Deduction of TDS and Taxability of the same; An Analysis of section 198 and 145 of Income tax 1961.
As per basic understanding, the net income which is received by the assessee in hands shall be net of the gross income accrued and the tax deducted at source. There came some cases where assessee considered only the net amount which was received in their hands as an income and did not consider the part which was not received in hands directly but was deposited to the government directly being (TDS). To protect the interest of the revenue and to consider the deducted amount as income, the government introduced section 198 in the act and stated that “All sums deducted in accordance with (the foregoing provisions of this chapter) shall, for the purpose of computing the income of an assessee, be deemed to be income received”.
It means the TDS which was deducted from gross income was directly deposited to the government shall be deemed as income received by the assessee (deeming fiction inserted).
The position got clear that gross income shall be taken into account including the TDS portion for the computation of income by virtue of section 198. The motive of the same was to tax the sum deducted at source so that people may not interpret the law as if the income which was never received by the assessee in his hands cannot be made taxable in his hands.
Now the issues which arises is this that section 198 discusses about the deemed receipt of the TDS but nowhere it explains that in which year the same should be offered as income. Before moving further let us understand the above issue in short.
The issue comes by virtue of section 145 of Income tax Act 1961. Where section 145(1) states that Income chargeable under the head PGBP or income from other sources shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
It means if an assessee is earning the income which is chargeable under the head PGBP or it is an income which is chargeable under the head income from other sources, then the same shall be computed according to the method of accounting which is regularly being employed by the assessee and the same can only be either in cash or in mercantile system.
In my next blog, I will be discussing about the hybrid system of accounting and consequences thereof on the computation of income.
Now see the section 198 provides about the taxability of the sum so deducted as TDS but nowhere discusses about the year in which the same shall be offered as income. Accordingly, it creates an ambiguity that whether: –
The aforesaid issue also arises because of below reasons: –
1. There are several sections given under chapter XVII of the act where the tax deduction at source is done on accrual basis only and in certain cases the same is done on payment basis. It means that the liability to deduct the TDS in those cases do not take any colour from the method of accounting employed by the assessee (deductee).
2. The cases where income is computed by the assessee by using cash system of accounting and the tax is deducted using mercantile system of accounting then by virtue of section 198, then whether the treatment of taxation of TDS portion shall be done as per section 145 only or it will be done as per section 198, this issue is under considerations).
Let us understand this with an example.
Mr. A is having an FDR of rupees 10 Lakh in a nationalised bank and the rate of interest is 7%. Interest being 70 thousand rupees was earned during the year. Mr A is using cash system of accounting regularly, and accordingly he shall be considering the entire interest income in the year of actual receipt, i.e., the year when the FDR shall mature.
However, by the virtue of section 194A, the bank is required to deduct the TDS on the aforesaid interest income and rupees 7000 being 10% of the interest earned during the year has been deducted as TDS and has been deposited to the account of government on mercantile basis of accounting.
Now Mr A is getting confused while interpreting section 198 and section 145 simultaneously.
These are the possible interpretations which he is of the view are as under:
1. The aforesaid TDS so deducted being Rs 7000 shall be considered as income by virtue of section 198 in the year of deduction itself and remaining 63000 shall be offered as income in the year of maturity of the aforesaid FDR accordingly 10% of the TDS amount (Rs. 700) shall be claimed during the year and remaining 90% TDS (Rs. 6300) to be carried forward for the year in which the FDR shall be matured on the ground that Rs. 7000 have been deemed to be received in the year of deduction.
2. The aforesaid TDS being Rs. 7000 shall be carried forward to the year in which the actual received income being 63000 shall be offered for taxation, because section 199 states that the credit of the tax shall be given in the proportion of the income offered for taxation, accordingly when the main component of the income i.e., Rs. 63000 shall be offered as income in the year of actual receipt of the same then the TDS portion shall also be treated as income in the year of actual receipt of the aforesaid sum and entire 70000 shall be offered for taxation in the year of maturity of the FDR and TDS shall be carried till the said year.
3. The TDS deducted shall be offered for taxation in the year of deduction and entire TDS shall be taken as refund in the year of deduction itself.
