TDS claim – in the case of FDs where TDS is paid periodically and interest income is credited to the account at the maturity of FDs.

Facts:

The assessee was following the cash system of accounting. She was holding cumulative term deposits in a bank entitling her for interest, which was periodically credited by the bank in the deposit account of the assessee.

• During the previous years relevant to the assessment years 1997-98 to 2000-01, the bank deducted tax at source on the interest credited in the deposit account of the assessee and issued TDS certificates to her.

 

• Though the assessee in the returns of income filed for the assessment years 1997-98 to 2000-01 did not disclose the interest income from these deposits as her income, she claimed credit of tax based on TDS certificates issued by the bank.

 

• The Assessing Officer declined to give credit for the tax deducted at source by the bank for the reason that interest income on which deduction of tax was made by the bank was not returned by the assessee in the relevant assessment years.

 

• However, the Assessing Officer accepting the contention of the assessee that she was following the cash system of accounting did not assess any interest income in the assessment years concerned.

 

Analysis of facts:

From a reading of the provisions of section 199, as they stood during the relevant assessment years 1997-98 to 2000-01, it is clear that the assessee is entitled to a credit of tax paid in the assessment year in which the income is assessed. In other words, the assessee should claim credit of tax based on the TDS certificate in the year in which the assessee returns the income from which deduction is made for the purpose of assessment. Even after the amendment of the section through the introduction of sub-section (3) in section 199, the Central Board was authorized to make rules for giving credit for tax deducted at source. As required under that section, rule 37BA was inserted in the Rules by the IT (Sixth Amdt.) Rules, 2009, with effect from 1-4-2009.

Thus, the assessee can retain the TDS certificates and claim credit in the assessment year in which the assessee returns the income on which deduction of tax is made for assessment.

Now the question arises – Whether the Assessing Officer was justified in refusing to give credit for tax deducted at source based on TDS certificates issued by the bank for the reason that income is not returned for assessment by the assessee in the assessment years following the years in which tax is deducted and paid by the bank?

Section 199 makes it clear that the assessee is entitled to a credit of tax based on the TDS certificate only in the assessment year in which income from which tax is deducted is assessed. Therefore, when the statute makes it mandatory that credit of tax based on TDS certificate is available only in the assessment year in which the income from which tax deducted at source is assessed, the Tribunal cannot overrule the statutory provisions.

Conclusion:

Thus, in such cases assessee has two methods of claiming credit of TDS in return for income as given below:

Method 1 –  Going by the practical difficulty to retain TDS certificates for several years until the interest is returned for assessment on the cash basis, prudent assessees should return income on which tax is deducted and remitted by the payer in the assessment year following the year in which such income is subject to deduction of tax and remittance by the payer.

Method 2 – The assessee who does not follow method 1 supra,  should follow section 199 and rule 37BA, retain the TDS certificates, and claim credit in the assessment year in which such income is returned for assessment.

In other words, the assessee should claim credit of tax based on the TDS certificate in the year in which the assessee returns the income from which deduction is made for the purpose of assessment. Even after the amendment of the section through the introduction of sub-section (3) in section 199, the Central Board was authorized to make rules for giving credit for tax deducted at source.