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T. Banusekar

OUR company engages a professional consultant. The consultant is required to visit our factories and offices in different States. He charges us a bill for his professional services. He also gives us a statement of expenses, incurred on travel and conveyance. These statements are hand written on a plain paper.

His expenses are reimbursed through a payment voucher by our company. Are we required to deduct tax at source even on such reimbursements?

T. V. Arora

Reply

The Board has through Circular No.715 dated August 8,1995 clarified that since Section 194J refers to "any sum paid", reimbursement of actual expenses cannot be deducted from the bill and that such reimbursement will also have to be taken into account in deducting tax at source.

However, the issue of whether tax deduction will be attracted where such expenses are claimed through a separate statement stands unclarified by the Board

It is felt that if the expenses are claimed through a separate statement there will be no requirement to deduct tax at source, provided the deductor is satisfied that the expenses claimed as reimbursement are only the actual expenses incurred. If there is an element of profit, that is to say that if the reimbursement is not of actual expenses, tax will have to be deducted at source even if the expenses are claimed through a separate statement.

Query

We hire contractors and sub-contractors in our business. And they raise bills dated March 31 and we receive those bills between April and July in the next financial year.

These bills are accounted for as on March 31, that is the date on the bill.

The entry is made by debiting the expense and crediting the concerned party.

Tax is deducted at source on such credits only when the bill is received, which could be any time between April and July of the next financial year and remitted before the seventh of the month succeeding the month in which tax is deducted at source.

Is this a violation of law?

S. V. Murali

Reply

Section 194C of the Act requires tax to be deducted at source on payments made towards a works contract or to a sub-contractor.

The Section requires tax to be deducted at source at the time of payment or credit, which ever is earlier.

In your case the payment though may be later, the credit having been made on March 31, of the previous year, tax will have to be deducted at source on this date.

It would not be possible to take a view that the tax is to be deducted when the bill is received from the contractor for that will amount to saying that the expenditure did not accrue in the previous year which will effectively affect the claim for allowability of the expenditure itself.

At any rate the credit having been made on March 31 of the previous year, the deduction will have to take place on this date. This will be that the remittance into the Government account will have to be made before May 31 following, in accordance with Rule 30. A failure to remit the same within this date will entail the levy of interest under Section 201(1A). The interest under this section would be charged at 12 per cent per annum. There could also be a disallowance of the expense from assessment year 2005-06 by virtue of Section 40(a) but it may be noted that the expense will be allowed in the year in which the amount of tax deduction is remitted into the government account.

Query

Ten years ago, I received an advance in foreign currency, which was equivalent to Rs 15 lakh in Indian currency. This advance was received towards export of garments to Australia. The buyer subsequently cancelled the order. I have not refunded the advance to the prospective buyer. The amount continues to be reflected in my books as payable to the concerned party. I now propose to write back the same in my books of account. Will it be treated as income on such write back?

D. Rajaram

Reply

A very similar issue has been considered by the Supreme Court in CIT v T.V.Sundaram Iyengar & Sons Ltd [1996] 222 ITR 344 (SC). In this case the assessee had received amounts in the course of trading transactions though these were not taxable in the year of receipt as being of revenue character.

These amounts were received as security deposits for performance of contracts by its constituents. The Supreme Court held that since the assessee had itself treated the amount as its trade receipts by bringing it to its Profit & Loss account, the same became taxable in such year in which the amount was credited to the Profit & Loss account.

Applying the same analogy the sum of Rs 15 lakh would be treated as income in the year in which it is written back to the Profit & Loss account, since even in your case you have received the money in the course of your business. You may, however, note that if you subsequently have to refund the same to the party, you can claim such refund as an allowable business deduction in the year in which the same is refunded.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.)

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