Credit of TDS to be allowed across the years in the same proportion in which income is assessable

The Chennai ITAT has held in  ITO Versus Shri Anupallavi Finance & Investments that Where tax has been deducted at source and paid to the Central Government and 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.

In this case deductor deducted TDS on accrual basis of income whereas deductee was declaring such income on cash basis as and when it was recieved by the deductee. The deductee-assessee however, claimed the credit of whole of TDS in the year of deduction stating that TDS deducted represents his income and is automaticaly offered to assessment in the year of deduction. But the AO allowed claim of TDS on pro rata basis i.e on the basis of income offered for assessment.

However CIT (Appeals) allowed the whole claim of TDS in the year of deduction even though the corresponding income was not offrered for assessment in the same year, holding assessee having offered the amount of TDS as income for the year of deduction, credit for the same could not be denied to it.

On appeal to Tribunal the order of CIT was vacated holding that TDS will be allowed in the corresponding year in which income is assessable to tax.

I find it a very important order and is produced herebelow for ready refernce
ITO Versus Shri Anupallavi Finance & Investments
No. - IT APPEAL NO. 1828/MDS/2009
Dated - December 10, 2010


Shaji P. Jacob for the Appellant. 

V.D. Gopal for the Respondent.

Per Sanjay Arora, AM —

This Appeal by the Revenue is directed against the Order by the CIT (Appeals)-VI, Chennai dated 27.4.2009, and the relevant assessment year is 2006-07.

2. The short point arising in appeal is the denial of credit for tax deducted at source (TDS) for Rs. 2,35,493 to the assessee by the Assessing Officer as the relevant income, i.e., on which TDS stands deducted, had not been admitted by the assessee for the relevant year. In appeal, the assessee, a firm in the business of investments and finance, maintaining its books on cash basis, stated that the interest stands credited to its account in their books by the corporate concerns - to whom money is advanced by it in the course of its business - on accrual basis and, accordingly, tax deducted at source therefrom at the prescribed rates. The assessee, however, would recognize interest as income only to the extent actually received by it. Now, that should not imply that it be denied credit for TDS on the tax actually deducted and deposited with Government treasury. The ld. CIT(A) allowed assessee relief by following the decision by Tribunal [Chennai Bench] in the case of a group concern, M/s. Shriram Investments [ITA No. 1124 and 1125/Mds/2001 dated 21.4.2006 for assessment years 1999-2000 and 2000-2001], reproducing the relevant findings of the tribunal in his order. Per the same, it stands held that the assessee having offered the amount of TDS as income for the year, credit for the same could not be denied to it. Aggrieved, the Revenue is in appeal before us.

3.1 Before us, the case was argued at length by both the sides. The ld. D.R. would submit that the issue stands settled, i.e., as far as the tribunal is concerned, by its Third Member decision in the case of Pradeep Kumar Dhir v. Asstt. CIT 107 ITD 118 (Chd) (TM). The said order is dated 27.4.2007, while the decision relied upon by the ld. CIT(A) is of a prior date. Further, vide the same, the controversy arising in the present case stands resolved, with the Third Member holding that the assessee shall be, in terms of section 199 of the Income-tax Act, 1961 (`the Act’ hereinafter), allowed credit for TDS on a prorata basis, i.e., in the proportion in which the income which is the subject matter of TDS stands offered to tax for the current year. This is precisely what section 199 says, with sub-section (1) thereof clearly stating that credit for TDS would be allowed on the production of the certificate under section 203 of the Act [TDS certificate] in the assessment under this Act for the year for which such income is assessable. In fact, even prior to the Third Member (TM) decision aforesaid, the tribunal had been consistently taking this view and for which he placed on record the decision in the case of Dy. CIT v. East Coast Constructions and Industries Ltd. (in ITA No. 2782/Mds/2005 dated 5.1.2007 for assessment year 2002-03). The view has not changed over time, with the tribunal continuing to hold likewise, as in the case of CIT v. A.R. Rehman (in ITA Nos. 1405 to 1409/Mds/2008 dated 5.1.2010) and Asstt. CIT v. Sarda Velu (in ITA No. 1403/Mds/2009 dated 24.6.2010 for assessment year 2006-07).

