ITAT Allows TDS credit although corresponding income declared by Sister concern

The case Haddock Propbuild Pvt. Ltd. Vs ITO (ITAT Delhi) addresses whether tax deducted at source (TDS) credit can be denied merely because the deductee has not offered the corresponding income to tax, even though the income has already been taxed in the hands of another entity. The Tribunal held that Section 199 of the Income-tax Act, read with Rule 37BA, is a machinery provision intended to ensure proper credit of taxes paid and must be applied pragmatically. In this case, although TDS was reflected in the assessee’s Form 26AS, the underlying income had accrued to and was duly offered to tax by the principal entity under a collaboration arrangement. The Tribunal observed that income must be taxed in the hands of the real recipient and that denying TDS credit in such circumstances would lead to double taxation and unjust enrichment of the Revenue. Relying on binding High Court precedents, the Tribunal directed the Assessing Officer to grant TDS credit after verifying that no double claim was made, emphasizing substance over form.

Facts:

• The assessee, Haddock Propbuild Pvt. Ltd., is a company incorporated under the Companies Act, engaged in the business of real estate development. For the Assessment Year 2017–18, the assessee filed its return of income on 27.10.2017, declaring a loss of ₹6,995 and claiming a refund of ₹3,41,286, representing tax deducted at source (TDS).
• The return was processed by the Centralised Processing Centre (CPC) and an intimation under section 143(1) of the Income-tax Act, 1961 was issued on 27.10.2019. While processing the return, the CPC denied the entire credit of TDS amounting to ₹3,41,286, on the ground that the corresponding income against which tax had been deducted at source was not offered to tax in the return of income filed by the assessee.
• Aggrieved by the denial of TDS credit, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who upheld the action of the CPC. The assessee thereafter approached the Income Tax Appellate Tribunal, which, in the first round of litigation, set aside the matter to the file of the Assessing Officer, directing him to verify that whether the TDS credit was duly reflected in Form 26AS, and whether the income corresponding to such TDS had been offered to tax, and accordingly to grant TDS credit.
• Pursuant to the directions of the Tribunal, the Assessing Officer again examined the claim. However, the Assessing Officer once again disallowed the TDS credit, holding that since the assessee itself had not offered the corresponding income to tax, the condition under section 199 of the Act was not satisfied. This action was once again confirmed by the CIT(A)/National Faceless Appeal Centre (NFAC).
• The assessee carried the matter in second appeal before the ITAT.
• Before the Tribunal, the assessee explained the commercial arrangement underlying the transaction. It was submitted that the assessee had entered into a collaboration agreement with EMAAR MGF Land Limited, under which the assessee was entrusted with the task of procuring land for development purposes. Although the land stood registered in the name of the assessee for operational convenience, the entire project was conceived, controlled and executed by EMAAR MGF Land Limited.
• Under the terms of the collaboration agreement, the assessee acted merely as a facilitating entity, the entire economic benefit and income from the project accrued to EMAAR MGF Land Limited, and the assessee was contractually obliged to pass on the receipts to EMAAR MGF.
• During the relevant year, tax was deducted at source on certain payments, and such TDS of ₹3,41,285 was reflected in Form 26AS in the name of the assessee. However, consistent with the contractual arrangement, the corresponding income of ₹3,41,28,527 was offered to tax by EMAAR MGF Land Limited in its own return of income.
• To substantiate this position, the assessee placed on record Form 26AS reflecting deduction and deposit of TDS, and a written confirmation from EMAAR MGF Land Limited, certifying that the corresponding income had been duly offered to tax in its return, and no credit of the impugned TDS had been claimed by EMAAR MGF.
• The assessee contended that denial of TDS credit in such circumstances would result in unjust enrichment of the Revenue, as tax had been deducted, deposited, and income had already suffered tax in the hands of another entity.
• In support of its claim, the assessee placed reliance on binding judicial precedents, including CIT v. Relcom (Delhi High Court, ITA No. 26 of 2015), CIT v. Bhooratnam & Co. (2013) 357 ITR 196 (Andhra Pradesh), and various decisions of the Income Tax Appellate Tribunal holding that TDS credit cannot be denied merely because the corresponding income is assessed in the hands of another person, provided the income is taxed and the TDS credit is not availed by anyone else.
• The Revenue, on the other hand, relied upon the literal interpretation of section 199, contending that TDS credit can be granted only to the person in whose hands the corresponding income is assessable, and since the assessee had not offered the income to tax, the denial of TDS credit was justified.

