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The credit of TDS to be given for the assessment year in which invoices are raised

In terms of Rule 37BA(3)(i) benefit of TDS is to be given for assessment year for which corresponding income is assessable, therefore, where the assessee raised invoice on ‘A’ in March 2011, the benefit of TDS had to be allowed in the assessment year 2011-12 even though the tax on invoice amount was deposited by ‘A’ in April 2011. So, in no case TDS credit can be given in other assessment years.

Assessee to reconcile income vis-à-vis TDS credit

Total freight collected by the assessee was Rs.30.53 crores and that the assessee paid freight to shipping companies at Rs.25.56 crores thus resulting in a balance of Rs.4.97 crores as gross income in its Profit and Loss Account, which was not disputed by the Assessing Officer.

The Assessing Officer did not allow full TDS credit of Rs.76,16,380/- to the assessee, as in the opinion of the Assessing Officer, since the assessee had not accounted for the entire gross receipts of Rs.30.53 crores it was not entitled to claim the full TDS credit of Rs.76,16,380/- and the Assessing Officer restricted the TDS credit to Rs.12,37,993/-

Even in various appeals TDS credit was not allowed as it is the responsibility of the assessee to reconcile TDS credit with income exposed to tax. The onus is on the assessee to make proper reconciliation of the differences between the receipts as per TDS certificates and that of as per Profit and Loss Account lay relevant evidence/material in support of its contentions/explanation.

No denial of TDS even in the absence of Form 16A (TDS certificates)

The Gujarat High Court in the case of Sumit Devendra Rajani v. Asstt. CIT [2014] 49 taxmann.com 31 (Gujarat), involving the assessment year 2010-11, held that “where the deductor having deducted TDS, issued Form No. 16A, credit of the same cannot be denied to the assessee-deductee solely on the ground that such credit does not appear on the ITD system of the department and/or the same does not match with the ITD system of the department.”

Any receipts do not become taxable just because TDS is deducted from it

Income and chargeability are two separate terms defined under the Act under 2(24) of the Act and Sec 4 of the Act respectively. Every transaction has to be tested separately as per the definition in the Act and then only the provisions of Chapter XVII- B of the Act can be applied.

If a Fixed Deposit is made by an assessee in the process of setting up a new project as security for opening an L/C for import of Plant and Machinery, then interest on such Fixed Deposit does not constitute income but is liable to be netted off against the cost of setting up of the project. In such cases, the interest on Fixed Deposit does not constitute income under the charging provisions of Section 4 of the Act. In such cases however the Revenue cannot claim the interest to be chargeable to tax under section 4 of the Act even if the Bank deducts tax on such interest income under section 194A of the Act by taking recourse to Sec. 198 of the Act.

Facts of the case:

S had engaged the services of the assessee for collection of the subscription amount against the commission and the assessee had remitted the entire gross amount received from the cable operators to S. The amount remitted by the assessee to S included the number of TDS deducted by the cable operators at the time of payment made by them to the assessee.

The assessee company filed its return of income for the assessment year 2010-2011 on 24.09.2010 declaring an income of Rs.13,62,81,800/-. The Assessing Officer while computing the assessment under section 143(3) of the Act, assessed the income at the same figure of Rs.13,62,81,800/- However, the Assessing Officer had not allowed the assessee’s claim of credit for TDS of Rs.2,46,80,256/- on the ground that the concerned income was not offered to tax in the return of income. The Assessing Officer in his order on noticing that the assessee had not included the subscription charges of Rs.86,34,97,146/- corresponding to the TDS amount of Rs.2,46,80,256/- in the Profit and Loss account, disallowed the credit for the corresponding TDS.

Arguments in favor of allowing TDS credit are as below:

• Since tax had already been deducted and paid to the Government at the time of making collections, it (the assessee) was entitled to get the credit of the same while receiving commission income.

• The amounts collected by the assessee were credited to the separate account ‘Subscription Charges’ and the said account was debited at the end of the Financial Year when the amounts were paid to S.

• As the subscription collected by the assessee from various cable operators was not the income of the assessee, the same was not shown in its Profit & Loss account.

• The fact of the situation was that the cable operators were deducting tax at source on the payments of subscription made to the assessee, whereas, the assessee was remitting the gross amount to S.

Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) and finally to High Court.