3.2 The ld. A.R., on the other hand, would submit that the very fact that the issue required a reference to a Third Member implies that it is debatable. Toward this, he also placed on record a decision by the tribunal in the case of Toyo Engineering India Ltd. v. Jt. CIT [2006] 5 SOT 616 (Mum); Escorts Limited. v. CIT (Dy.) [2007] 15 SOT 368 (Delhi); and Supreme Renewable Energy Limited v. ITO [2010] 3 ITR (Tribunal) 339 (Chennai). Deduction of tax at source is at prescribed rates in compliance with the statutory duty cast on the payer, i.e., to deduct and pay tax to the credit of the Central Government, and no inference as to the tax liability in its respect or even the taxability of the same follows. The payee-deductee may, rather, have incurred losses for the relevant year, as it is only the income, after setting off all the expenses and/or other claims, that is assessable for the year. Further, he drew attention to Rule 37BA of Income-tax Rules, 1962 [`the Rules’ for short], placing a copy of the same on record. Sub-rule 3(ii) of the Rules reads as under :
“Where tax has been deducted at source and paid to the Central Government and 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.”

Though, no doubt, it states the same thing as what the Revenue in the present case contends, or as held by the ld. Third Member, the sub-rule is only prospective, i.e., w.e.f.1/4/2009. If what stands held by tribunal per its Third Member decision were to be the only view, the lawmaker would have made the sub-rule operative from an earlier date. Also, it needs to be borne in mind that the issue at large is not one of section 199, or at least of section 199 alone, but of section 198 of the Act as well. On a query by the Bench as to whether the impugned TDS amount stood returned by the assessee as its income for the year, that being the premise of the decision in the case of Shriram Investments (supra) relied upon by the ld. CIT(A), he relied in the affirmative, though was unable to show the basis of his assertion with reference to any material on record.

3.3 The ld. D.R., in rejoinder, submitted that none of the decisions cited by the ld. AR bears any reference to the Third Member decision. The same is binding on a co-ordinate bench as held by the Special Bench of the Tribunal in the case of Dy. CIT v. Oman International Bank SAOG, 100 ITD 285 (Mumbai) (SB). Secondly, section 199 of the Act has witnessed a change by the Finance Act, 2008, w.e.f. 1.4.2008; the following words occurring at the end of sub-section (1) thereof having been omitted since “…., and credit shall be given to him for the amount so deducted on the production of the certificate furnished under section 203 of the Act in the assessment made under this Act for the assessment year for which such income is assessable.” The co-option of rule 37BA in the Rules follows the said omission, and only seeks to formulate what is otherwise obvious and implicit in Section 199 itself, i.e., that the credit for tax deducted at source shall follow the assessment of the corresponding income. Thirdly, the proportion being advanced by the assessee, if accepted, would defeat the very purpose of the relevant provision [section 199]. Suppose an assessee is paid an advance of Rs. 20 lakhs in Year One (Y1). He admits the same as income to the extent of Rs. 5 lakhs for Y1, though avails credit for the entire TDS on Rs. 20 lakhs. He returns another Rs. 5 lakhs from the same for Y2, but does not return the balance Rs. 10 lakhs, which falls to be assessed for Y3 (say). The Government would stand to loose 50% of its receipt by way of tax, which it otherwise would have secured thro’ TDS at least to some extent.

4. We have heard the rival submissions and perused the material on record, as well as the case law cited.

4.1 It passes our comprehension as to what the controversy in the present case is about. The deduction of tax at source is made in accordance with provisions of Part B to Chapter XVII of the Act titled ‘Collection and Recovery of Tax’. Part A of the said Chapter is titled `General’ and contains two provisions, which are in the nature of a prelude to the ensuing parts of the Chapter. Section 190 of the Act clarifies that the tax shall be deducted and collected, as the case may be, as per the provisions of the Chapter, notwithstanding that the regular assessment in respect of income (which is subject to tax deduction or collection) is to be made in a later assessment year and, further, that the said provision is without prejudice to the charge of tax on income u/s. 4(1) of the Act. Section 191 states that TDS is only one of the modes of recovery of tax, and that the same does not preclude direct payment of tax by the person receiving income. TDS on interest is covered by section 194A of the Act. Sub-section (1) thereof obliges persons specified thereunder responsible for paying interest [other than interest on securities] to deduct tax at source at the time of credit of such interest to the account of the payee or at the time of payment thereof, whichever is earlier. As such, the obligation cast u/s. 194(1), to which with some exceptions by way of monetary limits or certain specified transactions are listed per sub-section (3), is for deduction of tax at source at the earlier of the two points in time, i.e., payment or credit, the latter signifying accrual. In other words, the tax deduction has to match in time the earlier of the payment (receipt) or accrual. Put differently, the deduction of tax at source does not necessarily, or is not required to, march alongside the corresponding income, recognition of which by the recipient could be either on accrual or on receipt basis. The accrual of the tax liability on income would arise only on the same being/becoming assessable. There is thus an inherent mismatch, in terms of time, between the payment of tax (per TDS) and the accrual of tax liability against the corresponding income, i.e., given the fact of admission of income as per the relevant provisions of law. It is in view of and to address this mismatch in time, so that the tax stands deducted while the corresponding income, though accrued has yet to be received, or though received, as by way of an advance, is yet to accrue, that the law [per section 199 r/w sections 190 & 191] clarifies that the credit for the TDS shall be available for the year for which the corresponding income is assessable. It, i.e., the law as provided by the statute, to our mind, could not get clearer than this.

