The Mumbai ITAT came to the aid of a law firm (Naik Naik & Co.) and held that when tax has in fact been deducted at source from the taxpayer’s receipts, its TDS credit cannot be denied merely because the deductor has not deposited the tax or has not correctly reported it, and, therefore, the credit does not surface in Form 26AS.
The Tribunal referred to Section 205 of the Income Tax Act, which erects a clear bar against making a direct demand on the taxpayer to the extent tax has been deducted at source from his income. The moment deduction is shown on the strength of primary evidence, the embargo of section 205 attaches, and the deductee cannot again be called upon to bear the burden.
The Tribunal also observed that once credit is so allowed, the levy of interest under sections 234B and 234C does not survive. Even otherwise, when the tax liability stands met through deduction at source and the difference is occasioned solely by the deductor’s lapse, fastening compensatory interest upon the deductee would be unjust and contrary to the scheme of the Income Tax Act. Hence, the Tribunal directed the AO to delete the interest charged upon the appellant law firm under sections 234B and 234C of the Income Tax Act.
The Division Bench comprising Amit Shukla (Judicial Member) and Girish Agrawal (Accountant Member) criticised the action of the CIT(A) in making Form 26AS the decisive touchstone and casting the burden upon the appellant of securing rectification by the deductors, and pointed out that when primary materials on record show that payments were received net of tax after deduction at source, then insisting on reflection in 26AS as a condition precedent for credit amounts to elevation of form over substance.
The Bench explained that Form 26AS is a departmental statement that reflects the deductor’s compliance, and it does not form part of the taxpayer’s books and the mismatch in Form 26AS attributable to non-compliance by the deductor shall not bar the taxpayer’s rightful claim for TDS credit.
Reference was made to the CBDT Instruction No. 275/29/2014 IT(B), which recorded that taxpayers were being denied credit because deductors failed to deposit the tax, and directed that in such cases coercive recovery should not be enforced from the deductee. The subsequent Office Memorandum dated March 11, 2016, reiterated the same position and directed field officers not to enforce demands created on account of a mismatch of credit due to non-payment by the deductor.
The Bench also negated the view of the Department that the taxpayer must first secure rectification of the deductors’ e-TDS statements and only thereafter obtain credit, as the statute does not impose such a precondition. The Bench emphasized that the deductee has neither control over nor access to the deductor’s filings, and such insistence effectively makes the taxpayer hostage to another’s compliance and empties section 205 of content.
Briefly, the appellant, a well-regarded service law firm, filed its return declaring a total income of Rs. 20.16 crores, and calculated the self-assessment tax thereon at Rs. 7.04 crores and interest of Rs. 8.12 lacs. Against this liability, the appellant claimed TDS credit of Rs. 4.80 crores, advance tax of Rs. 2.20 crores, and self-assessment tax of Rs. 12.34 lacs. The Department, however, denied credit of TDS aggregating to Rs. 96.12 lacs solely on the ground that such amounts did not feature in Form No. 26AS. Additionally, a demand of Rs. 1.09 crores was raised, comprising the disallowed TDS together with interest under section 234B & 234C of the Income Tax.
On appeal before the CIT(A), the appellant produced evidence in the form of invoices, TDS advices, and bank statements showing that payments had indeed been received net of TDS, and claimed that the mismatch with 26AS was entirely attributable to failures by deductors in depositing tax or filing correct e-TDS statements. The CIT(A), however, proceeded to uphold the denial of credit, holding that unless the deduction appears in Form 26AS, the appellant cannot be allowed relief. As regards the levy of interest under sections 234B and 234C, the CIT(A) held the same to be consequential and mandatory.
Cases Relied On:
Yashpal Sahni vs. Rekha Hajarnavis [2007] 293 ITR 539 (Bom)
Pushkar Prabhat Chandra Jain vs. UOI [2019] 103 taxmann.com 106
Incredible Unique Buildcon (P.) Ltd. vs. ITO [2023] 153 taxmann.com 179
Appearances:
Advocates Porus Kaka, Aditya Ajgaonkar, and Rupal Shrimal, for the Appellant/ Taxpayer
Advocate Leyaqat Ali Aafaqui, for the Respondent/ Revenue