Analysis of facts:

• To examine the same, the Bench called for Profit and Loss account and Ledger accounts to know, how the subscription received was accounted in the assessee’s books. The assessee’s counsel filed only financial statements and not filed ledger accounts of subscription received accounts.

• Hence, we are not in a position to express any opinion whether the assessee is having an element of income from subscription charges received from various parties.

• Therefore, if the entire subscription received by the assessee is transferred to S and the assessee is entitled only to commission on subscription income, then TDS credit may be allowed to assessee.

• The assessee was entitled to a fixed commission on the collection amount on behalf of S. The Agreement dated 14^th October 2002 were self-explanatory about the services provided by the assessee with regard to the collection of Subscription Charges on behalf of S for a fixed commission and that the Agreement was entered as early as on 14^th October,.2002 (i.e.) much prior to the Assessment Years 2009-10, 2010-11 and 2011-12.

• These collection charges had been credited to the account “Subscription Charges” as and when they were billed and this account had been debited at the end of the financial year when the same was paid back to S.

• The amounts in question had been routed through the accounts maintained by the assessee, which formed part of the Balance Sheet and in turn, formed part of the Profit and Loss Account and therefore did not partake the character of income or expenses or capital in the hands of the assessee.

Conclusion:

Thus, the assessee was entitled to receive a credit of the tax deducted at source under section 199 of the Act subject to production of TDS Certificates received from respective deductors.

Case 1: The assessee had been taking contracts in its name as well as in the names of its director and the Assessing Officer agreeing with the contentions of the assessee that as both the receipts were deposited in the assessee company’s accounts it was entitled to claim credit of TDS reflected in Form 26AS in the case of the director passed the Assessment Order for the assessment years 2010-11 and 2011-12 subject to verification that TDS had not been claimed by the director.

Against such directions, the assessee filed appeals before the Commissioner of Income-tax (Appeals). Though the appeals were allowed by the Commissioner of Income-tax (Appeals), the issue of claiming and granting of TDS credit in the account of the director as appearing in Form 26AS in the hands of the assessee was not the subject matter of the appeal.

As the assessment orders passed by the Assessing Officer were found to be erroneous and prejudicial to the interest of the Revenue, the Principal Commissioner of Income-tax, exercising his jurisdiction under section 263 of the Act, issued a notice to the assessee and by virtue of his order directed the Assessing Officer to revise the assessment by giving credit to the extent of TDS certificate issued in the name of the assessee only and withdraw the TDS certificate in the name of the director.

The Tribunal also held at para.17 of its order as under-

“There is no denial in the written submissions filed by the assessee before the Principal Commissioner of Income-tax and before us that at the relevant time, the order was passed by the Assessing Officer, Rule 37BA was applicable. Further, the assessee has failed to mention that the case of the assessee would fall in any of the ingredients mentioned in Rule 37BA, as reproduced by the Principal Commissioner of Income-tax in para 2 of the impugned order. In view of the legal position, the opinion formed by the Principal Commissioner of Income-tax that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue cannot be faulted”

Thus, the issue was answered against the assessee, and TDS reflecting in 26AS of the director was not given to the assessee company.

Case 2: The facts of the case which arose before the Madras High Court in Madura Coats Ltd. v. CIT [1986] 25 Taxman 200 (Mad) were the assessee company was formed by the amalgamation of three companies. The amalgamation took place on January 1, 1975, with retrospective effect from July 1, 1974. During the accounting year relevant to the assessment year 1976-77, two of the three companies which held shares in the third company were entitled to dividend income on the said shares, and on the said dividend income, the tax was deducted at source. This dividend was declared at the annual general meeting of the company held on December 27, 1974.

The assessee’s claim before the Assessing Officer that the dividend income could not be taken as its income but the tax deducted at source from the said dividend should be given credit to in its assessment was rejected by the Assessing Officer who held that the dividend was the income of the amalgamated company as per the terms of the amalgamation.

The Commissioner of Income-tax (Appeals), however, directed the Assessing Officer to exclude the dividend income from the total income of the assessee and as regards the tax deducted at source, he held that the proper person should approach the concerned authority for a refund of the tax wrongly deducted.

The Tribunal held that the tax deducted at source could not be given credit to the assessee in whose hands the dividend income had not been taxed.

