02 November 2014
The assessee must prepare his books of accounts following the mercantile system of accounting. The same is also followed under section 145 of the Income tax act, 1961.
As per mercantile system of accounting, assessee had to made provision for the expenses which were incurred during the year, but their invoices were yet to be received. All this expenditure are allowable expenditure, even though made on the estimated basis.
Also as per AS 29, provision is the estimation of liability probability of which outflow will be ‘more likely than not’. It means here we are confirmed that whether provision made by us outflow will be there, however the amount will be still unidentifiable. Hence, in this case we can’t make credit to the party against whom we made the provision.
Now a days Income tax department are verifying that TDS had been deducted on this provisional entries made on the year end and disallowing the same under section 40(a)(ia) of the Income tax act, 1961.
The Provision of section 40(a)(ia) requires that Tax has to be deducted at source when amount is paid or credited to the account of the Payee whichever is earlier. When the amount is credited to suspense account or any account by whatever name it is called, then it is treated as amount is credited to the account of the payee and tax has to be deducted at source. Hence Tax has to be deducted at source even on provisions made in the books of accounts to which TDS provisions are applicable.
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