Case Law Details
Gerald Sequeira Vs ITO (ITAT Bangalore)
Bengaluru ITAT: TDS Credit Cannot Be Claimed by One Entity When Corresponding Income Is Taxed in Another; Firm Directed to Seek Credit Through Rectification
The Bengaluru Bench of the ITAT held that TDS credit cannot be allowed to an individual assessee where the corresponding income has been offered to tax by a partnership firm, even if the tax was mistakenly deducted under the individual’s PAN. The Tribunal observed that credit for tax deducted at source must ordinarily follow the taxation of the corresponding income, and one entity cannot claim TDS credit in respect of income assessed in the hands of another entity.
In the present case, the assessee had converted his proprietary concern into a partnership firm. Although the business thereafter belonged to the firm, certain long-standing clients continued to deduct TDS under the assessee’s individual PAN instead of the firm’s PAN. Consequently, the TDS appeared in the individual’s Form 26AS, while the corresponding receipts were offered to tax by the partnership firm. The Tribunal upheld the denial of TDS credit to the individual, holding that section 199 and Rule 37BA do not permit a person to claim TDS credit without offering the related income to tax.
However, to ensure that the Revenue does not unjustly retain the benefit of tax already deducted, the Tribunal directed the assessee to file a rectification application under section 154 in the name of the partnership firm. The Assessing Officer was directed to verify whether the firm had offered the corresponding income to tax and, if so, grant the TDS credit to the partnership firm in accordance with law. Thus, while rejecting the individual’s claim, the Tribunal ensured that the TDS credit reaches the entity legally entitled to it. The appeals were allowed for statistical purposes.
Cases Discussed
- Commissioner of Income Tax v. Measures RELCOM (Delhi HC), ITA No. 26/2015, dated 16 January 2015
- Decision of the Andhra Pradesh High Court, 357 ITR 196
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. Both appeals involve a common issue and are therefore disposed of by this consolidated order. ITA No. 1119/Bang/2026 relates to assessment year 2017-18 and arises from the order of the learned CIT(A) dated 5 January 2026, concerning the assessee’s appeal filed on 11 November 2019 against the order dated 25 September 2019 passed under section 154 of the Income-tax Act, 1961 by the Central Processing Centre, Bengaluru.
2. The facts show that the assessee, a senior citizen carrying on business as proprietor of Cargo Links, converted the proprietary concern into a partnership firm and became a partner of that firm. After the conversion, clients were informed that tax deducted at source should thereafter be credited to the firm and not to the assessee’s individual Permanent Account Number. Many clients complied; however, a few, owing to business exigencies and long-standing relationships, continued to deduct tax on the assessee’s individual PAN. The assessee filed his return of income on 16 November 2017 declaring total income of ₹8,99,750. The return was processed under section 143(1) of the Act with certain adjustments. The assessee’s rectification application was rejected, and he therefore preferred an appeal before the learned CIT(A). The only dispute before the learned CIT(A) was the partial denial of TDS credit. The assessee claimed TDS credit of ₹6,18,601, which included TDS relating to income of the partnership firm. As per Form 26AS, the TDS claimed by the assessee was ₹6,18,601, whereas the corresponding receipts were ₹4,11,94,750.
3. The learned Assessing Officer noted that the assessee’s claim related to short credit of TDS. The assessee claimed TDS of ₹6,15,160, whereas the CPC granted credit only to the extent of ₹1,24,082, resulting in short credit of ₹4,91,079. The short credit arose due to a mismatch between the TDS reported in Form 26AS and the TDS claimed in the return of income. The learned CIT(A) held that the requirements of section 199 of the Income-tax Act were not satisfied and, therefore, the assessee was not entitled to full TDS credit. Accordingly, he confirmed the disallowance of TDS credit of ₹4,91,079 on the ground that the corresponding receipts had not been offered to tax by the assessee. According to the learned CIT(A), the assessee would be entitled to credit for tax deducted at source only if the corresponding receipts were chargeable to tax in his hands. The appeal was therefore dismissed.
