Incorrect Form 26AS Comparison Cannot Restrict Full TDS Credit: ITAT Chennai

Ramasamy Sundarraj Vs ITO (ITAT Chennai)

Summary: The Income Tax Appellate Tribunal, Chennai, allowed the assessee’s appeal for AY 2023-24 concerning restriction of TDS credit because receipts appearing in Form 26AS exceeded the turnover disclosed in the return. The assessee had filed his return declaring net income of Rs. 29,00,927/- and turnover of Rs. 91,02,160/-, against gross receipts of Rs. 2,07,94,903/- in Form 26AS, and claimed TDS credit of Rs. 4,39,266/-. Following processing of the return and a rectification order under section 154, CPC restricted credit to Rs. 1,92,269/-, disallowed Rs. 2,46,997/-, and raised a demand of Rs. 90,934/-. The assessee explained that Form 26AS included Rs. 1,81,80,000/- received on sale of agricultural land, whose exempt character had been accepted.

The grounds of appeal recorded that credit of Rs. 1,81,800/- deducted on the agricultural land transaction had subsequently been allowed in the appeal-effect order, but a residual restriction of Rs. 65,197/- remained. The assessee contended that the authorities had excluded the exempt receipts from the return figures while retaining them in the Form 26AS denominator. Excluding those receipts reduced the comparable Form 26AS figure to Rs. 26,14,903/-, below the disclosed turnover of Rs. 91,02,160/-. He further submitted that the residual amount represented an arithmetical shortfall rather than a separate unsupported TDS transaction: the underlying Rs. 2,57,466/- was supported by Form 16A certificates and Form 26AS. Consequential relief was sought against interest under sections 234B and 234C and for the remaining refund with applicable interest.

The Tribunal noted that the returned income had been accepted in full and that the dispute concerned TDS credit and refund. Reading Rule 37BA with section 199, it held that the authorities’ approach was legally unsustainable. Receipts accepted as non-taxable could not nevertheless continue to depress the TDS credit ratio. The Tribunal also recorded that the TDS was documented and that the first appellate authority had failed to address the assessee’s argument concerning exclusion of agricultural land receipts from the denominator. It held that the presence of exempt receipts, on which tax had also been deducted, did not defeat the assessee’s entitlement to full TDS credit. Setting aside the orders below, it directed the jurisdictional Assessing Officer to allow the claim under ground 5.1, reproducing the refund statement showing a balance refund remaining of Rs. 56,265/-, and allowed the appeal.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This is an appeal preferred by the assessee against the order of Ld. Addl. / JCIT (A)-1 (hereinafter referred as the ‘Ld. Addl. / JCIT(A)-1’), Delhi dated 29.01.2026 for the Assessment Year (hereinafter referred as the ‘AY’) 2023-24.

GROUDS OF APPEAL

Ground 1 Arithmetical Unsustainability of Residual Disallowance of Rs. 65,197/-

1.1 The JCIT(A) and the ITO erred in not adjusting the Rule 37BA denominator after accepting that Rs. 1,81,80,000/- was agricultural land receipt. The residual disallowance of Rs. 65,197/- is arithmetically and legally unsustainable.

1.2 The residual disallowance of Rs. 65,197/- is the direct arithmetical consequence of applying the Rule 37BA ratio using an uncorrected Form 26AS denominator of Rs. 2,07,94,903/- a figure that admittedly includes Rs. 1,81,80,000/- of agricultural land receipt, the exempt nature of which has now been accepted both by the JCIT(A) and by the ITO (Ward-1, Namakkal) in the appeal effect order dated 17.02.2026.

1.3 On correct application of Rule 37BA once agricultural land receipts are excluded from the Form 26AS figure the recomputed position is as follows:

1.4 The ITO, while correctly allowing Rs. 1,81,800/- per the CIT(A) direction, has committed a fundamental error by not simultaneously correcting the Rule 37BA formula. He has treated the agricultural land receipts as excluded from the numerator (return receipts) while leaving them in the denominator (Form 26AS receipts). This internal inconsistency produces an arithmetically absurd outcome: the same receipts are simultaneously accepted as non-taxable (and hence properly excluded from return income) while continuing to reduce the TDS credit ratio in the Form 26AS denominator.

