Year-End Provisions Attract TDS Under Section 194J! ITAT Bangalore Holds Assessee in Default Under Section 201(1), but Grants Relief for Vendor Income Already Offered to Tax

 

Artha Real Estate Corporation Limited v. DCIT, TDS Circle-1(1), Bangalore | ITA No. 2624/Bang/2025 | AY 2018-19 | TS-639-ITAT-2026 (Bang.) | Order dated 28 April 2026

Can a company be treated as an assessee in default under Section 201(1) of the Income-tax Act, 1961, for failure to deduct TDS on year-end provisions, even when the invoices have not been received and the provisions are subsequently reversed?

Does the mere fact that the expenses are credited to a “Provision for Expenses” account instead of the vendor’s account absolve the assessee from the obligation to deduct tax at source?

Can relief be claimed where the recipient vendor has already offered the income to tax?

What is the position regarding salary provisions where the actual payment is made in a subsequent financial year?

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT), in the case of Artha Real Estate Corporation Limited v. DCIT, has examined these important issues.

The Tribunal held that the assessee was correctly treated as an assessee in default under Section 201(1) for non-deduction of TDS on identifiable year-end provisions. However, it granted an opportunity to claim relief under the first proviso to Section 201(1), where the recipient had already offered the income to tax.

Significantly, the Tribunal also granted relief in respect of salary provisions, holding that no TDS was required under Section 192 in the facts of the case, since the salary had not been paid during the relevant financial year.

Let’s examine the facts, legal issues and important observations of this ruling.

1.  Background and Facts of the Case

The assessee, Artha Real Estate Corporation Limited, is engaged in the business of real estate and construction.

For AY 2018-19, the Income-tax Department initiated proceedings under Section 201 of the Income-tax Act, 1961, on the basis of certain observations in the tax audit report.

The Assessing Officer noticed that the assessee had failed to deduct tax at source on certain expenses and year-end provisions.

The principal issues involved were:

Issue 1: Non-deduction of TDS on year-end provisions

The assessee had created year-end provisions aggregating to ₹77,55,264 in respect of 16 parties.

The tax deductible on these provisions was computed at ₹4,78,772, with interest under Section 201(1A) amounting to ₹3,92,593.

Issue 2: Short deduction of TDS on salary payments

The Assessing Officer also identified short deduction of TDS on managerial remuneration paid to two senior employees.

The short deduction was computed at ₹11,40,596, with interest under Section 201(1A) of ₹9,35,288.

The Assessing Officer accordingly treated the assessee as an assessee in default under Section 201(1).

The assessee challenged the order before the CIT(A). However, the appeal was dismissed for non-prosecution without deciding the issues on merits.

Aggrieved, the assessee approached the Bangalore ITAT.

2.  Assessee’s Arguments: Year-End Provisions Were Reversed in the Subsequent Year

The assessee contended that the provisions were merely accounting entries made at the end of the financial year.

According to the assessee:

– The invoices had not been received from the vendors as on 31 March 2018.

– The services were not fully completed by the service providers.

– The provisions were reversed on the first day of the subsequent financial year.

– TDS was deducted when the actual invoices were received and payments were made.

– No tax was required to be deducted at source on the mere creation of such provisions.

The assessee further submitted that out of the total provisions of ₹77,55,264:

– ₹40,59,470 was debited in FY 2018-19, on which TDS was subsequently deducted and deposited.

– ₹16,24,666 was fully reversed.

– The balance of ₹29,96,588 remained outstanding in the books.

The assessee argued that since the liability had not crystallised at the end of the relevant financial year, the provisions could not attract TDS.

The Tribunal, however, did not accept this argument.

3.  ITAT Holds That TDS Is Required on Identifiable Year-End Provisions

The Tribunal examined the nature of the provisions and the relevant statutory provisions.

It observed that the assessee had furnished the names of the recipients, their PANs, the nature of the expenses and the amounts provided.

Thus, as on 31 March 2018, the payees and amounts were identifiable.

The Tribunal noted that the assessee maintained its books of account on the accrual system of accounting.

It observed that where the payee and the amount are ascertainable, the mere fact that the amount is credited to a provision account rather than the vendor’s account does not absolve the assessee from the obligation to deduct TDS.

The Tribunal also noted that the provisions were reflected in the audited financial statements and the tax audit report.