The High Court, dismissing the petition, held that the finding of the Tribunal that the dividend income could not be treated as the income of the amalgamated company viz., the assessee, automatically resulted in the tax deducted at source from the said gross dividend not being part of the assessee’s income. The tax deducted at source could be given credit only in the case of the company in whose hands the income was to be assessed and as per section 198 of the Income-tax Act, 1961, the tax deducted at source would be the income received by the erstwhile companies which owned the shares in respect of which the dividend was declared. Accordingly, credit for the tax deducted at the source from the said dividend could not be given to the assessee.

Case 3: The Madras High Court in the case of CIT v. Tanjore Permanent Bank Ltd. [1987] 30 Taxman 265 (Mad.) held that:

“It is well settled that a tax credit can be given only in cases where the tax is paid on the income in respect of which tax has been deducted at source and which is offered for assessment.”

The assessee-bank, in this case, advanced money to its constituents, bought bonds of Electricity Board for them but in its own name, kept them in its own custody but the real and beneficial owners were the said constituents and the assessee-bank claimed credit for tax deducted at source on interest income of the said bonds through interest income from the said bonds had not been included by the assessee in its return. The Assessing Officer allowed credit for the said tax deducted at source but subsequently withdrew it by passing an order under section 154 of the Act. The High Court, reversing the order passed by the Tribunal, held that giving credit of tax deducted at source on the said interest income which had not been included in assessee’s total income amounted to a mistake apparent from record amenable to rectification under section 154 of the Act by the Assessing Officer.

Facts of the case:

• The original assessee Shri S. P. Patel (hereinafter referred to as “the assessee”) and his brother were partners in a firm known as M/s. Patel Brothers having 50 percent, share each in the profit and loss of the firm.

• The assessee held several equity shares of limited companies from which dividend income was received.

• Up to and inclusive of the assessment year 1971-72, the assessee was given the credit of tax deducted at source (TDS) from the dividend income.

• However, for the assessment years in question, namely, the assessment year 1972-73 and 1976-77, the Income-tax Officer declined to give credit of TDS from the dividend income to the assessee on the ground that the shares belonged to the firm and accordingly held that that the firm is entitled to the credit of the TDS amount.

Analysis of facts:

The shares from which dividend income was earned stood in the name of the assessee, TDS certificates issued by the company stood in the name of the assessee and moreover, admittedly the dividend income has also been assessed in the hands of the assessee. He submitted that the first proviso to section 199 comes into operation only if the dividend income is to be taxed in the hands of a person other than the shareholder.

The dividend income is admittedly taxed in the hands of the assessee/shareholder. Once the dividend income is assessed in the hands of the assessee/shareholder, the proviso to section 199 of the Act would have no application and consequently denying the credit of TDS to the assessee/shareholder does not arise at all.

The Bombay High Court in the case of Yezdi Hirji Malegam v. CIT [2008] 299 ITR 329 (Bombay) held that “The first proviso to section 199 of the Act, read with rule 30A, inter alia, provides for giving credit for TDS to the firm where dividend income is to be taxed in hands of firm and not to partner; once dividend income is assessed in hands of shareholder-partner, proviso to section 199 would have no application and consequently the question of denying credit of TDS to partner does not arise at all.”

The assessment years involved in this case were 1972-73 and 1976-77 and the law, as it stood then, provided for allocation of firm’s income together with tax to partners’ income. In other words, the share income of a partner was taxed twice in the relevant assessment years with proportionate credit of the firm’s tax in the hands of a partner.

To put it differently each section in the Income-tax Act would have application in so far as the purpose for which it has been enacted is concerned except in cases wherein it has been provided otherwise enlarging the scope of that section.

Conclusion:

Therefore, in the present case, admittedly the dividend income was taxed in the hands of the assessee/shareholder. And hence, denial of credit of TDS based on the decision of the Tribunal in the case of the assessee for the assessment year 1974-75, cannot be sustained.

