Facilitating TDS credit for income already disclosed in return of income of past years

Learn how the new Income Tax Rule 134 and Form 71 offer relief for taxpayers facing TDS credit mismatch. Discover the procedure, benefits, and limitations of Form 71, allowing you to claim TDS credit for income declared in previous assessment years, even if the TDS was deducted in subsequent financial years. Stay informed to avoid missing the window for claiming TDS credits.

Under the present provisions of Income tax Act 1961, TDS on specified income can be claimed in the year in which income is offered to tax and not otherwise. It means that if the income is booked in the income tax return in the financial year 2022-23, then TDS on said income also should have been ‘deducted and claimed’ in the said financial year 2022-23. If not, TDS credit being inconsumable, would not be available for set off against tax liability and thus the TDS credit will not be of any benefit to the tax payer.

In these circumstances, many individual taxpayers were facing sizable issues pertaining to deduction of tax at source from income in a different year than that of the year in which income was actually received by them and hence were facing legal difficulties in claiming the sums for years together without any remedy.  In all such cases, income tax was being deducted by the deductor (bank or any other deductor) in the financial year in which the income was actually paid to the assessee  whereas, the assessee since was following accrual method, was disclosing this income through his income tax returns based on his books of accounts in any of the earlier years. It is customary practice that the receipts of money for services rendered or collections received from debtors on account of credit sales effected can not be forcasted being unpredictable. In business or profession scenario, the income may not be received in the year in which it is generated and booked but could be received in subsequent year/s in sizable cases. This results in TDS mismatch, since the corresponding income has been offered to tax by the taxpayers in earlier years, where, TDS is being deducted much later when actual payment is being made.  Most of the taxpayers are unaware of the fact that the said sum cannot be claimed as set off against tax liability and yet blindly claim as tax paid while filing income tax returns. They are also unaware of the fact due to legal illiteracy that the credit of TDS in the year in which tax is deducted since income is not offered to tax in that year should not be claimed towards tax paid being contrary to the provisions of tax laws.

The other difficulty the tax payer may face would be that in order to ensure claim of such TDS in earlier year, it may not be feasible for them  to revise the return of past year in which the corresponding income was included, as time to revise the return of income for that year may have lapsed. Now the tax payers can file updated returns under section 139(8A) of the income tax act, 1961 but they have to pay additional tax as per period of default where as in sizable cases, since it would result into claiming refund, updated return will not be of any help to them too.

Illustration 1

An individual Mr. Digambar Parulekar from Ratnagiri was to receive FD interest of Rs 2 lakh in FY 2022-23 (AY 2023-24) from a bank due to which the Union bank of India will be required to effect TDS from interest component as per provisions of the income tax act, 1961. However, due to oversight the bank has deducted tax on FD interest three months latter i.e. on 30^th June 2023 i.e. in FY 2023-24 (AY 2024-25). As the bank deducted tax in the wrong financial year, the individual will not be able to claim credit for this TDS in FY 2023-24 (AY 2024-25). The FD interest was taxable in FY 2022-23 and TDS credit on this income can be claimed only for FY 2022-23 as per the existing provisions of law. The only way to claim TDS would be asking the deductor to revise its TDS return making TDS sum matching with that of income year. However, it may not be workable every time if it does not suit the deductor as component of interest and other penal charges that are required to be paid for this default

Illustration 2

M/S DVS & Co CAs from Pune rendered advice to a client for which they booked a sum of Rs one lakh for professional services rendered in FY 2021-22 (AY 2022-23). The client has paid the professional fees in the year 2023-24 (AY 2024-25) and effected 10% TDS under section 194J of the Income tax act 1961, in the FY 2023-24 (AY 2024-25). The year of deduction is incorrect as it should have been deducted in FY 2021-22 (AY 2022-23) only. The TDS will appear in the 26AS of FY 2023-24 (AY 2024-25) and the CA firm will be eligible to claim this TDS in FY 2023-24(AY 2024-25). However, since there is no corresponding income for services rendered in FY 2023-24 (AY 2024-25), the CA firm will not be able to claim this TDS

Illustration 3

Ms. Manu from Mumbai holds 15000 shares in Fairwell Industries limited where the company has declared dividend for FY 2022-23 (AY 2023-24) to the extent of Rs 15,000. The TDS has been effected in the FY 2023-24 (AY 2024-25). The year of deduction is incorrect as it should have been deducted in FY 2022-23 (AY 2023-24) only. The TDS will appear in the 26AS of FY 2022-23 (AY 2023-24) and the shareholder will be eligible to claim this TDS in FY 2022-23 (AY 2023-24). However, since there is no corresponding dividend in FY 2023-24 (AY 2024-25), the investor will not be able to claim this TDS 

What is the amendment ?

Ministry of finance received several representations from the tax payers that in sizable instances, tax is deducted by the deductor in the year in which the income is actually paid to the assessee rather than in the year in which it is accounted for by the tax payer in any earlier years, causing hardship to them. In order to remove this difficulty, the Budget 2023 inserted a new sub-section (20) in section 155 of the Act. This new sub-section applies where any income has been included in the return of income furnished by an assessee under section 139 of the Act for any assessment year (hereinafter referred to as the “relevant assessment year”) and tax has been deducted at source on such income and paid to the credit of the Central Government in accordance with the provisions of Chapter XVII-B in a subsequent financial year, credit can be availed by such tax payer by observing due procedure laid down recently.

