY 08-09 as per the Report Rules
3. My Question in 2B cannot be just brushed aside as 'hypothetical'. In the 135 days time the law gives for presentation of cost accounts for audit, anything can happen.
4. Thanks for your points 3 & 5 which I will explore further.
5. Thanks again for your patience.
2. I have referred to the 'contractor' case as a parallel to the main case in my original question. your para 2 does not, in my view, address the fact mentioned by me-I have NOT stated that ANY payment is made. The example refers to a case where apart from JUST entering into a contract there was no work; no payment in 07-08.
It is parallel to the original question where just an appointment of the auditor is done in 07-08 and No work begun or ended in FY 07-08. From the 'background' section, it is clear that even if the company and the auditor want to do the audit in 07-08 itself, it is JUST NOT possible, as the cost accounts for 07-08 will be ready and will be presented for audit ONLY in FY 08-09 as per the Report Rules
3. My Question in 2B cannot be just brushed aside as 'hypothetical'. In the 135 days time the law gives for presentation of cost accounts for audit, anything can happen.
4. Thanks for your points 3 & 5 which I will explore further.
5. Thanks again for your patience.
02 August 2025
This is a classic and important question on **timing of TDS deduction under section 194J** in case of cost audit fees where the work (audit) happens after the financial year for which the audit is done.
Let me summarize and clarify the key points, and address your concerns:
---
### 1. **When should the company deduct TDS under section 194J?**
* The company **follows mercantile (accrual) system of accounting** as per Companies Act, which means expenses are recognized when the liability arises — not necessarily when payment is made.
* For **cost audit fees**, even if the audit is physically conducted in the next FY (e.g., FY 2008-09), the liability for the audit fees **relates to the FY for which audit is done** (FY 2007-08).
* Therefore, the company should **provision for the cost audit fee and deduct TDS in FY 2007-08**, the year to which the service pertains.
* This is consistent with **Section 209(1)(d)** of Companies Act and basic accounting principles under mercantile system.
---
### 2. **What if the actual work/audit happens later? Can expense be recognized before work is done?**
* This is a practical challenge: The audit can only be done once accounts for that year are ready (which happens after year-end).
* However, the company **must create a provision for expenses incurred but not paid** (as per accrual accounting).
* The **TDS deduction is linked to the date when payment is due or liability is recognized**, not necessarily the date when the payment is actually made or the work is completed.
* This means the company has to estimate and record the expense as on 31st March and deduct TDS accordingly, even if the actual audit report is completed next year.
---
### 3. **What period should be mentioned in TDS certificate (Form 16A) and Form 26AS?**
* The TDS certificate and Form 26AS should **mention the FY in which TDS was deducted** (i.e., FY 2007-08).
* This is consistent with Section 203 which requires TDS to be reported for the FY in which deduction is made.
---
### 4. **When does the auditor recognize the income and claim TDS credit?**
* The auditor generally follows **cash basis** for income recognition (common in practice).
* So, the auditor will recognize the fee income **when the payment is actually received** (in FY 2008-09 or later).
* For claiming the TDS credit, the auditor can claim it in the year in which income is offered to tax and TDS certificate is available (AY 2009-10 or relevant AY).
---
### 5. **What if the audit was not done by the auditor to whom TDS was deducted?**
* This is a tricky situation.
* Since the TDS was deducted against the cost auditor appointed by the company, but audit not done by him, the company can only deduct TDS **when the service is actually rendered or liability crystallizes**.
* If audit is cancelled or changed auditor appointed later, company should deduct TDS on payment made to the actual auditor.
* If payment was made to first auditor but no audit done, company should not deduct TDS prematurely. Otherwise, refund or adjustment procedures apply.
