TDS on audit fee

Dear Mr Guru Prasad,

Although I would like to, but I find it difficult to agree with yourinterpretation of the provisions of the Income tax law along withthe Company law regarding the nature of office of the auditor andthe need to make a provision for audit fee and the consequentrequirement to make TDS thereon.On 31st March 2009 the company will have an auditor holding officetill the conclusion of the upcoming AGM in September 2009. The listof circumstances you've listed like the death of the auditor;dissolution of the firm of auditors; management deciding to partways with the existing auditor, are only contingencies. In thenormal course of events, such things won't happen. We can't wriggleour way out of a situation requiring legal compliance by conjuringup hypothetical scenarios. Those things may happen, but those thingshaven't happened till they have happened! The case of IndustrialDevelopment Bank of India v. ITO [2006] 10 SOT 497 (Mum.). that youhave brought up had very different circumstances. The IDBI had madeprovision for interest at the close of the year, but they had noidea who the ultimate recipients of the interest amounts would turnout to be. The bonds on which interest was payable were freelytransferable and so the bondholder at the time of making theprovision could be different from the bondholder at the time offinal payment. In such an event, the Mumbai Tribunal held that theIDBI was exempted from the requirement to withhold tax on interestsince one can't deduct TDS on payments to anonymous people.The office of the auditor certainly isn't akin to a Bond of afinancial institution. Barring contingencies, there's a highlikelihood that the auditor of the previous year would be theauditor this year too and continue to hold office till theconclusion of the next AGM. On 31st March all those things werepurely hypothetical. In the IDBI case, the anonymity of the payeesof the interest was a reality on 31st March and not a hypothesis.So in my opinion, as the law contained in Section 194J stands today,TDS would need to be made on provision for audit fee, taking intoaccount only the reality subsisting on that day.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=K2F4uKFXS6y82QT90PKbMHbkEEz-AHNKjBjxku7wH1gUv_lZ48DUHKguHW78xxljX0h2bG4_n2uBThPpLdcmFNe6azeceLPQMPZam-k, "Prasad & Suresh" wrote:>> Dear CA Vishal Guptaji,>> 1. The relevant report is attached.>> 2. My statement that the Auditor will be "indebted" to the companywas in the context of TDS being effected on 31st March - at whichpoint of time there will be no credit in the Auditor's account. TheTDS amount remitted by the company will result in a debit balance inthe Auditor's account. Such debit balance will continue till thedate the Auditor's bill amount is credited to his account.> If TDS were to be made upon completion of audit and receipt ofbill, then obviously the bill amount will be first credited to theAuditor's account, against which the TDS amount will be debited.There will therefore be no resultant "net debit" at any stage.>> The accounting sequence will be :>> On 31st March 08 - Debit Audit Fees / Credit Provision for AuditFees>> On 30th June 08 (assumed date of completion of audit & submissionof Report and Bill) - Debit Provision for Audit Fees / Credit ABC(Auditor)> On or after 30 June 08 - Debit ABC(Auditor) / CreditBank ..........for TDS made / remitted> On or after 30 June 08 - Debit ABC(Auditor) / CreditBank ..........for Net Amount paid>> Warm regards,>> CA Guru Prasad> Dear Guru Parasad Ji>> Kindly provide the complete citation of Mumbai ITAT for IDBIcase as mentioned by you.> Further please check how the TDS amount debited to auditor a/cwill be considered as "auditor" is indebted to the company. In myopinion if you are right then auditor will always be indebted to thecompany.>> Regards,> CA. Vishal Gupta>>> On 3/2/09, Prasad & Suresh wrote:>> A lot has been written about TDS on Audit Fees and how to takecredit for such TDS (when the Bill is raised only in the subsequentyear).>> My view is as follows –>> Companies do make a provision for Audit Fees in the accounts,at the close of the year. This is done in order to comply withmercantile system of accounting and to recognize the expenditure.>> Now let's examine the TDS issue :>> Unlike all other services, the Audit service is carried outafter the close of the year and not during the year. Therefore, theclaim for Audit Fees will arise only after Audit Report addressed toshareholders is received from the Auditor. It is only then that TDScan be effected and Form 16A issued. Even though a company may haveappointed or re-appointed an Auditor, there is no certainty that thesame Auditor will, in fact, carry out the audit for reasons such as(a) Resignation of the Auditor; or (b) Removal of Auditor; or (c)Death of the Auditor. If any such eventuality occurs after 31stMarch and before submission of Audit Report, a new Auditor steps in.Imagine the situation if a Form 16A in favour of the previousauditor is already doing the rounds !!>> Therefore, at the time a provision is made in the books (torecognize the expenditure), the identity of the beneficiary is notknown and hence TDS on Audit Fees cannot be made.>> In a similar context, in IDBI's case the Mumbai ITAT ruled asfollows :> "It is a sine qua non for vicarious tax deduction liabilitythat there has to be a principal tax liability in respect of therelevant income first, and a principal tax liability can come intoexistence when it can be ascertained as to who will receive or earnthat income. In this view of the matter, tax deduction at sourcemechanism cannot be put into practice until identity of the personin whose hands it is includible as income can be ascertained."> The correct step would be to effect the TDS only in the yearin which audit is complete and audit report is received. Therefore,for year ended 31 March, 08 TDS on audit fees should be effectedduring financial year 2008-09. There should be no fear ofdisallowance u/s 40(a) for the reasons cited above.>> Another interesting aspect is the implications under CompaniesAct if TDS is effected on 31st March itself – if the TDS amount wereto exceed Rs. 1,000 (which will be debited to the Auditor's account)would the Auditor not invite disqualification u/s 226(3)(d) forbeing indebted to the company for such sum ?>> CA Guru Prasad