Accordingly, the Tribunal rejected the contention that no expenditure had been incurred merely because the invoices had not been received or the provisions were reversed in the subsequent year.

The Tribunal held that the assessee was correctly treated as an assessee in default for non-deduction of TDS on the year-end provisions.

This is an important observation for companies that routinely create year-end provisions for audit fees, professional fees, contractual expenses and other vendor-related expenses.

4.  Section 194J: Credit to Any Account Triggers TDS

The Tribunal referred to the provisions of Section 194J, particularly Explanation (c), which deals with the credit of amounts to accounts other than the account of the payee.

The relevant principle is that TDS is required to be deducted at the time of credit of the amount to the account of the payee or at the time of payment, whichever is earlier.

The provision also covers credit to an account such as:

– Suspense Account;

– Provision for Expenses Account;

– Expenses Payable Account; or

– Any other account maintained by the assessee.

Therefore, merely transferring the amount to a provision account does not postpone the TDS obligation where the statutory conditions are satisfied.

The Tribunal also referred to the corresponding principle under Section 194C.

The decision reinforces the principle that the nomenclature of the accounting entry is not decisive.

An accounting entry cannot be used to postpone a statutory TDS obligation where the payee and amount are identifiable.

5.  Reversal of Provision in the Subsequent Year Is Not a Defence

One of the important arguments raised by the assessee was that the provisions were reversed in the subsequent year and that TDS was deducted when the actual invoices were received.

The Tribunal rejected the contention that such reversal, by itself, absolved the assessee from the TDS obligation.

The relevant consideration was whether the amount was identifiable and had been credited in the books during the relevant financial year.

Thus, the subsequent reversal of the provision does not automatically extinguish the liability arising from the earlier credit.

This aspect is particularly important for companies following the accrual system of accounting.

However, the ruling should not be understood to mean that every provision, irrespective of its nature, attracts TDS. The nature of the expense, the identity of the payee, the applicable TDS provision and the facts of the transaction remain relevant.

6.  Important Relief: First Proviso to Section 201(1)

Although the Tribunal upheld the assessee’s default in respect of the year-end provisions, it recognised that the assessee could be entitled to relief under the first proviso to Section 201(1).

The proviso provides relief to a payer who has failed to deduct TDS, where the recipient has:

1.  Furnished the return of income under Section 139;

2.  Taken the relevant income into account while computing income in such return; and

3.  Paid the tax due on the income declared in the return.

The payer must also furnish the prescribed certificate from an accountant in the prescribed form.

The Tribunal held that the assessee deserved relief to the extent that the recipient vendors had already offered the corresponding income to tax and the necessary certificate was furnished before the Assessing Officer.

Accordingly, the Tribunal directed the assessee to furnish the requisite information and evidence.

The Assessing Officer was directed to verify the same and determine the extent to which the assessee could be treated as not being in default.

This is a significant relief because the objective of TDS is to ensure tax collection and not to impose a double tax burden where the recipient has already discharged the corresponding tax liability.

Practical implication: Even where TDS was not deducted on a year-end provision, the assessee should examine whether the recipient vendor has already offered the income to tax and whether the prescribed documentation can be obtained.

7.  Salary Provisions: ITAT Grants Relief Under Section 192

The second issue involved short deduction of TDS on managerial remuneration payable to two employees.

The assessee submitted that the amounts represented variable pay and performance-linked incentives.

The salary was not paid during FY 2017-18 and was paid in the subsequent year, when TDS was deducted and the necessary Form 16 was issued.

The Tribunal examined Section 192 of the Income-tax Act, 1961.

Section 192 requires deduction of tax at source from salary at the time of payment.

The Tribunal observed that the salary in question had not been paid to the employees during the relevant financial year.

It therefore held that the assessee had correctly followed the provisions of Section 192 by deducting TDS when the actual salary was paid.

The Tribunal accordingly held that the assessee could not be treated as an assessee in default for non-deduction of TDS on the unpaid salary provisions.

The Tribunal also granted relief in respect of the corresponding interest under Section 201(1A).

This distinction between vendor-related year-end provisions and salary payable is particularly important.

