TDS Credit Mismatch: Assessee Right vs Form 26AS

Upasani Super Speciality Hospital Pvt. Ltd. Vs. ITO (ITAT Mumbai)

Legal Issue:-

Whether the assessee company, having offered the income to tax, is entitled to credit of TDS though such tax was erroneously deducted and reported in the PAN of the erstwhile partnership firm and not reflected in the assessee’s Form 26AS.

The learned Authorised Representative for the assessee reiterated that the income in respect of which TDS was deducted had been duly offered to tax in the hands of the assessee company; that the partnership firm had not claimed the credit in its return; that the assessee’s computations and annexures (A to C) demonstrated the bona fides of its claim; and that, despite complete invoices being raised by it, the deductors, by sheer error, made the deduction in the PAN of the partnership firm. It was emphasised that the assessee should not be penalised for the deductors’ lapse, and denial of such credit would result in double taxation of the same income, a result neither sanctioned by law nor by equity.

Statutory Framework

1. Section 199(1) – Credit for TDS

“Any deduction made in accordance with the provisions of Chapter XVII and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose income the deduction was made…”

Interpretation:

The focus is on “the person from whose income the deduction was made”, not necessarily the PAN mentioned in the TDS return.

Hence, the substantive right to credit follows the income, not the PAN.

2. Rule 37BA of the Income-tax Rules, 1962: Sub-rule (2):

(i) Where under any provision 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, as the case may be, shall be given to such other person.

(ii) The deductee shall file a declaration with the deductor and the deductor shall report the tax deduction in the name of the other person.

Legislative Intent:

This rule codifies the principle that TDS credit follows the income. The procedural requirement (filing of declaration and reporting) is directory, not substantive — the substance of taxation should prevail over form.

3. Section 205 – Bar against direct demand on the assessee

“Where tax is deductible at source… the assessee shall not be called upon to pay the tax himself to the extent to which such tax has been deducted from that income.”

Implication:

Once tax has been deducted and paid to the exchequer, the Revenue cannot demand it again from the assessee on the ground of reporting mismatch.

Otherwise, it results in double taxation of the same income.

Judicial Precedents Relied Upon

(1) Court on Its Own Motion v. CIT (2013) 352 ITR 273 (Delhi HC):Denying credit to a taxpayer merely due to mismatch in TDS reporting amounts to unjust harassment.

• Revenue must exercise powers under Section 133 to verify facts and grant due credit.
• Once the tax is deducted and paid to the Government, credit cannot be denied to the assessee whose income has been taxed.

Key Observations:

“The Revenue cannot pretend helplessness and remain a silent spectator… genuine taxpayers cannot be made to suffer due to the fault of the deductor.” The Hon’ble High Court admonished the Revenue for merely writing letters to deductors, observing that such perfunctory steps cannot be a substitute for statutory action. It was categorically held that the Assessing Officer is empowered to issue notices under Section 133, to compel deductors to furnish correct details, and to ensure that credit is granted to the person whose income has borne the tax. The Court directed that when an assessee approaches the Assessing Officer with requisite particulars, the officer must verify whether the tax has indeed been deducted and deposited, and upon satisfaction, grant credit to the assessee. To deny credit in such cases, the Court held, would amount to treating the taxpayer unjustly and would erode faith in the fairness of the system.

(2) DCIT v. Reliance Infrastructure Ltd. (ITA Nos. 233 & 234/Mum/2023, ITAT Mumbai):-Section 199(1) and Rule 37BA(2) must be read harmoniously.

• The legislative intent is to ensure that TDS credit follows the income, not the deductee’s PAN.
• Denying credit due to procedural lapses by the deductor results in double taxation, which is contrary to equity and legislative intent.

(3) Yashpal Sahni v. Rekha Hajarnavis, ACIT (2007) 293 ITR 539 (Bom.)Once tax is deducted at source and paid to the Government, the deductee cannot be denied its credit, even if the deductor fails to issue proper TDS certificates or make correct entries.

Revenue must recover the deficiency, if any, from the deductor.

(4) Om Prakash Gattani v. ITO (2000) 242 ITR 638 (Gau.)Procedural lapses in deduction or reporting of TDS cannot defeat the substantive right of the assessee to claim credit once the underlying income is taxed.

Tribunal’s Legal Reasoning: 

1. Undisputed Facts:

• The assessee company took over the business of the erstwhile partnership firm.
• Income was fully offered to tax by the company.
• The firm neither carried on business nor claimed TDS credit.
• Tax was deducted and paid to the Government, but reported against the firm’s PAN.

2. Substantive vs. Procedural Aspect:

• TDS represents tax on the income, not on the person.
• The real question is: whose income has suffered deduction?

Since the assessee company offered that income to tax, the corresponding TDS belongs to it.

3. Rule 37BA – Purpose and Compliance:

• Though the Rule requires declaration and reporting, these are procedural safeguards to prevent double claim — not conditions precedent to the right of credit.
• Here, the firm expressly admitted non-claim; thus, the risk of double credit did not exist.

4. No Double Taxation:

• The same income cannot be taxed once without granting corresponding credit.
• Such denial would violate Section 199(1) and the basic scheme of the Act.

5. Equitable and Purposive Interpretation:

• The Tribunal emphasised that the law must be interpreted to advance the remedy and suppress the mischief — i.e., avoid unjust loss to genuine taxpayers due to others’ errors.

6. System Constraints Not a Defence:

• The CPC’s technical inability to process credit in absence of 26AS reflection cannot override statutory provisions.
• Assessing Officers must use verification powers under Sections 133 & 154.

Conclusion and Direction (ITAT’s Finding)

• The assessee company is entitled to credit of ₹9,88,132 being TDS deducted on income offered to tax in its hands.
• The Assessing Officer was directed to verify that the partnership firm had not claimed such credit (which was already admitted in its return) and then grant full TDS credit.
• Denial of credit merely for non-reflection in Form 26AS is not permissible in law.