CBDT (Central Board of Direct Taxes) notified Form 71 on August 30, 2023, to enable taxpayers to claim TDS credit for income that has been declared in their income tax returns (ITRs) for a previous assessment year, but the tax was deducted at source (TDS) in a subsequent financial year. In these cases the assessee can make an application in the prescribed form 71 read with new rule 134, to the Assessing Officer within a period of two years from the end of the financial year in which such tax was deducted at source. Then Assessing Officer has to amend the order of assessment or any intimation allowing credit of such tax deducted at source in the relevant assessment year.

Illustration 4

Mr Karim from New Delhi was having a deposit of Rs 50 lakhs with Bank of Maharashtra in the financial year 2021-22 (AY 2022-23) which was to fetch interest at 6%. The interest of Rs 3 lakh was to be paid at the end of the year. The interest for FY 2021-22 (AY 2022-23) was actually paid on 2nd April 2022. The interest sum is appearing in the 26 AS for the year 2022-23 (AY 2023-24) and not FY 2021-22 (AY 2022-23). The depositor will not be eligible to claim TDS for FY 2022-23 (AY 2023-24) as corresponding income is not there in the said financial year.

Now with the introduction of E-Form 71, the depositor now can claim the practically lost credit by filling the e-form 71 and submitting it to the Assessing officer directly rather than begging to the deductor for giving relief. The amended version now allows to file this form e-71 within a period of two years from the end of the financial year in which such deduction of tax was made. In the instant case, since the deduction has been made on 2nd April 2022, the period of two years will commence after the completion of present financial year 2022-23 i.e. on 31^st March 2023  and the assessee can claim this TDS before 31st March 2025. It is a big relief to all tax payers.

The introduction of Form 71 is a welcome move by the government as it will help taxpayers to claim TDS credit for income that has been declared in their ITRs, even if the TDS was deducted in a subsequent financial year. This will help taxpayers to save money on their taxes.

Here are some of the key benefits and limitations of Form 71

• It allows taxpayers to claim TDS credit for income that has been declared in their ITRs, even if the TDS was deducted in a subsequent financial year.
• It saves taxpayers the hassle of approaching the tax deductor and requesting them to revise their TDS return.
• It is a simple and easy-to-use form that can be downloaded from the website of the Income Tax Department.
• The time limit has been prescribed for claiming the TDS which will not allow to claim TDS beyond the stipulated time. Maximum time is practically three years. For Example : If TDS is effected on 1st April 2023, then financial year will end on 31^st March 2024 and two years thereafter means 31^st March 2026. Thus you get maximum of three years period.
• This limitation also ridicules the claim of all mismatch and TDS sums effected before 1^st April 2021. In other words, no previous claims of TDS mismatch will be entertained by the income tax department as per the amended provisions of the law.

The following information must be mentioned in Form 71

• The taxpayer’s name, PAN, and address
• The assessment year in which the income was declared in the ITR
• The financial year in which the TDS was deducted
• The amount of TDS deducted
• The reason for claiming TDS credit

The form must be signed by the taxpayer and submitted to the tax authorities along with a copy of the ITR in which the income was declared.

The tax authorities will then verify the information provided in the form and allow the TDS credit, if it is valid.

Procedure to Submit Form 71

• Proceed to the e-filing portal of the income tax department on the link incometax.gov.in and download the form.
• Fill in the needed information along with the name of the assessee, PAN, and address the assessment year where the income was shown in the income tax return (ITR), the fiscal year where the TDS was deducted, the TDS amount deducted, and lastly the cause to claim the TDS credit.
• The claimant should duly sign the form and provide it to the tax council for the purpose of verification. The form should be validated via an electronic verification code (EVC) or with a digital signature certificate (DSC).

If the tax authorities determine that the claim is genuine, they will take action and give a refund.

A New Income Tax Rule 134

A new Rule 134 is inserted after 133 which expresses regarding the Application under sub-section (20) of section 155 about credit of tax deduction at source. The taxpayer must make the application under sub-section (20) of section 155 will be in Form No. 71.

e-Form No. 71 Will Be Issued Electronically

Form No. 71 will be provided to the Principal Director General of Income-tax (Systems) the Director General of Income-tax (Systems) or the person authorized by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems).

Form No. 71, will get issued electronically, — (i) under a digital signature, if the income tax return (ITR) is needed to get provided under a digital signature; (ii) through an electronic verification code in a case not covered under clause (i).

According to the case, the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), will mention the process to issue Form No. 71 and is indeed liable for developing suitable security, archival, and retrieval procedures with respect to the form that has been provided.

Form No. 71 must be forwarded to the Assessing Officer by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as applicable, or by any individual authorized by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems).

Additional points:

It has been further provided that the provisions of section 154 of the Act shall, so far as may be, apply thereto, and the period of four years specified in sub-section (7) of that section shall be reckoned from the end of the financial year in which such ttax has been deducted. Further, credit of such tax deducted at source shall not be allowed in any other assessment year.

Amendment has also been proposed in section 244A of the Act to provide that the interest on refund arising out of above rectification shall be for the period from the date of the application to the date on which the refund is granted.

These amendments will take effect from 1st October 2023