1.5 This is a mathematical impossibility. If Rs. 1,81,80,000/- is accepted as agricultural land receipt not forming part of taxable receipts, it cannot simultaneously remain in the Rule 37BA denominator to depress the TDS credit ratio. The formula must be applied to comparable figures on both sides.

1.6 The Appellant accordingly prays that this Hon’ble Tribunal may hold that the entire Form 16A TDS of Rs. 2.57,466/- is creditable without any Rule 37BA restriction and directs that TDS credit of Rs. 4,39,266/- be allowed in full.

Ground 2- Rule 37BA Proportionate Restriction Has No Application Where Form 26AS Receipts Include Amounts Not Constituting “Income” Under the Act

2.1 Rule 37BA (3) (i) provides for restriction of TDS credit in proportion to income offered to tax where gross receipts in Form 26AS exceed receipts reported in the return. The underlying legislative intent is to prevent a person from claiming credit for TDS on income that has not been offered to tax in the current year.

2.2 This provision has no application where the excess in Form 26AS arises not from under-reporting of taxable income, but from inclusion of receipts that are not “income” chargeable to tax at all. Agricultural land sale consideration is not “income” under the Act, and Section 143(1)(a)(vi) can only trigger addition of “income” appearing in Form 26AS. An amount that is not income under the Act cannot be treated as “income not included in the return” for purposes of Section 143(1)(a)(vi) or Rule 37BA.

2.3 The CBDT’s scheme of Rule 37BA is designed to address mismatches arising from deferred income reporting or multi-year TDS claims it is not designed to penalize an assessee for correctly excluding exempt receipts from taxable income. Applying Rule 37BA in the present facts produces a result that is manifestly contrary to the scheme and intent of Section 199.

2.4 Section 199 of the Act the parent provision governing TDS credit-mandates credit to the person whose income has been subjected to deduction. The section does not restrict credit to cases where the underlying income is taxable. A plain reading of Section 199 entitles the Appellant to credit of Rs. 1,81,800/- deducted u/s 194-IA (which has been granted) and to full credit of the Form 16A TDS of Rs. 2,57,466/- on income fully offered in the return.

2.5 The residual disallowance of Rs. 65,197/- cannot be sustained on any interpretation of Rule 37BA when the corrected figures show that return receipts (Rs. 91,02,160/-) exceed the adjusted Form 26AS receipts (Rs. 26,14,903/-).

Ground 3- The Rs. 65,197/- Disallowance is a Mathematical Residue with No Independent Evidentiary Basis

3.1 The JCIT (A) upheld the disallowance of Rs. 65,197/- solely on the ground that the Appellant “has not submitted any documents or not even contested for the rest of the TDS credit amounting to Rs. 65,197/-.”

3.2 This reasoning is fundamentally erroneous. The Rs. 65,197/- is not separately it is simply the identifiable TDS transaction requiring independent documentation arithmetical difference produced by applying an incorrect Rule 37BA formula to the gross TDS figure. It does not correspond to any specific deductor, income stream or transaction for which separate documentary evidence could be separately produced.

3.3 The correct characterization is as follows:

• Total Form 16A TDS deducted and deposited: Rs. 2, 57,466/- fully documented (Form 26AS, Schedule TDS-1 of return).
• TDS credit allowed under Rule 37BA formula: Rs. 1, 92,269/-
• Disallowed: Rs. 65,197/- (Rs. 2, 57,466/- Rs. 1, 92,269/-)

The Rs. 65,197/- is simply the shortfall in credit arising from the formula undocumented or disputed deduction. Every rupee of the underlying TDS of Rs. 2,57,466/- has been fully evidenced by Form 16A certificates and confirmed in Form 26AS.

3.4 The JCIT(A)’s direction to the AO to verify and allow the Rs. 1,81,800/- which was duly complied with in the appeal effect order was itself predicated on the AIS and Form 26AS being treated as sufficient documentary evidence. The same evidentiary standard applies with even greater force to the Form 16A TDS of Rs. 2,57,466/-, which is corroborated by Form 26AS entries of multiple deductors including TMB, Federal Bank, DBS Bank, Specsmakers Opticians, etc.

3.5 The Appellant had raised this ground specifically before the JCIT (A) in written submissions and the legal note filed, contending that the Rule 37BA formula should be applied after excluding agricultural land receipts from the denominator. The JCIT (A) failed to address this arithmetical argument, and his order is consequently perverse on this point.