Issues:

• Whether the assessee is entitled to credit of TDS under section 199 of the Income-tax Act when the corresponding income has been offered to tax by its principal / sister concern, and not by the assessee itself.
• Whether the denial of TDS credit on the ground that the corresponding income was not offered in the assessee’s return is legally sustainable.
• Whether the Revenue can retain tax deducted at source without granting credit to any person, when it is undisputed that the TDS has been deducted, deposited, and reflected in Form 26AS.

Observations:

• The Tribunal examined the controversy in the light of the statutory provisions governing credit for tax deducted at source and the settled judicial position on the subject. At the outset, the Tribunal noted that section 199 of the Income-tax Act, 1961, read with Rule 37BA of the Income-tax Rules, constitutes a machinery provision intended to ensure that tax deducted and paid to the credit of the Central Government is duly given credit and not retained by the Revenue without corresponding adjustment. The Tribunal observed that these provisions cannot be construed in a rigid or hyper-technical manner so as to result in taxation of the same income twice or to unjustly enrich the State.
• On facts, the Tribunal recorded that there was no dispute that the tax in question had been duly deducted at source and deposited with the Government and that such deduction was duly reflected in Form 26AS. It was further noted that the corresponding income had been offered to tax in the hands of EMAAR MGF Land Limited, which had acknowledged the income and discharged the tax liability thereon. The assessee had placed material on record to demonstrate that it merely acted as an intermediary under a collaborative arrangement and that the real income accrued to EMAAR MGF Land Limited.
• In this context, the Tribunal reiterated the settled principle that income must be taxed in the hands of the person to whom it actually accrues. Once it is established that the income has already been subjected to tax in the hands of the real recipient, denial of credit for tax deducted at source merely because of a mismatch between the deductee reflected in Form 26AS and the person offering the income to tax would lead to impermissible double taxation. The Tribunal observed that the Income-tax Act does not contemplate such a result.
• The Tribunal placed reliance on the judgment of the Hon’ble Andhra Pradesh High Court in CIT v. Bhooratnam & Co. (2013) 357 ITR 196 (AP), wherein it was held that credit for tax deducted at source cannot be denied merely because the income is assessable in the hands of another person, provided the income has been duly offered to tax and there is no double claim of credit. The High Court had emphasised that the Revenue cannot retain tax deducted at source without granting credit to any assessee.
• Reliance was also placed on the judgment of the Hon’ble Delhi High Court in CIT v. Relcom (ITA No. 26 of 2015, Delhi HC), where the Court held that once tax has been deducted and the corresponding income has been taxed, denial of TDS credit on procedural grounds would amount to unjust enrichment of the Revenue. The Tribunal noted that the High Court had cautioned against a purely technical interpretation of section 199 which would defeat its purpose.
• The Tribunal further observed that Rule 37BA of the Income-tax Rules specifically recognises situations where the income and the tax deducted at source may not align in the hands of the same person. The rule permits grant of credit to a person other than the deductee where the income is assessable in the hands of such other person, subject to verification. This statutory recognition, according to the Tribunal, reflects commercial realities and must be given full effect.
• The Tribunal also drew support from earlier coordinate bench decisions wherein it has been consistently held that where the income has been taxed in the hands of one entity and the TDS has been deducted in the name of another, credit cannot be denied if it is demonstrated that there is no double claim and the tax has already reached the exchequer. The Tribunal emphasised that tax administration must proceed on substantive justice rather than form alone.
• In conclusion, the Tribunal held that the approach adopted by the Assessing Officer and sustained by the Commissioner of Income-tax (Appeals), in denying credit for tax deducted at source solely on the ground that the assessee had not offered the corresponding income to tax, was legally unsustainable. The Tribunal directed the Assessing Officer to allow the credit of TDS after verifying that the same had not been claimed by EMAAR MGF Land Limited, thereby ensuring that the tax deducted at source is duly given credit and no double benefit is availed.