4. The ld. CIT (A) decided the issue as under :-
“5. DECISION:-
5.1 I have carefully gone through the Intimation u/s 143(1), the subsequent rectification order u/s 154, the grounds of appeal and submission made by the appellant in this regard. Briefly stating facts of the case is that the appellant filed return of income which was processed u/s 143(1) by CPC making certain adjustments over and above the returned income. Rectification request filed by appellant was rejected by the impugned order u/s 154. The only issue involved in this case is that there was short credit of TDS in the Intimation u/s 143(1) from the amount as claimed by appellant in return of income.
5.2 All the grounds of appeal raised by the appellant are against short credit of TDS. Facts involved in the issue is that the appellant filed return of income disclosing taxable income of Rs.8,99,750/- and claiming credit of TDS for Rs.6,15,161/-. While processing the return u/s 143(1), AO, CPC assessed the income at the returned income but allowed credit of TDS to the extent of Rs.1,24,082/- only resulting in short credit by Rs.4,91,079/-. The reason for such short credit as mentioned in the Intimation was mismatch of TDS as reported in Form 26AS from that as claimed in return. On the other hand, during appellate proceedings, the appellant admitted the fact that there was such mismatch but at the same time claimed that the mismatch occurred due to the fact that receipts/payments made by the respective deductors corresponding to the untallied TDS were offered to tax in the return of income of another entity of which the appellant was partner. According to appellant, although income was offered to tax by another taxpayer but credit of corresponding TDS was claimed by him. Since provisions of clause (a) of section 143(1) read with clause (c) of the said section of the Act authorizes the assessing officer (in this case, AO, CPC) to adjust for tax payable/refundable by/to the assessee on the basis of prima facie information available with him, the AO rightly denied the credit of TDS which was not reported in the Form 26AS of the appellant.
5.3 Having analysed the facts involved and details and documents available on record as well as filed by appellant during appellate proceedings, I find that the only dispute is whether credit of TDS claimed by appellant in his return of income should be allowed though the same was missing in Form 26AS. As already briefly stated above, the facts as narrated by appellant are that he was running a proprietorship business in the name of M/s. Cargolinks since 1998 and till 30th September 2015. With effect from 1 st October 2015, the said M/s. Cargolinks was converted from sole proprietorship to partnership firm and appellant became one of the partners of the firm. The business of M/s Cargolinks however remained same even after being converted to firm. The appellant also claimed that all the related business parties from whom business receipts were received were informed about the change with the request to make the payments and deduction of corresponding TDS against the name and PAN of the newly established firm. But though some of them did so but many others continued to make payments and deduct TDS in the PAN of appellant himself. So according to appellant, since the receipts belonged to the firm and offered to tax in the return of the firm, he was compelled to claim credit of TDS in his individual return of income. The appellant has argued that he is legally eligible for such claim of TDS since the corresponding receipts have been taxed albeit in the case of another entity. The appellant also quoted judgement of Hon’ble Delhi High Court in the case of CIT vs Relcom where claim of TDS credit in the name of assessee was upheld though the corresponding receipts were offered to tax by another group entity.
5.4 The legal position on this particular issue is now discussed. Section 199 of the I.T. Act states as under:-
“199(1): Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.
(2) ………………… (3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.
The rule prescribed as per sub-section (3) to section 199 is the Rule 37BA of the I.T. Rules which states as under:-
“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 in 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 subrule (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 to verification in accordance with the risk management strategy formulated by the Board from time to time.” Conjoint reading of the provisions of Sec. 199 and different sub-Rules of Rule 37BA therefore imply that credit of TDS shall be allowed only to that person in whose name such tax is deducted. However, credit of TDS can be claimed by any other person also, subject to certain conditions are fulfilled and declarations and forms filled. 1 st , the person claiming credit of TDS should file a declaration to the deductor to this effect and the deductor will deduct TDS accordingly and 2 nd, the person desirous of claiming such credit should file his or her return of income showing the particular of income and corresponding TDS in the Schedule TDS specifically earmarked for this purpose in the return of income.
