The ITAT Bangalore held that TDS is generally required on year-end provisions where the payee and liability are identifiable, but the matter was remanded to the AO to verify whether taxes were already paid by recipients and grant relief.
Khushi Jain | May 7, 2026 |
TDS applicable on year-end provisions; TDS on salaries required only required at payment time: ITAT
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) recently gave a ruling on whether a company must deduct tax (TDS) on expenses set aside at the end of the financial year and on variable pay for employees.
The case involved a real estate company that set aside Rs. 77.55 lakh for expenses at the end of the year without deducting TDS. The Tax Auditor mentioned this in the audit report. The Assessing Officer (AO) then labelled the company as an “assessee in default” and asked for Rs. 4.78 lakh in tax plus interest.
The AO also found a shortfall in TDS regarding payments made to two employees, totalling Rs. 11.40 lakh. When the company appealed, the Commissioner of Income Tax dismissed the case simply because the company did not show up for the hearing.
The ITAT ruled that TDS must be deducted even if the money is just put into a provision account, as long as the person receiving the money and the specific amount are known. Because the company failed to do this, it was technically at fault.
However, the Tribunal added a helpful point: if the people who were supposed to receive that money have already paid the income tax on it themselves, the AO must check this and give the company relief.
For salaries, the Tribunal clarified that TDS is only required at the time of actual payment. Since the company paid the variable pay in later years and deducted the correct tax at that time, it did not break the law. The Tribunal removed the Rs 11.40 lakh liability and the related interest.
The ITAT also observed that the ld. CIT(A) has not decided the issue on the merits of the case and therefore in substance the appeal is required to be restored back to the file of the ld. CIT(A) to decide the appeals of the assessee on its merits. The ld. CIT(A) does not have any power to hold that the appeal of the assessee is dismissed for non-prosecution.
The appeal was partly allowed. The liability regarding employee salaries was completely removed. The issue regarding the year-end provisions was sent back to the AO to verify if the recipients had already paid their taxes.
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