4.2 The controversy, in fact, should not obtain even in the absence of the provision of s. 199, as section 191 clearly states that TDS is only one of the modes of recovery of tax, so that tax to that extent has been paid on a particular income, and the liability to tax of the assessee-deductee on the corresponding income abates to that extent. Now, it cannot be that while the tax deduction at source, which is only a manner or mode of payment or recovery of tax, is on income ‘A’, the credit thereof is allowed against income ‘B’. In any case, section 199 makes things abundantly clear, eliminating scope of any doubt. Sub-rule 3(i) of section 37BA is identically worded, i.e., employs the same words as of the erstwhile section 199 of the Act, reproduced hereinabove, since omitted. Sub-rule 3(ii) of the Act further clarifies that where the income subject to TDS is assessable over a number of years, credit for TDS shall be allowed across those years proportionately. Clearly, a course that plain common sense and linear thinking would suggest, given Rule 37BA(3)(i) of the Act. In other words, there is a complete harmony between the erstwhile section 199 and section 199 as it now reads [after substitution by Finance Act, 2008 w.e.f. 1.4.2008] r.w.r. 37BA. In fact, the tribunal in most cases, including those cited before us, has de hors the said provision held exactly what r. 37BA(3)(ii) states, that is, prior to the said rule, and only on the basis that the credit for TDS is to be allowed only for the assessment year for which the income is assessable. As such, the assessee’s case gets no support with reference to Rule 37BA of the Rules, as sought to be drawn by the ld. A.R. The said rule, rather, further endorses and validates the Third Member decision of the tribunal in the case of Pradip Kumar Dhir (supra). This also explains as to why the ld. D.R. was at pains to show the necessity for r. 37BA. As we see it, the said rule seeks to address the various contingencies that may arise in allowing the credit for TDS, viz. qua the years to which corresponding income is allocated; qua the persons in whose hands the corresponding income is assessable, as where the underlying security or asset yielding income subject to TDS is owned jointly, etc., some of which stood addressed by the erstwhile section 199 itself, vide proviso to sub-section (1) thereof, also omitted since.

4.3 Coming to section 198, the same reads as under:
“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:
Provided that the sum being the tax paid, under sub-section (1A) of section 192 for the purpose of computing the income of an assessee, shall not be deemed to be income received.”
We are unable to understand as to how the said provision assists the assessee’s case. All the section says, to state illustratively, is that if there is deduction of tax at source out of income of Rs. 100 [say @ 10%], crediting or paying assessee Rs. 90, the same, i.e., Rs. 10 is also his income. It nowhere speaks of the year for which the said amount of TDS is to be deemed as income received. The same would, understandably, only correspond to the balance 90%. As such, if 30% of the total receipt/credit is assessable for a particular year, it shall, by virtue of section 198 of the Act be reckoned at Rs. 30 [Rs. 100 × 30%] and not Rs. 27 [Rs. 90 × 30%]. Thus, though again a natural consequence of the fact that tax deducted is only out of the amount paid or due to be paid as income, and in satisfaction of the tax liability on the gross amount to that extent, yet clarifies the matter, as it may be open to somebody to say that TDS of Rs. 10 has neither been credited nor received, so that it does not form part of income received or arising and, thus, outside the scope of s. 5 of the Act. That, to our mind, is sum and substance of section 198.

4.4 True, tax deduction also does not agree, i.e., in quantum, with the actual tax liability arising on the corresponding income, which has to be determined only after giving effect to all relevant and applicable provisions of the Act. But then, it is neither the Revenue’s claim, nor anybody’s case that the two should agree. TDS is only an estimated tax, deducted at source at the prescribed rates, out of the stipulated incomes. The actual tax liability of the assessee-deductee for the year may be higher or lower than the amount of TDS, resulting in payment or refund of tax, as the case may be. The bone of contention in the present case is the year for which the credit for TDS is to be allowed, and which, as per the clear prescription of law, is to be the year for which corresponding income is assessable to tax.