5.5 In the present case, none of these conditions have been satisfied either by the appellant or the entity in whose hands the relevant income has been claimed to be disclosed. During the appellate proceedings, the appellant has submitted a number of documents and written submissions. But there is no evidence on record to suggest that either the appellant or the firm has made any such declaration with the concerned deductors. There is also no evidence to suggest that the appellant or firm has filled the Schedule TDS of there respective returns of income wherein the details of income disclosed and corresponding TDS claimed as credit were reported. In fact, appellant’s return of income does not contain any such details in Schedule TDS though it is required to be mandatorily filled in if income is not offered to tax but credit of TDS is claimed. Even after such defaults committed by both the appellant and the firm, if credit of TDS claimed by appellant is allowed to him, though corresponding income is not offered to tax by him on the ground that such income has been offered to tax by some other entity, it will give rise to several legal discrepancies: –
1. There will be mismatch of tax determined as payable or refundable among the two stakeholders. The person claiming credit of TDS may be granted refund with interest u/s 244A which will not be commensurate with the income disclosed by him. Similarly, the person offering the income to tax but not claiming credit of corresponding TDS will be taxed at higher amount with higher amounts of mandatory interests chargeable u/s 234A, 234B and 234C not commensurate with his income.
2. True picture will not be reported if future litigations arise between the two entities and courts of law may not arrive at proper decision on the basis of such incorrect reporting of income and tax determined. Moreover, the issue is not that simple as is tried to be portrayed. Appellant has claimed that income corresponding to the TDS of which he has claimed credit has been offered to tax by another entity. At the assessment stage (be it under summary assessment or regular assessment) the assessing officer has no option to examine and verify whether the entire income has been offered to tax after following the relevant sections of law by such entity because it is not the subject matter before him. Without such verification, it will be legally unsustainable to allow credit of corresponding TDS to some other person. In view of above discussion, I conclude that AO, CPC has justifiably disallowed the credit of TDS to the extent of Rs.4,91,079/- due to not offering to tax the corresponding receipts. The appeal is therefore dismissed.”
5. ITA No. 1120/Bang/2026, for assessment year 2018-19, involves a similar In that appeal also, the learned CIT(A) confirmed the action of the Central Processing Centre in disallowing TDS credit of ₹2,29,176 because the corresponding receipts had not been offered to tax by the assessee. The assessee is therefore in appeal for both assessment years.
6. The learned authorised representative, Shri Narendra Sharma, Advocate, submitted that the assessee was denied the TDS credit claimed in the return of income. He explained that the income had been offered by the partnership firm, while the TDS credit was claimed by the assessee because certain clients, though remitting income to the partnership firm, deducted tax at sourceusing the assessee’s individual PAN instead of the firm’s PAN. Consequently, the TDS credit appeared in the assessee’s Form 26AS. He further submitted that the corresponding income had been fully offered to tax by the partnership firm and that this situation arose only because the assessee’s business structure changed from an individual proprietorship to a partnership firm.
7. Shri Ganesh R. Ghale, learned Standing Counsel for the Department, submitted that the assessee’s claim is not in accordance with law, as the income was offered by one entity while the TDS credit was claimed by another. He contended that there was no infirmity in the orders of the lower authorities in denying the credit. Even if the revenue was fully offered in the hands of the partnership firm, the individual assessee could not claim the corresponding TDS credit. He further submitted that it was for the assessee to coordinate with his clients and request them to revise the TDS statements by correcting the PAN.
8. We have carefully considered the rival submissions and perused the orders of the lower authorities.
9. The appellant, a senior citizen, carried on business as proprietor of M/s. Cargolinks under PAN AMRPS9730Q until 30 September 2015. Thereafter, the business was converted into a partnership firm under PAN AAKFC4782H, in which the appellant became a partner. The nature of business remained unchanged, namely, operating as a Custom House Agent providing clearing and forwarding services and stevedoring services at various ports in India. During the transition from proprietorship to partnership, clients were informed to deduct tax at source in the name of the newly constituted partnership firm. However, certain clients inadvertently continued to deduct tax in the appellant’s individual PAN, resulting in TDS of Rs. 6,02,745/-. Despite repeated requests to the deductors to correct the TDS entries, they did not cooperate, citing internal approval requirements and the lengthy process for revising TDS returns. To resolve the issue, the assessee offered the income in the hands of the firm during audit under section 44AB and paid the necessary taxes, while filing the appellant’s return and claiming TDS credit of Rs. 6,02,745/-. For assessment year 2017-18, the appellant filed his return on 16 November 2017 declaring total income of Rs. 8,99,750. He set off prepaid taxes of Rs. 6,45,161, comprising TDS credit of Rs. 6,15,161 and advance tax of Rs. 30,000, against aggregate tax liability of Rs. 1,02,949, and claimed a refund of Rs. 5,42,210. On processing the return, the CPC did not grant full TDS credit, compelling the appellant to file a rectification application under section 154. In the order dated 25 September 2019 passed under section 154, the CPC again allowed only partial TDS credit of Rs. 1,24,082 and denied credit of Rs. 4,91,079. Aggrieved, the appellant filed an appeal before the CIT(A) on 11 November 2019. By order dated 20 January 2026 under section 250, the CIT(A) sustained the denial of TDS credit of Rs. 4,91,079 on the grounds of non-compliance with section 199 and rule 37BA, which require TDS credit to be allowed only to the person in whose name tax is deducted, and on account of alleged procedural lapses, including failure to file a declaration with the deductor and observations regarding the manner in which the return was filed.