Difference between vendor provisions and salary provisions

Particulars| Vendor-related provisions| Salary provisions

Applicable TDS section| Section 194J / 194C, as applicable| Section 192

Relevant trigger| Credit or payment, whichever is earlier| Payment of salary

TDS on identifiable year-end provision| Required, subject to statutory conditions| Not required in the facts of the case where salary was unpaid

Relief under Section 201(1)| Available subject to conditions of first proviso| Tribunal granted relief in the present case

8.  CIT(A) Cannot Dismiss Appeal Merely for Non-Prosecution

Another important observation of the Tribunal concerned the manner in which the CIT(A) had dismissed the assessee’s appeal.

The CIT(A) had issued several notices, but the assessee had not responded.

The appeal was consequently dismissed for non-prosecution without adjudicating the issues on merits.

The ITAT observed that the CIT(A) does not have the power to dismiss an appeal merely on account of non-prosecution.

The appellate authority is required to decide the appeal on merits.

The Tribunal accordingly restored the matter to the CIT(A) for adjudication on merits.

This observation is also useful for taxpayers whose appeals are dismissed without examination of the substantive grounds.

9.  Final Decision of the Bangalore ITAT

The Tribunal partly allowed the assessee’s appeal.

The important conclusions were:

A.  Year-end provisions

The assessee was correctly treated as an assessee in default under Section 201(1) for non-deduction of TDS on the year-end provisions aggregating to ₹77,55,264.

B.  Relief under the first proviso to Section 201(1)

The issue was restored to the Assessing Officer to verify whether the recipient vendors had already offered the corresponding income to tax and whether the prescribed certificate and supporting information were furnished.

C.  Salary provisions

The Tribunal held that the assessee could not be treated as an assessee in default under Section 201(1) for the salary provisions which had not been paid during the relevant financial year, in the facts of the case.

The corresponding interest under Section 201(1A) was also deleted.

D.  Appeal dismissal by CIT(A)

The Tribunal held that dismissal of the appeal merely for non-prosecution was not proper and restored the issue to the CIT(A) for decision on merits.

The appeal was accordingly partly allowed.

10.  Practical Checklist for Companies and Tax Professionals

The ruling highlights the importance of careful year-end TDS compliance.

Companies should consider the following measures:

1.  Review all year-end provisions for expenses before finalising the financial statements.

2.  Identify the nature of each expense and the applicable TDS provision.

3.  Ensure that the payee and amount are ascertainable wherever provisions are made.

4.  Examine whether TDS is required at the time of credit, even if the entry is made in a provision account.

5.  Do not assume that reversal of a provision in the next financial year automatically eliminates the TDS obligation.

6.  Deduct TDS at the time of payment of salary in accordance with Section 192, as applicable.

7.  Obtain the prescribed accountant’s certificate where relief under the first proviso to Section 201(1) is claimed.

8.  Maintain vendor-wise records of provisions, reversals, actual invoices and subsequent TDS deductions.

9.  Reconcile the tax audit report with the TDS returns and books of account.

10.  Ensure that appellate proceedings are properly attended and that substantive issues are decided on merits.

Conclusion: Year-End Accounting Provisions Cannot Be Used to Postpone TDS

The Bangalore ITAT’s decision in Artha Real Estate Corporation Limited v. DCIT reinforces an important principle of TDS compliance.

Where the payee and amount are identifiable and the statutory provisions require deduction at the time of credit, the mere creation of a year-end provision cannot be used to postpone the obligation.

Reversal of the provision in the subsequent year does not, by itself, eliminate the liability under Section 201(1).

At the same time, the first proviso to Section 201(1) provides a meaningful safeguard where the recipient has already offered the corresponding income to tax and the prescribed evidence is furnished.

The decision also highlights the different treatment of unpaid salary provisions under Section 192 in the facts of the case.

For companies, the message is clear: Year-end provisioning is not merely an accounting exercise. It must be accompanied by a careful examination of the applicable TDS provisions.

The closing entry may be made on 31 March, but the TDS obligation cannot be closed merely by reversing it on 1 April!

Case Law Reference

Artha Real Estate Corporation Limited v. Deputy Commissioner of Income Tax, TDS Circle-1(1), Bangalore, ITA No. 2624/Bang/2025, Assessment Year 2018-19, TS-639-ITAT-2026 (Bang.), order dated 28 April 2026.

The copy of the order is as under:

ITA No. 2624-Bang-2025