Pfizer Ltd vs. ITO (ITAT Mumbai)

No TDS obligation for general credit entry & so no s. 40(a)(i) disallowance. Even if TDS applicable, no s. 201 TDS liability if s. 40(a)(i) disallowance made

The assessee made a provision for Rs. 10 crores in respect of payment due to various parties but did not deduct TDS thereon. The provision was made without making specific entries into the accounts of the parties. The assessee disallowed the expenditure in respect of the said provision u/s 40(a)(i) & 40(a)(ia). Next year the entire provision of expenses was written back and the actual amounts paid to the respective parties were credited to their respective accounts after deducting TDS. The AO held that despite such disallowance, the assessee was liable u/s 201 as an assessee-in-default for failure to deduct TDS. On appeal by the assessee, HELD by the Tribunal:

(i) As the provision was made without making specific entries into the accounts of the parties and the payee was not identifiable, the TDS provisions are not applicable. The whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. The TDS mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained (IDBI vs. ITO 107 ITD 45(Mum) followed);

(ii) Once the amount has been disallowed u/s 40(a)(i) for non-deduction of tax, it cannot be subject to TDS provisions again so as to make the assessee liable to pay the tax u/s 201 & interest u/s 201(1A). If the AO’s view was accepted that the assessee was liable to pay the TDS not deducted, then a disallowance u/s 40(a)(i) and 40(a)(ia) cannot be made and those provisions may become otiose.