10. The issue is straightforward: the assessee, an individual, converted his proprietary business into a partnership firm. After the conversion, the services were rendered by the partnership firm, and it is stated that the related income was offered to tax in the hands of that firm. However, some clients, who had earlier dealt with the assessee as an individual and continued their business relationship with the partnership firm, deducted tax at source using the assessee’s individual PAN, although the income was remitted to the firm. As a result, the TDS appeared in the assessee’s Form 26AS and not in the firm’s Form 26AS. The assessee claimed the full TDS credit on that basis. The question is whether the individual assessee can claim TDS credit when the corresponding income has not been offered in his return of income. The clear answer is no. We therefore find no infirmity in the action of the Central Processing Centre or in the order of the learned CIT(A) in denying such credit to the assessee. Income offered by one entity cannot give rise to a TDS credit claim by another entity.
11. The learned authorised representative strongly relied on the decision of the Hon’ble Delhi High Court in Commissioner of Income Tax v. Measures RELCOM, ITA No. 26/2015, dated 16 January 2015. In that case, the assessee, M/s. RELCOM, was engaged in the business of erection, commissioning, and installation of towers on a contractual basis. Its Form 26AS reflected total receipts of ₹6,20,99,368, as against ₹19,08,20,903, and TDS credit of ₹1,20,73,097. The assessee explained that the vendor had billed Reliance Engineering Private Limited, its sister concern, for the work, but had mistakenly quoted the assessee’s PAN in the TDS certificate, thereby crediting the TDS to the assessee’s Form 26AS. The Assessing Officer denied the TDS credit, but the CIT(A) allowed it, and the coordinate bench confirmed that decision. The Revenue therefore carried the matter to the Hon’ble High Court. After considering section 199 of the Income-tax Act and relying on the decision of the Andhra Pradesh High Court reported in 357 ITR 196, the Hon’ble Delhi High Court decided the issue against the Revenue. The Court also observed that procedure is the handmaid of justice and cannot be used to defeat a just claim.
12. In the present case, however, we adopt a different course that is consistent with the law as well as the above decision of the Hon’ble High Court. Under section 199 of the Income-tax Act, TDS credit must be granted to the person who has offered the corresponding income to tax. Therefore, in our view, the partnership firm alone is entitled to the TDS credit, and not the individual assessee, who claimed the credit without offering the related income in his return. The Revenue authorities were justified in denying such credit to the individual assessee, and we uphold their action.
13. At the same time, we are conscious that the disputed TDS credit has been denied, although such credit ought to be allowed to the correct assessee, whether the individual or the partnership firm. It is clear that the individual assessee is not entitled to credit for such tax deducted at source. However, it would also be incorrect to deny the partnership firm the TDS credit where the corresponding income has been offered to tax by that firm.
14. Our role is not merely to decide the dispute in appeal but also, where appropriate, to guide the parties toward a lawful resolution. Since the TDS was deducted by clients of the partnership firm in which the assessee is a partner, and since neither entity has effectively received the benefit of that credit, we direct the assessee to file an application under section 154 of the Income-tax Act in the name of the partnership firm for both the years for grant of the TDS credit involved in these two appeals. The learned Assessing Officer shall examine such applications and, if the partnership firm is entitled to the credit, grant the same after proper verification. To these propositions the learned departmental representative has also agreed during the course of the hearing.
15. In the result, the assessee’s appeals for both assessment years are allowed for statistical purposes in the terms indicated above.
Order pronounced in the open court on 20th July, 2026.
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