TDS on Audit fee--Who's the Payee?

Dear Pradeep,

Interesting Question. So the company makes provision for audit feeat the end of the year; withholds and deposits tax on it; and hasalready uploaded Form 26Q mentioning the PAN and name of theauditor. But when it comes to actually conducting the audit, thecompany has changed its mind and appoints someone else to be auditor(by passing a special resolution in a specially convened EGM, I amsure).There have been case laws that said that where the identity of thepayee is not known, there is no need to make TDS when we makeprovision for the expense. But in this case, we can't pretend thatwe didn't know the identity of the payee—the auditor conductingaudit in the previous year is automatically reappointed in the AGM,unless removed by the shareholders. So the liability to deduct taxat source was there.Revising the TDS return is a good idea. Wrong names and PANs of thepayees often get mentioned in the e-TDS return. In that event also,it is advised to revise the TDS returns so that the payees don'thave any trouble in claiming TDS when their incomes are assessed.Although TDS isn't something that is negotiable, the practical wayout of this situation would be revision of the e-TDS return. Wecan't recover the amount of tax from the previous auditor since he'sgot no income to have that tax adjusted against.And although we do have a CBDT circular that says that TDS depositederroneously or deposited excess, can be claimed back by the deductorhimself, and can even be adjusted against the deductor's own advancetax liabilities, etc, invoking that circular isn't advisable in thiscase, since we have problem only with the payee's identity here, andnot with TDS as such.Regarding the problem in mentioning of the date of TDS while e-filing our ITRs, that's only a procedural problem to overcome forwhich we need to work out a practical solution rather than referringto sections. But I wouldn't agree with your thinking that "we had nochoice but to forget such tax which may of handsome amount". Notbeing able to claim TDS would mean enhancing our tax liability,which would be in violation of Section 205. Section 205 says thatwhere tax is deductible and has been deducted at source on anassessee's income, the revenue can't burden the assessee once againwith the tax that's already been deducted from his income. Whatabout a case where the deductor doesn't deposit the TDS or doesn'tfile the e-TDS return? Would the payee stand to lose the amount oftax that's been withheld from him from out of his income? Section205 seeks to protect the payees from the negligence of the payers.Section 205 will certainly be pressed into service to bail out theassessees in a case where there is a clash between the years whenthe payer deducted the TDS and the year in which the payee accountsfor the income.I shall try and have this thing sorted out after discussion with afew people and will get back to you if I have got somethingworthwhile to say.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=8WAJVhgGD0UHc28FFrz-Rw1j-KQmU0A16-YS-S0X-aHGE5k6gDxjhDKcwMPAbK5p-6V6WrVSKj7kDhTmRI2IjxpDelqdTl-zFGL0hr8s, pardeep gupta wrote:>> Dear Sanjeev Ji> First of all i would like to thank 4 clarifying the matter sosoon. i m really surprised to see such a quick response from ur end.by the way thanks a lot.> may u please clarify wheteher there would be any change in case ofsystem of accounting is mercantile basis. i think there should beequally applicable, becoz either it is cash basis or mercantilebasis, we would book TDS in the year in which we are booking income.> Am I right?> I think until any rules being framed by the Government under subsection (3) to section 199, we may carry on the practice.> One more issue, if suppose a company deducts tax in name of one CAfirm while making provision of audit fee on 31st March 2009. andfile form 26 Q. Later on say the said CA firm doesn't conduct theaudit due to resignation etc.. Then wheteher it is suggested torevise the TDS return by the company and indulge the name of newlyappointed CA firm. > Moresoever In my personal opinion there should be amendment insec. 194 j that company (incl. other assessee) should be liable todeduct TDS on professional fee whenever they receive the bill fromthe concerned professioanl and not on basis of making provision.> In other words Explanation 3 to subsection 3 of sec. 194 J shouldbe abolished.> CA Pradeep Gupta> Haridwar> 09897238017> --- On Sat, 2/28/09, Sanjeev Bedi wrote:>> From: Sanjeev Bedi > Subject: {amresh's-CA's} Re: TDS on Audit fee> To: http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=8WAJVhgGD0UHc28FFrz-Rw1j-KQmU0A16-YS-S0X-aHGE5k6gDxjhDKcwMPAbK5p-6V6WrVSKj7kDhTmRI2IjxpDelqdTl-zFGL0hr8s> Date: Saturday, February 28, 2009, 12:05 AM>>>>>>> Hi Pardeep Ji,>> No issue at all here! You need to go through Section 199 of the IT> Act.