GIRNAR SOFTWARE PVT. LTD.,DELHI vs. ASSISTNAT COMMISSIONER OF INCOME TAX-TDS, JAIPUR, JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 24.08.2017 of

ld. CIT (A)-3, Jaipur arising from the order passed under section 201(1)/201(1A) of

the IT Act for the assessment year 2015-16. The assessee has raised the following

grounds :-

“ 1. That on the facts and in the circumstances of the case and in law, ld. CIT-A erred in sustaining the action of ld. ACIT (TDS) Jaipur in treating assessee company as defaulter for alleged violation of section 192 of the Act on certain “provisions” made in books, dealing with tax deduction at source on income chargeable under the head “salary” in total non appreciation of condition precedent of “payment” which mandates actual payment having been made to an identified payee so as to trigger tax deduction obligation u/s 192, which is evident from pages 2, 3, 4, 5 and page 23 of the impugned order passed by ld. ACIT (TDS), Jaipur.

2 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

e-commerce and online sale/purchase of used cars under the domain of ‘cardekho.com’. During the course of spot verification conducted on 27th February,

2015 at the business premises of the assessee, it was found that the assessee has

debited various expenditures in the Profit & Loss account and had credited these

expenses as provisions in the books which were in the nature of perquisites but had

not deducted any TDS on these perquisites. The AO in the proceedings under

section 201(1)/201(1A) of the Act was of the view that as per the IT Act, TDS is to

be deducted on credit or payment, whichever is earlier. Thus the AO observed that

as soon as the credit entries were passed and the expenses were booked, the

assessee should have deducted TDS. The AO accordingly proposed to held the

assessee as assessee in default in respect of the Employees Stock Option Plan

(ESOP), leave encashment, gratuity and bonus. The assessee objected to the action

of the AO and submitted that as per the provisions of section 192 of the Act, the

TDS obligation arises only on the payment and not at the time of accrual or crediting

the provisions. Further, it was contended that the ESOP is crystallized only when the

employees exercised their option and not at the time of granting of option by the

assessee company. The AO did not accept the contention of the assessee and held

the assessee as assessee in default for non deduction of TDS to the tune of Rs.

3 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

53,91,554/- and Rs. 9,70,480/- as interest under section 201(1) and 201(1A) of the

Act respectively. The assessee challenged the action of the AO. However, the ld.

CIT (A) upheld the order passed under section 201(1)/201(1A) of the Act by

following the decision of Bangalore Bench of the Tribunal in the case of IBM India

(P) Ltd. vs. ITO TDS LTU, 59 taxmann.com 107 (Bangalore – Trib.).

section 192 require deduction of tax in respect of the salary only on payment and

not at the time of entry made in the books. When there is no payment during the

year under consideration to the employees, the assessee is not liable to deduct tax

as per the provisions of section 192 and consequently the AO cannot held the

assessee liable for the same. The ld. A/R has also referred to the provisions of

section 17(2) and submitted that all the perquisites are part of the salary and,

therefore, no deduction of tax at source contemplated under section 192 in case

where the payment towards salary has accrued but is not made. He has relied upon

the decision of Hon’ble Delhi High Court in the case of CIT vs. Tej Quebecor Printing

Ltd., 281 ITR 170 (Delhi) and submitted that the Hon’ble High Court has held that

section 192 of the Act inter alia requires any person responsible for paying any

income chargeable under the head ‘Salaries’ to deduct income tax on the amount

payable at the stipulated rate at the time of payment. The Hon’ble High Court has

observed that the expression “ payment “ shall have to be given its ordinary literal

meaning and, therefore, the person making the payment can or is required to make

a deduction towards tax at source only at the time of making such payment. It was

specifically held that the accrual of payment and the actual act of making payment

must both exist in order that a deduction at source may be made. Hence, the ld. A/R

4 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

has submitted that the reliance placed by the AO and ld. CIT (A) on the decision of

Bangalore Bench of the Tribunal in the case of IBI India Pvt. Ltd. vs. ITO TDS LTU

(supra) is misplaced as the said decision was not in respect of the liability of TDS

under section 192 of the Act.