4. Such kind of income shall not be subject matter of benefit under section 145 and shall be taxed on mercantile basis only.
According to section 199 of income tax act the credit of the TDS so deducted shall be given as per Rule 37BA.
According to following clauses of rules 37BA, credit shall be given in the given proportion: –
(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.
As per plain reading of the aforesaid rule the credit of the TDS so deducted shall be allowed in the year in which the income on which such TDS has been deducted shall be offered as income. But the aforesaid specified the way in which the credit of the TDS shall be given but it nowhere discusses about the way of offering the TDS portion as income in a particular year, and the issues is left as it is.
1. Section 198 only inserted the deeming fiction about the TDS amount so deducted that the same shall be income deemed to be received only and not the year in which the same should be offered as income.
2. Section 145 of the act is given in chapter XIV and the income tax act is divided into chapters and then it is further divided into sections and so on. It means any particular thing shall be governed by a particular chapter and when it satisfies the condition of falling in a particular chapter then only the same shall be referred to sections and subsections of that chapter.
3. The name of the chapter is “Procedure of Assessment” and the same shall decide the views of the department while computing the income of a particular assessee and method of accounting shall be relevant for the aforesaid computation of income and the same may also be considered as a procedural law by which the particular assessment shall be concluded and interpretation should be made according to the same.
4. The cases where the deducted of TDS is done on the basis of payment, however the income is taxed on the basis of accrued/ mercantile system (for example TDS on salary is deducted on actual payment basis as per section 192 however the income from Salary is taxable in the year it is earned and not as per actual receipt basis) then if the section 198 is interpreted in the method explained in the possible interpretation no. 1 then the salary which was accrued for the month of march shall be considered as income in the year in which the same has been earned, moreover the TDS on the march’s salary shall be deducted in April while making actual payment of the salary, then the TDS so deducted shall be considered as income for the next financial year by virtue of section 198, which would attract double taxation of the TDS amount on the march months salary in our case which is a wrong interpretation in the opinion of the author.
5. The possible interpretation (3) and (4) can also not be considered as valid because (3) is against the rule 37BA of the act as discussed above and (4) is against section 145.
6. In the author’s opinion, it has been discussed above that the income tax act is divided in chapters and then into sections, and if a particular income/ sum is not covered by a particular chapter then the same cannot be governed by any section given in that chapter. The section 198 cannot be considered as charging section because chargeability of an income is decided by chapter IV and procedure of assessment has been given in chapter XIV of income tax act. Moreover, the chapter XVII explains the way of “Collection & Recovery- Deductions at Source’ and it can never be given a power of chargeability of a particular sum.
7. With the views explained above the income can not be treated as deemed to be received in the year TDS has been deducted because deeming fiction has been inserted regarding deemed received of the income only and not about the year in which the same shall be done and accordingly the same shall be offered for taxation with the principle/ gross income on which this TDS has been deducted.
8. Neither the section 198 nor 199 can be given the power of deciding the time in which a particular sum shall be offered as an income. Because the scope of this chapter is limited to mode of collection, payments, and recovery of taxes by way of TDS, TCS, Advance tax etc.
Relevant case laws: –
1. ITO, New Delhi vs M/S. Paragon Xt, New Delhi on 14 March, 2019
2. Shri. Kanthula Ravishankar vs Assistant Commissioner of Income Tax
3. BP Dash Vs ITO Calcutta ITAT
The taxation of the income shall be governed by the chapters which specify the mode of computation and not the way of collection of taxes on income and accordingly the possible interpretation (2) hold good in the eyes of the author. Accordingly the entire income shall be offered as income for taxation in the year of actual receipt of the same by virtue of section 145 of the act and TDS shall also be carried forward to the aforesaid year by virtue of section 199 of the act and the credit shall be allowed in the year in which the principle income (Gross Income) shall be offered as income for taxation and section 198 shall be treated as section inserting deeming fiction to avoid ambiguity in the law regarding sum which is never going to be received by the assessee in the hands but the same shall be paid to the government on his behalf and accordingly the possible interpretation (2) is correct in the eyes of the author.