Karnataka High Court ruling wherein it was held that the Assessee was not liable for TDS under section 194J of the Income Tax Act, 1961, on year end provisions i.e. provision of legal and professional fees wherein neither the payees nor the amount payable were identifiable.

Brief Background

• Revenue noted that the Assessee made the provision for legal and professional charges, whereon no tax was deducted and made addition under Section 40(a)(ia), which was deleted by DRP;
• On Revenue’s appeal, ITAT held that the Assessee was liable to deduct tax on the provision made for legal and professional charges when entry is credited even if payment was not made;
• Aggrieved Assessee approached the High Court and submits that it was not liable to deduct tax on the professional charges as the identity of payee was not certain at the stage when the provision was made;

High Court ruling

• The High Court takes note that the provisions made at the end of the accounting year were reversed in the beginning of the next year and neither the payees nor the exact amount payable were identified;
• Relied on the co-ordinate bench ruling in Volvo India Pvt. Ltd. and Karnataka Power Transmission Corporation, wherein it was held that if no income is attributable to the payee, there is no liability to deduct tax at source;
• Held that the existence or absence of entries in the books of accounts is not decisive or conclusive factor in deciding the right of the assessee claiming deduction;
• Noted that the Assessee had duly deducted tax at source in the subsequent year in accordance with the provisions of Chapter XVII-B and remitted the same within the due date, which was not refuted by the Revenue;
• Also, the HC rejected Revenue’s reliance on SC ruling in Palam Gas Service vs. CIT, observing that the payees therein were identified which is in contradiction with the present case, where payees were not identified.