4.5 Coming to the decisions cited before us, none of them, as pointed out by the ld. D.R., advert to the Third Member decision; all but one, i.e., Supreme Renewable Energy Ltd. (supra), being prior to the same or its reporting. As such, we fail to see as to how these would prevail over the clear provisions of the Act, i.e., sections 198 & 199 of the Act [r/w sections 190 & 191]. The hon’ble apex court in Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) has held that where a provision is clear as to its scope, that interpretation is to be adopted, irrespective of acceptance of a contrary view by some authority and raised by the assessee. The said understanding gets further validated by r. 37BA as well as by the Third Member decision by the tribunal. In fact, as our perusal of the said orders reveal, the controversy in those cases arose due to the peculiar circumstances, so that the matter required adjudication by reading the provision purposively; as where the corresponding ‘income’ represented a capital receipt, tax credit of TDS could not be denied. Similarly, when the work-in-progress is stated at the billed value, though the recognition of income is deferred to the completion of the project due to uncertainties prevalent in the trade, the corresponding tax deducted has to be allowed for the relevant year/s and could not be postponed till the completion of the project. The same, in our view, do not represent a rule, while the Third Member decision could be said to be representative of the consistent view of the tribunal in the matter. The issue under consideration is only the year of allowability of the credit for TDS, and which is precisely what the sections 198 & 199 seek to address. In any case, the law has to be read as it is and applied as justifiably and purposively as the circumstances of the case admit. As sought to be emphasized by us, the provision [section 199 of the Act], even otherwise, represents a common sense, purposive view of the matter; TDS being only a manner of recovery of tax, so that it would, subject to the provisions to the contrary, be allowable only against the corresponding income, as otherwise tax on one income may get set off against TDS on another, and which would be defeative of its concept as well as contradictory to the TDS provisions.

4.6 Finally, we may also advert to the question addressed by the Bench to the ld. A.R. who stated that TDS amount [Rs 2.14 lakhs] stands offered as income for the year, so that credit for the same as tax paid would ensue, as held in the case of Shriram Investments (supra). The same is, firstly, without any basis; the finding by the Assessing Officer (which stands not rebutted), as well as the very basis of his order denying credit of TDS being that the corresponding income has not been offered to tax for the relevant year. The ld. CIT(A) has not issued any finding in the matter while applying the decision in the case of Shriram Investments (supra), even as therein lies the root of the controversy. Further, the averment by the ld. A.R. is rather in contradiction with the assessee’s professed method of recognizing income, i.e., cash (receipt) basis, so that it is not understood as to how the impugned TDS amount was accounted for as income for the year. It could, at best, account for the amount of TDS proportionate to the income actually received and accounted for as its income for the year, i.e., what section 198, in fact, mandates. The denial of credit for TDS in only on account for the income not received by the assessee and, as such, not recognized and returned by it, so that there is no scope of the impugned TDS being inclusive of such a proportionate amount, and toward which we also do not find any claim by the assessee before any forum, including us, and the assertion made - without even attempting to substantiate the same - was only in response to a query by the Bench.

Further, even assuming hypothetically of the impugned TDS amount having been returned as income for the year, the assessee could claim credit in its respect only to the extent of the amount of TDS proportionate to the same. That is, if the TDS rate is 10% (say), at Rs. 0.214 lacs. In fact, in this context, we may also add that the credit [for TDS] is to be allowed for the year for which the income is assessable, and not assessed, so that income has to, as per assessee’s consistently followed method of accounting, be assessable for that year. As such, strictly speaking, the assessee would not be entitled to any credit for TDS even if the same stands returned for the year, being not assessable for the relevant year, even as there is no finding, or even a claim, qua the said returning, which is contradictory to the assessee’s basis of returning income and, rather, abortive of the issue arising for our adjudication in the present case.


5. The issue arising for our adjudication, i.e., the year of allowance of credit for TDS stands addressed by the clear language of the provisions itself. The same, rather, presents an ideal situation where the course yielded by plain common sense matches with that statutorily provided, i.e., allow credit for TDS against the corresponding income on its assessment, so that even the absence of section 199 would yield the said course in view of the dictum by the hon’ble apex court that tax laws should be applied, as far as circumstances may admit, in an equitable manner [refer: CIT v. Ghotla J.H. [1985] 156 ITR 323 (SC)]. In fact, in all the decisions cited by the Revenue in its favour, i.e., except for the Third Member decision, the tribunal’s verdict arises following this approach, and is without reference to section 199 of the Act. Rule 37BA further validates the Revenue’s stand. The same stands brought on the statute with effect from a later date, to provide for a comprehensive guideline for all matters relating to the allowance of credit for TDS in the variety of situations that generally obtain. The argument of non-retrospectively of the said Rule - which has not been applied by the Revenue - by the ld. A.R., is both misconceived and specious.

6. In the result, appeal of the Revenue is allowed.

Order pronounced in the court on10th December, 2010.

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