Requirement of TDS on the Basis of Book Entry Requirement of TDS on the Basis of Book Entry

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The Tax Publishers Requirement of TDS on the Basis of Book Entry CA. Dr. Nisha Bhandari The liability to deduct tax at source arises when specified payments are credited or paid to the account of the payee. Sometimes issue arises as to whether an obligation to deduct tax at source can be imposed merely on the basis of passing of an entry in books of account. The learned author analyses the said issue with help of various judicial decisions in this regard. 1. Liability of deduction of tax at source Under the Income Tax Act there are certain payments in respect of which tax is required to be deducted by the person responsible for making such payment. In respect of most of the payments tax is required to be deducted at the time of credit of such income to the account of credit of such income to the account of the payee or at the time of payment, whichever is earlier. Thus the obligation of a payer to deduct tax at source (TAS) arises when the amounts payable are credited into the accounts of the payee, even if the same is credited prior to making the payment thereto. 2. Book entry does not form basis of deduction of tax where amount is not ultimately payable In DIT v. Ericsson Communications Ltd. 2015 TaxPub(DT) 3571 (Del-HC) : (2015) 378 ITR 395 (Del), it was observed that the rationale for imposing an obligation to deduct TAS on a credit entry being passed by a payer in favour of payee, is that such entry represents an acknowledgement of debt by a payer in favour of a payee; the debt acknowledged is in respect of an income that has accrued in favour of the payee; and such income is exigible to tax under the Act. Once a payer has unequivocally acknowledged the debt payable by crediting the account of payee in its books or has actually paid the same (whichever is earlier), the provisions of Chapter XVII of the Act relating to deducting TAS and depositing with the Income Tax Authorities are triggered and not otherwise. It is also necessary that the question whether a transaction results in an obligation to deduct TAS, be viewed from the standpoint of the payer and not from the standpoint of a person claiming any amount from the payee. Thus, if a debt owed by a person is not acknowledged as payable, there would be no obligation to withhold or deposit any tax. The obligation imposed on a person to deduct TAS and deposit the same with the authorities is an obligation similar in nature to the directions in garnishee proceedings where the person obliged to deduct TAS stands as a garnishee and Income Tax Authorities stand as a garnisher; there cannot be an obligation to pay, where the debt allegedly payable is disputed by a garnishee. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Requirement of TDS on the Basis of Book Entry

CA. Dr. Nisha Bhandari

The liability to deduct tax at source arises when specified payments are credited or paid to the account of the payee. Sometimes issue arises as to whether an obligation to deduct tax at source can be imposed merely on the basis of passing of an entry in books of account. The learned author analyses the said issue with help of various judicial decisions in this regard.

1. Liability of deduction of tax at source

Under the Income Tax Act there are certain payments in respect of which tax is required to be deducted by the person responsible for making such payment. In respect of most of the payments tax is required to be deducted at the time of credit of such income to the account of credit of such income to the account of the payee or at the time of payment, whichever is earlier. Thus the obligation of a payer to deduct tax at source (TAS) arises when the amounts payable are credited into the accounts of the payee, even if the same is credited prior to making the payment thereto.

2. Book entry does not form basis of deduction of tax where amount is not ultimately payable

In DIT v. Ericsson Communications Ltd. 2015 TaxPub(DT) 3571 (Del-HC) : (2015) 378 ITR 395 (Del), it was observed that the rationale for imposing an obligation to deduct TAS on a credit entry being passed by a payer in favour of payee, is that such entry represents an acknowledgement of debt by a payer in favour of a payee; the debt acknowledged is in respect of an income that has accrued in favour of the payee; and such income is exigible to tax under the Act. Once a payer has unequivocally acknowledged the debt payable by crediting the account of payee in its books or has actually paid the same (whichever is earlier), the provisions of Chapter XVII of the Act relating to deducting TAS and depositing with the Income Tax Authorities are triggered and not otherwise.

It is also necessary that the question whether a transaction results in an obligation to deduct TAS, be viewed from the standpoint of the payer and not from the standpoint of a person claiming any amount from the payee. Thus, if a debt owed by a person is not acknowledged as payable, there would be no obligation to withhold or deposit any tax. The obligation imposed on a person to deduct TAS and deposit the same with the authorities is an obligation similar in nature to the directions in garnishee proceedings where the person obliged to deduct TAS stands as a garnishee and Income Tax Authorities stand as a garnisher; there cannot be an obligation to pay, where the debt allegedly payable is disputed by a garnishee.