Facts:

1. The assessee derived income from the business of erection, commissioning, and installation of towers on a contract basis.
2. The Assessing Officer noticed that total receipts declared by the assessee were less than the amount on which TDS credit was claimed. [Rs. 6,20,99,368/- as opposed to Rs. 19,08,20,903/- & the TDS claimed was Rs. 1,20,73,097/-]
3. The assessee explained that discrepancy arose because the vendor had billed the assessee’s sister company REPL for the work but had mistakenly mentioned the assessee’s PAN in the TDS certificate and, thus, inadvertently crediting assessee’s TDS account in the 26AS statement, which was PAN-based.
4. The assessee had claimed credit of all TDS certificates, including those related to REPL stating that benefit of the TDS certificates mistakenly issued in the assessee’s PAN name had not been availed by REPL. The total TDS claim made by the assessee was Rs. 1,20,73,097/- against a total of Rs. 19,08,20,903/- received.
5. The Assessing Officer rejected the assessee’s claim relying on section 199 and held that the TDS credit should be allowed to the person from whose income the deduction was made.
6. On appeal, the Commissioner (Appeals) allowed the assessee’s claim on the ground that since the assessee had already paid the due taxes in REPL, it would be a travesty of justice to not allow the benefit of TDS to the assessee. The Tribunal upheld the order of the Commissioner (Appeals).

Analysis of facts:

“199. Credit for tax deducted.

(1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of the property or of the unit-holder, or of the shareholder, as the case may be.

(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.”

Revenue cannot be allowed to retain tax without credit being allowed to anybody: Revenue cannot be allowed to retain tax deducted at the source without the credit is available to anybody. If the credit of tax is not allowed to the assessee, and the joint venture (sister concern in the above case) has not filed a return of income, then credit of the TDS cannot be taken by anybody. This is not the spirit and intention of the law. Also, the procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice.

Applicability of rule 37A: At this stage, it is also relevant to note the provisions of Rule 37BA of the Income Tax Rules, 1962, which envisions grant of TDS credit to entities other than the deductee (herein, M/s REPL). We must clarify that we are not oblivious of the fact that Rule 37BA is not directly applicable in the facts of this case. The reliance placed on Rule 37BA is merely to demonstrate that in not all circumstances is TDS credit given to the deductee.

Conclusion:

When can the assessee claim credit of TDS even in the case of mistake of credit of TDS to a wrongly but related person/account?

Where due to an inadvertent mistake of the vendor, the TDS relating to the assessee’s sister concern was credited to the assessee’s TDS account, the assessee could claim credit of such TDS, provided its sister concern had not availed the benefit of such TDS certificates.

A few extracts from this decision would probably indicate that even after an amendment to rule 37BA, credit for TDS can be claimed by the person who is not liable to pay tax on the receipt covered by that TDS.

1. TDS benefit may be taken even in cases where corresponding income is not offered for tax

“The Assessing Officer denied credit of TDS in the hands of the assessee on the ground that corresponding income by way of compensation has not been offered to tax. – It is worth noting here that once TDS certificates are in the name of the assessee and credit for such TDS is appeared in the name of the assessee in the AIR database and also the fact that the particular income is not taxable either in the hands of the assessee or in the hands of the HUF credit for TDS cannot be rejected merely on the ground that the corresponding income has not been offered to tax.

There is merit in the arguments for the reason that when a particular income is exempt from tax in view of specific provisions provided under section 10(37) and also the fact that the HUFs have declared the compensation received on account of compulsory acquisition of agricultural land in their return of income and claimed exemption under section 10(37) there is no reason for the Assessing Officer to deny credit for TDS merely on the ground that no income has been offered to tax in the hands of the assessee. The compensation received on account of compulsory acquisition of agricultural land is exempt from tax under section 10(37).

It is further noticed that HUFs have declared the said compensation in the return of income. It is also undisputed that the HUFs have not claimed credit for TDS in their return of income.

Therefore, when the facts are clear in respect of exemption of particular receipt in the hands of the assessee as well as HUFs, the question of offering such income for tax in the hands of the assessee does not arise.

2. Where credit of TDS is appearing in AIR database and assessee have furnished TDS certificate

When the credit for such TDS is appearing in the name of the assessee in the AIR database and the assessee has furnished the necessary TDS certificate in his name, the Assessing Officer erred in rejecting the claim of credit for TDS by citing the provisions of section 199 read with rule 37BA.

Therefore, the revenue’s contention that the assessee instead of claiming the entire TDS amount ought to have sought a correction of the vendor’s mistake would unnecessarily have prolonged the entire process of seeking a refund based on TDS credit. Therefore, the Assessing Officer erred in denying credit of TDS to the assessee.