Mumbai ITAT distinguishes accounting recognition of expenditure from crystallisation of liability to an identified payee

Background

Businesses following the mercantile system of accounting commonly recognise expenditure relating to services received during a financial year even where the corresponding invoices have not been received by the reporting date.

This gives rise to an important TDS question:

Does the mere creation of a year-end provision for expenditure trigger an obligation to deduct tax at source even where the payee and the precise amount payable have not yet been identified or crystallised?

The Mumbai Bench of the Income Tax Appellate Tribunal recently considered this issue in the case of Pfizer Limited.

The Case

Pfizer Limited, engaged in the manufacture, marketing and trading of pharmaceutical products, had created year-end provisions aggregating to approximately ₹50.50 crore towards various expenses, including:

  • commission or brokerage;
  • rent;
  • payments to contractors; and
  • fees for technical services.

No tax was deducted at source at the time of creation of these provisions.

The non-deduction of tax was reported by the tax auditor in paragraph 21(b) and clause 34(a) of Form 3CD. Further, while computing its taxable income, the company suo motu disallowed 30% of the corresponding expenditure under Section 40(a)(ia).

The Assessing Officer nevertheless treated Pfizer as an assessee in default under Section 201(1) and raised a demand of ₹2,22,15,118. Interest of ₹22,21,511 was also levied under Section 201(1A), resulting in an aggregate demand of approximately ₹2.44 crore.

The JCIT(A) deleted the demand, following which the Revenue preferred an appeal before the ITAT.

What Was the Nature of the Year-End Provisions?

This factual aspect is central to understanding the decision.

Pfizer explained that the provisions represented expenditure pertaining to services availed during the relevant financial year. However, at the time the provisions were created:

  • the corresponding invoices had not been received;
  • in several cases, the identity of the vendors or payees had not been ascertained; and
  • the precise amounts payable had not crystallised.

The provisions were reversed on the first day of the succeeding financial year.

Upon receipt of the actual invoices and crystallisation of the liabilities, the corresponding expenditure was accounted for in the names of the respective vendors and tax was deducted at source wherever applicable.

Pfizer therefore contended that a mere accounting provision, in the absence of an identifiable payee and crystallised liability, could not give rise to an obligation to deduct tax at source.

The Central Question

The principal question before the Tribunal was:

Whether the creation of estimated year-end provisions itself constituted a credit attracting TDS where the actual invoices had not been received, the precise liability had not crystallised and the corresponding payees were not identified?

A related issue was whether a demand under Sections 201(1) and 201(1A) could nevertheless be sustained where the corresponding expenditure had already suffered disallowance under Section 40(a)(ia).

Revenue's Position

The Revenue challenged the deletion of the demand by the JCIT(A).

Its case was that the applicable TDS provisions, including Sections 194C, 194H and 194I, required deduction of tax and that the creation of provisions for the relevant expenditure attracted the withholding obligation.

The Revenue also questioned the JCIT(A)'s conclusion that, because the expenditure had suffered disallowance under Section 40(a)(i)/40(a)(ia), a demand could not be raised under Sections 201(1) and 201(1A).

Assessee's Position

Pfizer contended that the year-end provisions were created merely to recognise expenditure relating to services received during the financial year in accordance with the mercantile system of accounting.

At that stage, the invoices had not been received and, in several cases, neither the payee nor the precise liability had been ascertained.

The provisions were subsequently reversed, and upon receipt of invoices and crystallisation of the liability in favour of the respective vendors, TDS was deducted wherever applicable.

Pfizer also relied upon decisions of the Tribunal in its own case for earlier assessment years involving substantially the same issue.

What Did the Mumbai ITAT Hold?

The Tribunal upheld the order of the JCIT(A) and dismissed the Revenue's appeal.

The Tribunal's reasoning brings out an important distinction between recognition of expenditure for accounting purposes and crystallisation of a liability payable to a particular person.

Accounting Recognition and Crystallisation of Liability Are Distinct

The Tribunal observed that Sections 194C, 194H and 194I contemplate deduction of tax at the prescribed stage upon payment or credit, as applicable, to the concerned payee.

Accordingly:

Mere recognition of expenditure in the books of account under the mercantile system cannot, by itself, establish a corresponding credit of an ascertainable amount in favour of an identified payee.

The Tribunal considered the following factual circumstances significant:

  • the provisions were created on an estimated basis;
  • actual invoices had not been received;
  • precise amounts payable were not ascertainable;
  • corresponding payees were not identified at the relevant point of time;
  • provisions were reversed at the beginning of the succeeding financial year; and
  • TDS was deducted upon receipt of actual invoices and crystallisation of the liabilities.

The Tribunal therefore regarded the year-end entries as accounting provisions made for recognising estimated expenditure pertaining to the relevant financial year and not as final credits of ascertainable amounts in favour of identified payees.

Principle of Consistency

The Tribunal also noted that this was not a new controversy in Pfizer's case.

The issue of TDS on similar year-end provisions had been considered repeatedly by coordinate Benches in Pfizer's own case for several earlier assessment years.

On materially similar facts, the Tribunal had taken the view that year-end provisions created before receipt of bills, crystallisation of the actual liability and identification of the payees did not trigger TDS merely upon creation of the provision.

The Tribunal acknowledged that the doctrine of res judicata does not ordinarily apply to income-tax proceedings for different assessment years.

However, where a fundamental issue has repeatedly been decided in an assessee's own case on substantially identical facts, and neither a distinguishing factual feature nor a contrary binding precedent is brought on record, the Tribunal considered that there was no justification for taking a different view merely because the assessment year was different.