3.1. On the other hand, the ld. D/R has relied upon the orders of the authorities

below and submitted that there is no dispute that the assessee has not deducted

TDS in respect of the various expenditures claimed and debited to the Profit & Loss

Account. Therefore, the assessee has recognized these expenditures as accrued

during the year under consideration. However, when the assessee has failed to

deduct the tax then the assessee cannot escape from the tax liability under section

201(1) and 201(1A) of the Act. The entries in the books of accounts would not

determine the tax liability but the real nature of the transaction has to be taken into

consideration. The ld. CIT (A) has relied upon the Special Bench decision of

Bangalore Benches of the Tribunal in the case of Biocon Ltd. vs. DCIT dated

18.07.2013 in ITA No. 368/B/2010 as well as in the case of IBM India Pvt. Ltd. vs.

ITO TDS LTU (supra).

record. The AO has given the details of the expenditure and TDS liability under

section 192 of the Act as under :-

S. FY Expense Amount of TDS to be Actually Short Interest No. provision deducted deducted deduction u/s made u/s 192 @ by the u/s 201(1) 201(1A) 30% deductor Rs. 1) 2014- ESOP Rs.1,09,84,200 Rs.3295260 0 Rs.3295260 593147 15 expense 2) 2014- Leave Rs. 23,06,313 Rs. 691893 0 Rs.692893 124721 15 encashment expenses 3) 2014- Bonus Rs. 5,65,310 Rs. 169593 0 Rs.169593 30527

5 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

15 expenses 4) 2014- Gratuity Rs.4112694 Rs.1233808 0 Rs.1233808 222086 15 expenses Total Rs.53,91,554 Rs.970480

Thus all these expenditures are in the nature of perquisites to the employees. We

will deal with each nature of expenditure separately as under :-

ESOP Expenses

1,09,84,200/- in the books on account of Employees Stock Option Plan. However,

until and unless the said option was exercised by the employees, it will not be an

income accrued to the employees. We find force in the contention of the ld. A/R

that at the time of option vested with the employees, the provisions of section 192

are not attracted for deduction of TDS and only when the employees exercised this

option and finally the shares are allotted in pursuant to the option exercised by the

employees the liability to deduct tax at source would arise. The AO has not

examined the fact whether during the year under consideration the option was

exercised by the employees or it was exercised in the subsequent years. Further,

how many employees have exercised the option and the crystallization of the

expenditures depends on the number of employees exercised the option.

Accordingly, when the AO has not contradicted the fact as asserted by the assessee

that there was no credit given to the employees during the year under consideration

on account of employee stock option plan as it was subject to the exercise of option

by the employees and final allotment of shares, therefore, the provisions of section

192 are not applicable on this expenditure. The Hon’ble Delhi High Court in the case

6 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

of CIT vs. Tej Quebecor Printing Ltd., 281 ITR 170 has considered this issue in para

7 to 11 as under :-

“7. Section 192 of the Income-tax Act, inter alia, requires any person responsible for paying any income chargeable under the head "Salaries" to deduct income-tax on the amount payable at the stipulated rate at the time of payment. The term "payment" has not been defined either in section 192 or at any other place of the Act. The expression shall, therefore, have to be given its ordinary literal meaning. It follows that the person making the payment can or is required to make a deduction towards tax at source only at the time of making such payment. The accrual of the payment and the actual act of making the payment must both exist in order that a deduction at source may be made. No deduction at source is contemplated under section 192 in cases where a payment towards salary has accrued but is not made. This position becomes clearer if we refer to similar other provisions in the Act like sections 194(B), 194(BB), 194(BE), 194(F) and 194(L) under which also a deduction at source is envisaged only if actual payment of the amount is made to the payee. In contradiction to that requirement, there are provisions in the Act which authorise deduc- tion at source even in cases where the payment is either made to the payee or credited to his account. The provisions of sections 193, 194(A), 194(C), 194(D), 194(E), 194(G), 194(H), 194(I), 194(J), 194(K), 195, 196(A), 196(B), 196(C) and 196(D) are in this regard relevant. The inference therefore is that wherever the Parliament intended deductions to be made at source only at the time of making the payment, it provided so and wherever deductions were intended to be made even if the payment is credited to the account of the payee it made a specific provision to that effect. The distinction between the two cannot be obliterated by interpreting the provisions of section 192 in a manner which would amount to re-writing the said provision so as to bring them at par with the provisions that require deductions at the time of payment or credit of the amount to the payee's account. The decision of the Andhra Pradesh High Court in Syndicate Bank's case (supra) takes a somewhat similar view. 8. In Standard Triumph Motor Co. Ltd.'s case (supra) relied upon by Mr. Jolly, the Supreme Court was dealing with a situation where a Non-resident Indian company was entitled to a royalty on all sales effected by it. The Indian company which was liable to make this payment credited the amount of royalty to the appellant in its account books. In the returns filed by the assessee-non-resident company it admitted the royalty but filed nil returns claiming that it was maintaining its accounts on cash basis and since no part of the royalty had been received by it, therefore, nothing was payable. The question was whether the credit entry of the royalty to the account of the appellant-assessee amounted to receipt of the royalty by the appellant and was, therefore, taxable. Interpreting section 5(2)(b) of the Act, the Apex Court held that as soon as money is credited to the account of the assessee it must be deemed to have received the same, hence taxable. In arriving at the