---
### Summary Table
| Question | Position |
| ---------------------------- | --------------------------------------------------------- |
| Timing of TDS deduction | FY in which liability arises (FY of audit, not payment) |
| Entry before actual audit? | Yes, provision to be made as per accrual accounting |
| Period in TDS certificate | FY in which deduction is made (FY of audit) |
| Auditor income recognition | Usually on cash basis, when fee received |
| TDS claim by auditor | In AY when income declared and TDS certificate received |
| If audit not done by auditor | TDS should be deducted only when payment/liability arises |
---
### Practical Takeaway
* Companies following accrual system **must deduct TDS on audit fees in the FY the audit relates to**, even if actual audit is done next year.
* Auditor can claim TDS credit in the year of actual receipt of fees.
* Any mismatch in TDS credit timing is resolved by tax filing and claiming credit in appropriate AY.
---
If you want, I can help draft an explanatory note or practical steps for your company to handle this, including accounting entries and TDS deduction timeline. Would that be helpful?
Let me summarize and clarify the key points, and address your concerns:
---
### 1. **When should the company deduct TDS under section 194J?**
* The company **follows mercantile (accrual) system of accounting** as per Companies Act, which means expenses are recognized when the liability arises — not necessarily when payment is made.
* For **cost audit fees**, even if the audit is physically conducted in the next FY (e.g., FY 2008-09), the liability for the audit fees **relates to the FY for which audit is done** (FY 2007-08).
* Therefore, the company should **provision for the cost audit fee and deduct TDS in FY 2007-08**, the year to which the service pertains.
* This is consistent with **Section 209(1)(d)** of Companies Act and basic accounting principles under mercantile system.
---
### 2. **What if the actual work/audit happens later? Can expense be recognized before work is done?**
* This is a practical challenge: The audit can only be done once accounts for that year are ready (which happens after year-end).
* However, the company **must create a provision for expenses incurred but not paid** (as per accrual accounting).
* The **TDS deduction is linked to the date when payment is due or liability is recognized**, not necessarily the date when the payment is actually made or the work is completed.
* This means the company has to estimate and record the expense as on 31st March and deduct TDS accordingly, even if the actual audit report is completed next year.
---
### 3. **What period should be mentioned in TDS certificate (Form 16A) and Form 26AS?**
* The TDS certificate and Form 26AS should **mention the FY in which TDS was deducted** (i.e., FY 2007-08).
* This is consistent with Section 203 which requires TDS to be reported for the FY in which deduction is made.
---
### 4. **When does the auditor recognize the income and claim TDS credit?**
* The auditor generally follows **cash basis** for income recognition (common in practice).
* So, the auditor will recognize the fee income **when the payment is actually received** (in FY 2008-09 or later).
* For claiming the TDS credit, the auditor can claim it in the year in which income is offered to tax and TDS certificate is available (AY 2009-10 or relevant AY).
---
### 5. **What if the audit was not done by the auditor to whom TDS was deducted?**
* This is a tricky situation.
* Since the TDS was deducted against the cost auditor appointed by the company, but audit not done by him, the company can only deduct TDS **when the service is actually rendered or liability crystallizes**.
* If audit is cancelled or changed auditor appointed later, company should deduct TDS on payment made to the actual auditor.
* If payment was made to first auditor but no audit done, company should not deduct TDS prematurely. Otherwise, refund or adjustment procedures apply.
---
### Summary Table
| Question | Position |
| ---------------------------- | --------------------------------------------------------- |
| Timing of TDS deduction | FY in which liability arises (FY of audit, not payment) |
| Entry before actual audit? | Yes, provision to be made as per accrual accounting |
| Period in TDS certificate | FY in which deduction is made (FY of audit) |
| Auditor income recognition | Usually on cash basis, when fee received |
| TDS claim by auditor | In AY when income declared and TDS certificate received |
| If audit not done by auditor | TDS should be deducted only when payment/liability arises |
---
### Practical Takeaway
* Companies following accrual system **must deduct TDS on audit fees in the FY the audit relates to**, even if actual audit is done next year.
* Auditor can claim TDS credit in the year of actual receipt of fees.
* Any mismatch in TDS credit timing is resolved by tax filing and claiming credit in appropriate AY.
---
If you want, I can help draft an explanatory note or practical steps for your company to handle this, including accounting entries and TDS deduction timeline. Would that be helpful?
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