Ground 4-Interest u/s 2348 and 234C Is Unsustainable and Liable to Deletion

4.1 The appeal effect order levies interest u/s 234B of Rs. 15,618/- and u/s 234C of Rs. 10,640/- on the Appellant, aggregating Rs. 26,258/-. This interest arises solely because TDS credit of Rs. 65,197/- continues to be withheld.

4.2 Upon restoration of full TDS credit of Rs. 4,39,266/-, the Appellant’s total prepaid taxes (Rs. 4,39,266/- + Rs. 90,000/- + Rs. 3,99,567/- = Rs. 9,28,833/-) exceed the tax liability of Rs. 7,24,390/- by a wide margin, and no interest liability would arise under either Section 234B or 234C.

4.3 The Appellant accordingly prays for deletion of interest of Rs. 26,258/- (Rs. 15,618/- + Rs. 10,640/-) levied in the appeal effect order.

Ground 5 Consequential Relief: Refund Entitlement

5.1 Upon allowance of full TDS credit of Rs. 4,39,266/- and deletion of interest u/s 234B and 234C, the correct refund position is as follows:

5.2 The Appellant prays that consequential direction may be issued for refund of the balance amount together with interest u/s 244A at the applicable rate from the date of payment of Self-Assessment Tax/demand payment to the date of actual refund.

Ground 6- General

The Appellant craves leave of this Hon’ble Tribunal to add, amend, alter or withdraw any of the above grounds at or before the time of hearing.

PRAYER

In view of the foregoing grounds, the Appellant most respectfully prays that this Hon’ble Tribunal may be pleased to:

(a) Hold that the Rule 37BA proportionate restriction formula must be applied after excluding Rs. 1,81,80,000/- of agricultural land receipts from the Form 26AS denominator, whereby the Appellant becomes entitled to full credit of TDS of Rs. 4,39,266/-;

(b) Direct allowance of the residual TDS credit of Rs. 65,197/- that continues to be disallowed in the appeal effect order dated 17.02.2026;

(c) Delete the interest u/s 234B (Rs. 15,618/-) and u/s 234C (Rs. 10,640/-) levied in the appeal effect order aggregating Rs. 26,258/-;

(d) Direct issuance of balance refund of approximately Rs. 56,265/- together with applicable interest u/s 244A; and

(e) Pass such other and further orders as this Hon’ble Tribunal may deem fit and proper in the facts and circumstances of the case.

2. The brief facts of the case are that the assessee is an individual. In the relevant assessment year consideration, the appellant has filed income tax return vide dated: 18.09.2023, disclosing net income of Rs. 29,00,927/-. Declaring total turnover as per books of accounts at Rs. 91,02,160/-, whereas total gross receipts as per Form 26AS stood at Rs. 2,07,94,903/-. The appellant claimed TDS credit of Rs. 4,39,266/-, reflecting the deduction made by government authorities. The CPC processed the return under section 143(1)(a) of the Act and later passed the rectification order u/s. 154 of the Act vide dated: 14.03.2025, restricting the TDS credit to Rs. 1,92,269/-, disallowing Rs. 2,46,997/- by proportionately reducing the TDS claim to match the turnover reported in the books as per Rule 37BA of the Rules. As a result, instead of processing a refund of Rs. 1,85,633/-, CPC raised a demand of Rs. 90,934/-. The appellant being aggrieved with the same preferred appeal before the Ld. Addl./JCIT (A)- Delhi and contends that the difference between turnover as per ITR and turnover as per Form 26AS is solely due to the exclusion of consideration received on sale of agricultural land, which is an exempt income. The Ld. Addl./JCIT (A)- Delhi dismissed the appeal of the assessee. The assessee being further aggrieved with this order preferred the present appeal before us.

3. We have gone through the orders of the CPC, order of the Ld. Addl./JCIT (A)- Delhi and submissions of the assessee along with grounds taken before us. It is observed that the return income filed by the assessee has been accepted in toto by the department, the only dispute in this case is w.r.t. claim of refund made by the assessee in the light of Rule-37BA of the Rules. For better appreciation of the matter under consideration, we deem it fit to reproduce the relevant provisions of Rule 37BA of the Rules as under:

Credit for tax deducted at source for the purposes of section 199.