Accordingly, the principle of consistency assumed significance.

Could Pfizer Be Treated as an Assessee in Default?

The Tribunal answered this in the negative.

Following the consistent view taken in Pfizer's own case, it held that, in the peculiar facts before it, creation of the year-end provisions did not give rise to an obligation to deduct tax at source at that stage.

Consequently, Pfizer could not be treated as an assessee in default under Section 201(1) in respect of those provisions.

The deletion of the demand of ₹2,22,15,118 under Section 201(1) was therefore upheld.

What About the Disallowance Under Section 40(a)(ia)?

There was a second dimension to the dispute.

Pfizer had itself disallowed 30% of the expenditure aggregating to approximately ₹50.50 crore under Section 40(a)(ia) while computing its taxable income.

The Tribunal noted that its earlier decisions in Pfizer's own case had held that where the relevant expenditure had already suffered disallowance under Section 40(a)(i)/(ia), the same default could not again form the basis for treating the assessee as an assessee in default under Section 201.

Following those decisions, the Tribunal held that the demand under Section 201(1) could not be sustained on this additional ground as well.

Once the Section 201(1) demand was held unsustainable, the consequential interest of ₹22,21,511 under Section 201(1A) was also held to have no independent foundation.

Practical Implications

The ruling is particularly relevant for businesses that create provisions as part of their financial year-end closing process.

However, the decision should not be understood as laying down a blanket proposition that TDS is never applicable to year-end provisions.

The factual character of the provision remains critical.

Where a provision represents merely an accounting estimate and:

the payee is unidentified,
the precise amount has not crystallised, and
no final credit has arisen in favour of a particular person,

the reasoning adopted by the Mumbai ITAT in Pfizer Limited becomes relevant.

Conversely, where the payee is already identified and the liability has crystallised, merely describing the accounting entry as a “provision” may not, by itself, postpone the TDS obligation.

The substance of the liability, rather than the nomenclature assigned to the ledger entry, therefore requires examination.

SSB Perspective

The significance of Pfizer Limited lies in the distinction between accounting accrual and tax withholding.

Under the mercantile system, an enterprise may recognise expenditure in the financial period to which the underlying services relate. The TDS provisions, however, operate by reference to the statutory trigger prescribed for deduction.

The two need not necessarily arise at the same point in time.

From a practical standpoint, the following questions assume significance while reviewing year-end provisions:

Has the payee been identified?

Has the liability crystallised?

Is the amount payable ascertainable?

Has an amount actually been credited to the account of an identified person?

If the provision is subsequently reversed, when is the actual vendor liability recorded and when is TDS deducted?

These questions may be more relevant to the TDS analysis than the mere existence of an accounting provision at the reporting date.

The decision also highlights the importance of maintaining appropriate contemporaneous documentation for material year-end provisions. Organisations may consider documenting the basis of estimation, status of invoices, whether vendors were identifiable, whether liabilities had crystallised, subsequent reversal of provisions and the stage at which TDS was ultimately deducted.

Such documentation may assist in demonstrating the true character of the accounting entry if the withholding-tax treatment is subsequently examined.

At the same time, the ruling must be read within its factual and judicial context. The Tribunal repeatedly referred to the peculiar facts of Pfizer's case and also placed reliance on consistent decisions rendered in Pfizer's own case for earlier assessment years.

Conclusion

The Mumbai ITAT's ruling in Pfizer Limited reinforces an important distinction in the application of TDS provisions to year-end accounting entries.

Recognition of expenditure under the mercantile system does not necessarily mean that an ascertainable liability has simultaneously crystallised in favour of an identified payee.

Where year-end provisions are created on an estimated basis, actual invoices have not been received, the precise liability is not ascertainable and the corresponding payees are not identified, the Tribunal held, on the facts before it, that creation of such provisions did not itself trigger the obligation to deduct tax at source.

The ruling, however, should not be extended to all year-end provisions irrespective of their factual character.

The broader takeaway may therefore be expressed as follows:

For TDS purposes, the substance of a year-end liability — particularly identification of the payee and crystallisation of the amount payable — may be more significant than the mere accounting label of “provision”.

Case Reference

DCIT (TDS)-2(1), Mumbai v. Pfizer Limited
ITA No.: 2882/Mum/2026
Assessment Year: 2019-20
Forum: Income Tax Appellate Tribunal, Mumbai – “C” Bench
Coram: Shri Challa Nagendra Prasad, Judicial Member and Shri G. M. Doss, Accountant Member
Date of hearing: 11 August 2026
Date of pronouncement: 20 August 2026
Relevant provisions: Sections 194C, 194H, 194I, 201(1), 201(1A) and 40(a)(ia) of the Income-tax Act, 1961

The Revenue's appeal against deletion of the demand under Sections 201(1) and 201(1A) was dismissed.

Publication Details

Publication: SSB Tax Insights
Reference: SSB-TI-2026-005
Published by: SSB & Associates, Chartered Accountants
Author: SSB Editorial Team
Reviewed by: CA Sreenivas C S, Partner
Publication Date: 4th September 2026

Disclaimer

This publication is intended solely for general information and knowledge sharing and should not be construed as professional advice or opinion. The analysis is based on the facts and findings recorded in the judicial decision referred to above. The applicability of the principles discussed, particularly in relation to deduction of tax at source on year-end provisions, would depend upon the nature of the underlying expenditure, identification of the payee, crystallisation of the liability, applicable statutory provisions and the facts and circumstances of each case. Readers should examine the applicable law and obtain appropriate professional advice before acting on the basis of this publication.

SSB & Associates
Chartered Accountants