7 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

conclusion, the Supreme Court placed reliance upon its earlier decision in Raghava Reddi's case (supra). 9. It is, therefore, evident that the Supreme Court was not dealing with a case involving deduction of tax at source under section 192 of the Act. It was, on the other hand, dealing with the question of taxability of the amount credited to the account of the assessee having regard to the provisions of section 5(2)(b) of the Act. The question whether the amount was taxable in the hands of the payee and, if so, for which assessment year is, however, a matter distinctly different from the question of deduction of tax at source under section 192. The majority decision of the Tribunal, therefore, rightly held that the obligation to deduct tax at source did not in the instant case arise as the amount of salary due to the employee had not been paid. 10. Mr. Jolly made a feeble attempt to urge that the salary due to Mr. Garnett had in fact been received by him outside the country and that the plea of non- payment was raised only to avoid the liability arising out of the non-deduction of tax at source. We see no reason to go beyond the finding of fact recorded by the Tribunal that there was no actual payment of the salary by the assessee to Mr. Garnett. The Tribunal has, in this regard, observed :

"The lower authorities have simply proceeded on the assumption that the money credited in the account of Mr. Garnett with HongKong and Shenghai Banking Corporation was paid by the assessee out of unknown sources. Such assumption, in our opinion, is based on surmises and conjectures, and therefore, no adverse inference can be drawn against the assessee. If the Assessing Officer could obtain the account of Mr. Garnett from the bank, he could also make enquiries as to who paid the amount in the account of Mr. Garnett. On the other hand, the assessee has been able to place the evidence that Quebecor World of Canada had paid this amount as advance to Mr. Garnett for discharging his income-tax liability in India. It further shows that this money was returnable by Mr. Garnett to the Canadian Company on receiving his salary from India. Accordingly, it is held that the revenue has not discharged its onus to prove that any payment of salary was made by the assessee to Mr. Garnett during the year under consideration." 11. In the light of, what we have said above, we see no error of law in the view taken by the Tribunal to warrant interference by this Court. The appeal, accordingly, fails and is hereby dismissed.”

Thus it was held that for attracting the provisions of section 192 the accrual of

payment and actual act of making the payment must both exist. Though sub-

section (1)(a) curves an exception in the provisions of section 192 of the Act

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regarding the perquisites which is not provided for by way of monetary payment as

referred in clause (2) of section 17, the tax on such perquisites is required to be

otherwise deductible as per the provisions of section 192(1) of the Act. However,

when the employees stock option was not finally exercised by the employees then

the question of deduction of TDS as per section 192 does not arise. This position is

also recognized by the provisions of section 17(2)(vi) and explanation thereto. As

per clause (c) of the explanation, the value of the sweet equity share shall be fair

market value or specified market value on the date on which the option is exercised

by the employees as reduced by the amount actually paid by the employees in

respect of such share.