37BA. (1) Credit for tax deducted at source and paid to the Central Government in accordance with the provisions of Chapter XVII, shall be given to the person to whom payment has been made or credit has been given (hereinafter referred to as deductee) on the basis of information relating to deduction of tax furnished by the deductor to the INCOME-TAX authority or the person authorised by such authority.

(2) (i) Where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, credit for the whole or any part of the tax deducted at source, as the case may be, shall be given to the other person and not to the deductee:

Provided that the deductee files a declaration with the deductor and the deductor reports the tax deduction in the name of the other person in the information relating to deduction of tax referred to in sub-rule (1).

(ii) The declaration filed by the deductee under clause (i) shall contain the name, address, permanent account number of the person to whom credit is to be given, payment or credit in relation to which credit is to be given and reasons for giving credit to such person.

(iii) The deductor shall issue the certificate for deduction of tax at source in the name of the person whose name credit is shown in the information relating to deduction of tax referred to in sub-rule (1) and shall keep the declaration in his safe custody.

(3) (i) Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.

(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.

(3A) Notwithstanding anything contained in sub-rule (1), sub-rule (2) or sub-rule (3), for the purposes of section 194N, credit for tax deducted at source shall be given to the person from whose account tax is deducted and paid to the Central Government account for the assessment year relevant to the previous year in which such tax deduction is made.

(4) Credit for tax deducted at source and paid to the account of the Central Government shall be granted on the basis of—

(i) the information relating to deduction of tax furnished by the deductor to the INCOME-TAX authority or the person authorised by such authority; and

(ii) the information in the return of income in respect of the claim for the credit,

subject verification in accordance with the risk management strategy formulated by the Board from time to time.

4. In view of the provisions of Rule – 37BA of the Rules, the relevant facts of the matter are listed below as below: –

a. The ITO, while correctly allowing Rs. 1,81,800/- per the CIT(A) direction, has committed a fundamental error by not simultaneously correcting the Rule 37BA formula. He has treated the agricultural land receipts as excluding Form 26AS receipts. This inconsistency produces an arithmetically absurd outcome: the same receipts are simultaneously accepted as non-taxable (and hence properly excluded from return income) while continuing to reduce the TDS credit ratio in the Form 26AS denominator;

b. Rule 37BA Proportionate Restriction Has No Application Where Form 26AS Receipts Include Amounts Not Constituting “Income” Under the Act;

c. The CBDT’s scheme of Rule 37BA of the Rules is designed to address mismatches arising from deferred income reporting or multi-year TDS claims. It is not designed for correctly excluding exempt receipts from taxable income. Applying Rule 37BA of the Rules in the present facts produces a result that is manifestly contrary to the scheme and intent of Section 199 of the Act.

d. Rs. 65,197/- is simply the shortfall in credit arising from the formula undocumented or disputed deduction. Every rupee of the underlying TDS of Rs. 2,57,466/- has been fully evidenced by Form 16A certificates and confirmed in Form 26AS as submitted by the assessee along with the return and before the Ld. Addl./JCIT (A)- Delhi.

e. Before the Ld. Addl./JCIT (A)- Delhi, the assessee has already raised in written submissions and the legal note filed, contending that the Rule 37BA of the Rules, formula should be applied after excluding agricultural land receipts from the denominator. The Ld. Addl./JCIT (A)- Delhi failed to address this arithmetical argument.

5. In view of the above facts, r.w.s. 199 of the Act and Rule 37BA of Rules, it is observed that the logic applied by the CPC and confirmed further by the office of the Ld. Addl./JCIT (A)- Delhi is legally not sustainable. The assessee is entitled for the whole amount of TDS, as he already disclosed various income as per the provisions of section 199 of the Act and Rule 37BA of Rules, simply because some exempt is also included in the total income of the assessee (although TDS was deducted on this exempt income also), will not vitiate the claim of the assessee as far as TDS on exempt income is concerned. The logic applied by the CPC and the same being confirmed by the Ld. Addl./JCIT (A)- Delhi is absurd in nature and needs to be set aside.

6. In view of the above the order of the authorities below is set aside and JAO is directed to allow the claim of the assessee as per ground no. 5.1 raised by the assessee and reproduced below for sake of clarity and convenience: –

Resultantly, the grounds raised by the assessee are allowed, in view of above discussions and directions.

7. In the result, the appeal of the assessee is allowed in the above terms.

Order pronounced on the 7th day of October 2026, in Chennai.