TDS on Year-End Provisions: ITAT Bangalore Upholds Default Under Section 201 but Grants Conditional Relief to Artha Real Estate
Background and Context
A significant ruling has emerged from the Income Tax Appellate Tribunal (ITAT), Bangalore, in the matter of Artha Real Estate Corporation Limited Vs DCIT, concerning one of the most frequently contested questions in TDS compliance — whether tax must be deducted at source on year-end book provisions, even when those provisions are subsequently reversed without any actual payment being made to vendors.
The Tribunal's order in ITA No.2624/Bang/2025, pronounced on 28th April 2026, pertains to Assessment Year 2018-19 and addresses two distinct issues: first, the TDS obligation on year-end accrual entries aggregating to Rs.77,55,264, and second, the question of short deduction on salary payments — specifically variable pay and performance-linked incentives — made to senior managerial personnel.
This ruling carries substantial implications for companies operating under the accrual system of accounting, particularly those in the real estate and construction sector, where year-end provisioning is a common and widespread practice.
Factual Matrix of the Case
Artha Real Estate Corporation Limited, a company engaged in real estate development and construction, had financial ties with the Times of India group. During scrutiny of the tax audit report for AY 2018-19, the Assessing Officer noticed that Column 21 of Form 3CD disclosed that the assessee had failed to deduct TDS on payments made to 16 parties, with the aggregate amount being Rs.77,55,264.
The DCIT, TDS Circle 1(1), Bangalore, accordingly issued a notice under Section 201 of the Income Tax Act, 1961, calling upon the assessee to explain why it should not be treated as an assessee in default for non-deduction of TDS. The AO subsequently passed an order on 24.1.2025, holding the assessee in default and determining:
- TDS shortfall on year-end provisions: Rs.4,78,772
- Interest under
Section 201(1A)for 82 months: Rs.3,92,593 - Short deduction of TDS on salary paid to two senior personnel: Rs.11,40,596
- Interest on salary-related short deduction under
Section 201(1A): Rs.9,35,288 - Total assessed liability: Rs.39,47,249
A parallel issue involved two managerial employees — Mr. R. Chandrasekar, to whom managerial remuneration of Rs.77,23,286 was paid with TDS deducted of only Rs.52,72,006, and Mr. Giridhar Kumar, to whom Rs.50 lakhs was paid with TDS of only Rs.36,49,293. The shortfall in TDS on these salary payments was the basis of the second limb of the demand.
Proceedings Before CIT(Appeals)
The assessee challenged the AO's order before the CIT(Appeals)-4, Delhi, which issued four notices. However, since no response was received from the assessee on any occasion, the CIT(A) dismissed the appeal on grounds of non-prosecution, without examining the merits of the dispute.
This approach by the CIT(A) was squarely criticised by the ITAT, which observed that an appellate authority does not possess the power to dismiss an appeal merely on account of non-prosecution. The ITAT clarified that such dismissal is legally untenable and that the appellate authority is obligated to adjudicate the matter on its substantive merits.
Arguments Raised by the Assessee Before ITAT
The authorised representative, Shri Shesha Hegde, CA, presented the assessee's case before the Tribunal and relied upon a paperbook of 156 pages. The core contentions advanced were as follows: