No Rule 37BA Declaration? TDS Credit Cannot Be Denied: ITAT Jodhpur

Summary: TheITAT Jodhpur Bench, in the case of Shri Venktesh Ayurvedic Aushdhalaya, considered denial of TDS credit of Rs. 2,47,910/- arising from a mismatch between the trust’s return and Form 26AS. The assessee, a trust, had purchased securities from its own funds, but the securities were held in the trustee’s name because the trust could not open a demat account in its own name. Consequently, TDS on the interest income was deducted against the trustee’s PAN and reflected in the trustee’s 26AS, while the corresponding interest income was offered to tax by the trust. The CPC allowed only Rs. 9,93,220/- out of the Rs. 12,41,130/- prepaid taxes/TDS claimed. The CIT(A) upheld the denial, holding that Section 199 read with Rule 37BA(2) required a declaration by the deductee nominating the trust for TDS credit. Before the Tribunal, the assessee relied upon Anil Ratanlal Bohora v. ACIT and Prem Mukundan, contending that the declaration is procedural and cannot defeat the substantive entitlement under Section 199. The Tribunal endorsed this distinction, noting that the Revenue could not controvert or distinguish the cited precedents and that the substantive facts of beneficial ownership, funding from trust funds and offering of income to tax were undisputed. Relying also on the principle recognised in Bhooratnam & Co. and Court on Its Own Motion v. CIT, the Tribunal held that the procedural lapse could not justify withholding TDS credit. The CPC/AO was directed to grant TDS credit of Rs. 2,47,910/-, and the appeal was allowed in full.

Introduction

Trusts and other entities that are legally barred from holding certain assets in their own name — most commonly, from opening a demat account, routinely face a peculiar TDS mismatch problem: the income belongs to the entity, but the tax is deducted at source in the PAN of the person in whose name the asset is held (typically a trustee), and consequently never reflects in the entity’s own Form 26AS. The CPC’s automated processing under Section 143(1) is not equipped to look behind this mismatch, and credit for such TDS is routinely denied. The ITAT Jodhpur Bench, in this recent ruling in the case of a public charitable trust running an Ayurvedic dispensary, has reaffirmed that the requirement of filing a declaration under Rule 37BA(2) of the Income Tax Rules, 1962 is a procedural safeguard and not a substantive precondition, and that credit for TDS must follow the person who has actually offered the underlying income to tax, once that fact is established.

Brief facts

The assessee, Shri Venktesh Ayurvedic Aushdhalaya, a trust, filed its return of income for A.Y. 2024-25 claiming credit for prepaid taxes/TDS of Rs. 12,41,130/-. While processing the return under Section 143(1), the CPC allowed credit of only Rs. 9,93,220/-, denying the balance of Rs. 2,47,910/- on the ground of a “mismatch between the tax credits claimed and allowed,” as set out in Table B of the intimation. Three TDS entries, aggregating Rs. 2,47,910/-, did not find corresponding entries in the assessee’s Form 26AS, since Form 26AS did not contain the amounts against the TAN of the relevant deductors as claimed in the return.

The assessee’s explanation was that it had purchased securities out of trust funds, but since a trust is not permitted in law to open a demat account in its own name, the securities were mandatorily held in the name of the trustee. Consequently, TDS on the resultant interest income was deducted against the trustee’s PAN and reflected in the trustee’s 26AS rather than the trust’s. The interest income itself, however, had been returned to tax by the trust, which accordingly claimed credit for the corresponding TDS.

The assessee’s first appeal before the Ld. CIT(A) [Addl/JCIT(A)-01, Nashik] was unsuccessful. The Ld. CIT(A), while not disputing that the investment was made from trust funds through RTGS and that the interest income had been offered to tax by the trust, held that Section 199 read with Rule 37BA(2) of the Income Tax Rules mandatorily required the deductee (the trustee) to file a declaration nominating the trust as the person to whom credit should be given, failing which credit could not be allowed to the trust. The CIT(A) rejected the assessee’s contention that this declaration requirement was merely procedural, and upheld the denial of TDS credit of Rs. 2,47,910/-, leading to the present appeal before the Tribunal.

Contentions of the Assessee

Before the Tribunal, counsel for the assessee did not dispute that no declaration under Rule 37BA(2) had been filed by the trustee. Instead, it was contended that:

• The Ld. CIT(A) had not controverted the underlying facts, that the investment belonged to the trust, was funded through RTGS from the trust’s own bank account, and that the corresponding interest income had in fact been returned to tax by the trust.
• The requirement of filing a declaration under Rule 37BA(2) is a procedural safeguard intended to prevent double claims of the same TDS, and not a substantive condition that can override the statutory mandate of Section 199 that credit must go to the person actually chargeable to tax on the income.
• Reliance was placed on the Pune Bench ruling in Anil Ratanlal Bohora v. ACIT [(2023) 148 taxmann.com 15 (Pune)], where the Tribunal held that once the beneficial ownership of income is established and offered to tax by a person other than the deductee, credit for TDS must follow that person notwithstanding non-filing of the Rule 37BA(2) declaration.
• The Cochin Bench ruling in Prem Mukundan v. ITO [ITA No. 790/Coch/2022] was also cited, where — following the Andhra Pradesh High Court’s decision in CIT v. Bhooratnam & Co. [I.T.T.A. Nos. 117 & 222 of 2012], it was held that the Rule 37BA declaration is a procedural requirement and that credit must go to the beneficial owner of income once that ownership is sufficiently established, even where the declaration could not be filed (in that case, because the deductee had passed away).

Contentions of the Revenue

The Ld. Departmental Representative supported the order of the Ld. CIT(A), but was unable to distinguish the case law relied upon by the assessee’s counsel on the central proposition that the Rule 37BA(2) declaration is directory and procedural rather than mandatory, once the substantive fact of beneficial ownership and the offering of income to tax stood established.

Observation of the Tribunal

The distinction between substantive and procedural provisions

The Tribunal endorsed the reasoning in Anil Ratanlal Bohora, which draws a clear line between the substantive mandate of Section 199 read with Rule 37BA(2), that credit for TDS follows the person in whose hands the corresponding income is chargeable to tax, and the proviso to Rule 37BA(2), which merely prescribes the procedural mechanism (a declaration by the deductee) for giving effect to that substantive right. Non-compliance with a procedural, directory provision cannot be allowed to override or defeat a substantive entitlement.

Precedents cited by the assessee were on point and unrebutted

The Tribunal noted that the Revenue was unable to controvert or distinguish the decisions relied upon by the assessee, Anil Ratanlal Bohora (Pune) and Prem Mukundan (Cochin), the latter itself drawing on the Andhra Pradesh High Court’s ruling in Bhooratnam & Co. that Rule 37BA is a procedural provision governing pending proceedings, and that alterations in procedure are ordinarily to be applied even retrospectively absent good reason to the contrary.

Revenue cannot retain TDS without granting credit to anyone

Echoing the principle recognised in Bhooratnam & Co. and in the Delhi High Court’s suo motu PIL ruling in Court on Its Own Motion v. CIT [W.P.(C) No. 2659 of 2012], the Tribunal implicitly reaffirmed that where tax has genuinely been deducted and deposited with the Government on income that has been duly returned to tax by the rightful owner, the Revenue cannot retain that tax without allowing corresponding credit merely on account of a procedural lapse in documentation between the deductee and deductor.

Substantive facts of beneficial ownership were undisputed

On facts, the Tribunal found that the Ld. CIT(A) had not disputed that the investment was made from the trust’s own funds through RTGS, that the securities were held in the trustee’s name only because the trust could not open a demat account in its own name, and that the interest income had actually been returned to tax in the hands of the trust. With these substantive facts undisputed, the sole ground for denial, absence of a Rule 37BA(2) declaration — could not, by itself, justify withholding the credit.

Conclusion / Result

Holding that credit for TDS could not be denied merely because it was not reflected in the assessee’s Form 26AS and merely for want of the declaration prescribed under Rule 37BA(2), when the substantive condition of the assessee having returned the corresponding interest income to tax stood established, the Tribunal held the issue to be squarely covered in the assessee’s favour by the decisions in Anil Ratanlal Bohora and Prem Mukundan. The CPC/AO was accordingly directed to grant credit of TDS of Rs. 2,47,910/- to the assessee. The grounds raised by the assessee were allowed in these terms, and the appeal was allowed in full.

Key Takeaways for Practitioners

• Where a trust or similar entity is legally barred from holding an asset in its own name and TDS consequently gets deducted against another person’s PAN, credit can still be claimed by the beneficial owner of the income, provided the funding source and the offering of the corresponding income to tax by that owner are clearly documented and demonstrable.
• Non-filing of the Rule 37BA(2) declaration by the deductee is not, by itself, a fatal defect. It is best practice to file the declaration wherever possible, but its absence is curable at the appellate stage by establishing beneficial ownership through independent evidence, bank statements showing the source of funds, and the return of income reflecting the corresponding receipt.
• This ruling adds to a consistent line of Tribunal and High Court authority – including Bhooratnam & Co. (AP High Court), Anil Ratanlal Bohora (Pune ITAT), Prem Mukundan (Cochin ITAT) and Hotel Ashok Garden (Bangalore ITAT, on the parallel TCS provision) – holding that the procedural machinery under Rule 37BA(2)/37-I cannot be used to defeat the substantive credit contemplated under Section 199.
• Where a CPC intimation under Section 143(1) denies TDS credit citing a 26AS mismatch, taxpayers (particularly trusts, HUFs, and joint holders) should specifically examine whether the underlying income and the TDS thereon were deducted in a related party’s PAN, and build the beneficial-ownership case at the first appellate stage itself rather than treating the mismatch as a lost cause.
• Assessing Officers giving effect to such orders should verify only that there is no double claim of the same TDS by both the deductee and the beneficial owner, once that is confirmed, credit cannot be withheld on documentation grounds alone.