>> It's been held in numerous Tribunal cases that credit for TDS isto> be given in the year in which the assessee (the recipient ofincome)> offers the income for taxation. Chartered accountants follow cash> system of accounting. Their auditee companies on the other hand> follow the mercantile system of accounting, which requires thatthey> provide for accrued expenses on 31st March. Now the year mentioned> on the TDS certificate, in case of TDS made on 31.03.2009, wouldbe> A Y 2009-10. But the payee would be accounting for that incomeonly> in the financial year 2009-10, the relevant A Y for which is 2010-> 11. So in the event, would he have any problem in claiming suchTDS> in his computation of income? No.>> But the FA 2008 has amended Section 199 to insert the followingsub-> section:>> [(3) The Board may, for the purposes of giving credit in respectof> tax deducted or tax paid in terms of the provisions of thisChapter,> make such rules as may be necessary, including the rules for the> purposes of giving credit to a person other than those referred to> in sub-section (1) and sub-section (2) and also the assessmentyear> for which such credit may be given]>> The power to make rules for the purposes of giving or denyingcredit> for TDS has been vested in the CBDT. I am not aware of any rules> being brought onto the statute book that have disturbed the status> quo. I think we shall still continue to be entitled to claimcredit> for TDS in the year in which we offer the income for taxation. IfI> follow cash system of accounting, I shall claim, and be allowed by> the AO, the TDS deducted by my clients on 31st March 2009, in my> return of income for the A Y 2010-11. TDS works on the matching> concept: you get to claim an amount of TDS only in the year inwhich> you submit for taxation the income upon which tax has beendeducted> at source.>> In Pradeep Kumar Dhir v. Asstt. CIT [2007] 107 ITD 118 (Chd.)(TM),> the assessee, a commission agent received commission from various> principals and TDS was made by the payers on accrual basis as soon> as they booked the commission expense. The commission agent sincehe> followed cash system of accounting accounted for the income only> after he'd actually received it. The Tribunal held that the TDS> claim was admissible as and when the assessee offered forassessment> the income subjected to TDS.>> The decision of the Mumbai Bench in the case of Toyo Engg. India> Ltd. v. Joint CIT [2006] 5 SOT 616 (Mum.) is also an instructive> one. In this case also, it became difficult to establish a nexus> between income and TDS, the assessee being engaged in providing> technical services and recognizing his income only on thecompletion> of a project. The Tribunal laid down the following rules:>> [The income or loss is the cumulative result of the workingcarried> on by the assessee and measured for each assessment year. There> could be no immediate or direct nexus between the incomechargeable> to tax and the tax deducted out of the payments made.>> Tax deduction is basically a machinery provision for collectingtax> on the potential income of the assessee. But there is noconclusive> presumption that tax is invariably deducted out of income. That is> why the expression is `tax deducted at source' instead of `tax> deducted from income'>> It is not possible to correlate the amount of TDS with a specific> amount of income earned by the assessee in a particular assessment> year. When section 199 says that credit shall be given for the TDS> on the production of TDS certificate for the assessment year for> which such income is assessable, it is implied that the nexus> between the TDS and the income would remain rather notional or> conceptual only]>> Based on the above discussion, I think we should have any problemin> claiming TDS deducted by a company on 31st March 2009 even if we> account for that income in the A Y 2010-11.>> Thanks,>> CA Sanjeev Bedi>> --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, pardeep gupta> wrote:> >> > Dear Sanjeev Ji> > I have joined the group very recently, and i have gone throughur> reply on various queries which are extremely helpful and logical.> After reading ur views I m really a big fan of urs. I will behighly> obliged if u please help me in clarifying a issue related to TDSon> Audit fee.> > > > As u know in every balancesheet a provision for audit fee isbeing> created on say as on 31st March of previous year. while we (CA)are> issuing the fee bill in the year we conduct our audit and charge> service tax (if applicable). Now if the company deducts TDS on> provision of audit fee (as is required by Sec. 194 J), how can we> (CA) can claim benefit of that Tax deducted by the compnay during> previous year while we would be able to show the same only during> next financial year when we actually conduct the audit and raised> fee bill. now if the company does not deduct tax on provision made> in books , we are liable to qualify our report. and if the company> deducts tax we are not able to claim the benefit of TDS.> > Could u please suggest the remedy for this practical situation,> since i think most of our member will be facing the same problem.> > > > CA Pradeep Gupta> > Haridwar> > 9897238017> >>