Leave encashment expenditure, Bonus expenditure & Gratuity Expenditure :

were made for the liability to be discharged in future. This fact has not been

disputed by the AO that these are only provisions made on account of Leave

encashment, Bonus and Gratuity expenses. Hence in view of the decision of the

Hon’ble Delhi High Court in the case of CIT vs. Tej Quebecor Printing Ltd. (supra)

when there is no actual payment of these perquisites being part of salary, then the

liability to deduct tax at source under section 192 of the Act does not arise. The

revenue has relied upon the decision of Bangalore Benches of the Tribunal in the

case of IBM India Pvt. Ltd. vs. ITO TDS LTU (supra). However, we find that the

issue in the said case was not for deduction of tax at source under section 192 of

the Act. The provisions were created by the assessee in the said case on account of

9 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

various expenditures and the particulars are reproduced by the Tribunal in para 4 as

under :-

“ 4. The provision so created by the Assessee in the books of accounts for the various assessment years are as follows:— F.Y. 2005-06 Particulars Amount Section Percentage Amt to be Interest deducted Sub-contracting 196063727 194C 1.13% 210250 1766116 charges Commission 23787112 194H 5.65% 1343971 1128936 Professional charges 24241731 194J 5.65% 1369657 1150512 Contractors charges 33159502 194C 2.26% 749404 629499 Sub-contracting 1428358659 194C 1.13% 16140452 13557980 charges Foreign payments 775791935 195 10% 77579193 62063354 (WTC) TOTAL 2471402665 9739292 80296397 F.Y. 2006-07 Particulars Amount Section Percentage Amt to be Interest deducted Commission 8823629 194H 5.65% 498535 358945 Subcontracting 1334844862 194C 1.13% 15083746 10860297 Professional & 71477952 194J 5.65% 4038504 2907723 Consultancy Advt & Marketing 21641814 194C 1.13% 244552 176077 Recruitment 46079329 194C 2.26% 1041392 749802 Repair & Maintenance 4420775 194C 2.26% 99909 71934 General Exp. - Education 92581732 194C 2.26% 2092347 1506489 Exp. Rent 174993369 194I 22.66% 39653497 28550518 Other Expenses 16154003 194C 2.26% 365080 262857 Foreign payments 1134433077 195 10% 1344330 967917 TOTAL 2905450542 64461892 46412559

10 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

FY 2007-08 Particulars Amount Section Percentage Amt to be Interest deducted Commission 233671617 194H 5.65% 13202446 7921467 Subcontracting 479760513 194C 1.13% 5421293 3252776 Professional & 127571394 194J 5.65% 7207783 4324670 Consultancy Advt & Marketing 213424632 194C 1.13% 2411698 1447019 Recruitment 237073540 194C 2.26% 5357862 3214717 Repair & Maintenance - 194C 2.26% - General Exp. - - 194C 2.26% - Education Exp. Rent 331697952 194I 22.66% 75162755 45097653 Other Expenses 469931105 194C 2.26% 10620442 6372265 TOTAL 2093130753 119384279 16730567 FY 2008-09 Particulars Amount Section Percentage Amt to be Interest deducted Professional fees 816228909 194J 11.33% 92478735 44389792 Contractors/sub- 243440622 194C 2.26% 5501758 2640843 contractors Foreign payments 112899026 195 15% 169348804 81287425 Commission 234463891 194H 11.33% 26564759 12751084 Rent 273153222 194I 22.26% 61896520 2971032 Others 1368936161 194C 11.33% 155100467 74448224 Total 4065214831 510891043 218488400

As none of the expenditures was falling within the ambit of section 192 of the Act,

therefore, the said decision of the Tribunal would not help the case of the revenue

for the purpose of TDS under section 192 of the Act. Accordingly, in the facts and

circumstances of the case and following the decision of Hon’ble Delhi High Court in

11 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.

case of CIT vs. Tej Quebecor Printing Ltd. (supra), we set aside the orders of the

authorities below.

Order is pronounced in the open court on 05/09/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member

Jaipur Dated:- 05/09/2018. Das/

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

12 ITA Nos. 792/JP/2017 Girnar Software Pvt. Ltd., Delhi.