ISSUE FOR
CONSIDERATION
Section 145
requires the assessee to compute his income chargeable under the head “Profits
and gains of business or profession” or “Income from other sources” in
accordance with either cash or mercantile system of accounting, which is
regularly followed by the assessee. The assessee following cash system of
accounting would be offering to tax only those incomes which have been received
by him during the previous year. On the other hand, most of the provisions of
Chapter XVII-B provide for deduction of tax at source at the time of credit of
the relevant income or at the time of its payment, whichever is earlier.
Therefore, often tax gets deducted at source on the basis of the mercantile
system of accounting followed by the payer, which requires crediting of the
amount to the account of the assessee in his books of account. However, the
underlying amount on which the tax has been deducted at source is not
includible in the income of the assessee till such time as it has been received
by him.
Section 198
provides that all sums deducted in accordance with the provisions of Chapter
XVII shall be deemed to be income received, for the purposes of computing the
income of an assessee.
Till Assessment Year 2007-08, section 199 provided for grant of credit
for tax deducted at source to the assessee from income in the assessment made
for the assessment year for which such income is assessable. From Assessment
Year 2008-09, section 199 provides that the CBDT may make rules for the
purposes of giving credit in respect of tax deducted or tax paid in terms of
the provisions of Chapter XVII, including rules for the purposes of giving
credit to a person other than the payee, and also the assessment year for which
such credit may be given.
The corresponding
Rule 37BA, issued for the purposes of section 199(3), was inserted with effect
from 01.04 2009. The relevant part of this Rule, dealing with the assessment
year in which credit of TDS can be allowed, is as follows:
(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.
After the amendment, though the section does not expressly provide for
the year of credit as it did prior to the amendment, Rule 37BA effectively
provides for credit similar to the erstwhile
section. In fact, under Rule 37BA, more clarity has now been provided in
respect of a case where the income is assessable over a number of years.
In view of these
provisions, an issue has arisen in cases where the assessee’s income is
computed as per the cash system of accounting regarding the year in which the
TDS amount is taxable as an income, and the year of credit of such TDS to the
assessee, when the underlying income from which tax has been deducted is not
received in the year of deduction. The Delhi bench of the Tribunal took a view
that the income to the extent of TDS has to be offered to tax as an income as
provided in section 198 in the year of deduction, and the credit of TDS is
available in such cases in the year of deduction, irrespective of Rule 37BA. As
against this, the Mumbai bench of the Tribunal did not concur with this view,
and denied credit of TDS in the year of deduction.
CHANDER SHEKHAR
AGGARWAL’S CASE
The issue had come
up before the Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal vs. ACIT [2016] 157 ITD 626.
In this case, the
assessee was following cash system of accounting. He filed his return of income
for A.Y. 2011-12, including the entire amount of TDS deducted during the year
as his income, claiming TDS credit of Rs. 80,16,290.
While processing
the return u/s. 143(1), the Assessing Officer allowed credit of only Rs.
71,20,267, on the ground that the income with respect to the balance amount was
not included in the return filed by the assessee. The assessee appealed to the
CIT (A), disputing the denial of credit of the differential amount of TDS.
Placing reliance on Rule 37BA, the CIT (A) concluded that the assessee was not
entitled to credit for the amount though mentioned in the certificate for the
assessment year, if income relatable to the amount was not shown and was not
assessable in that assessment year.
The assessee
contended before the Tribunal that the amount equivalent to the TDS had been
offered as income by him in his return of income. This was in accordance with
the provisions of section 198, which mandates that all sums deducted under
Chapter XVII would be deemed to be income received for the purposes of computing
the income of an assessee. It was argued that the provisions of Rule 37BA are
not applicable to assessees following cash system of accounting. Since, as per
provisions of section 199, any deduction of tax under Chapter XVII and paid to
the Central Government shall be treated as payment of tax on behalf of the
person from whose income deduction of tax was made, it was pleaded that the
credit of the disputed amount should be allowed to the assessee.
The Tribunal duly
considered the amended provisions of section 199 as well as Rule 37BA. It
concurred with the view that once TDS was deducted by the deductor on behalf of
the assessee and the assessee had offered it as his income as per section 198,
the credit of that TDS should be allowed fully in the year of deduction itself.
Once an income was assessable to tax, the assessee was eligible for credit,
despite the fact that the remaining amount would be taxable in the succeeding
year.
With regard to Rule
37BA(3)(ii) providing for proportionate credit across the years when income was
assessable over a number of years, the Tribunal held that it would apply where
the entire compensation was received in advance but was not assessable to tax
in that year, but was assessable over a number of years. It did not apply where
the assessee followed cash system of accounting.
This was supported by an illustration – suppose an assessee who was
following cash system of accounting raised an invoice of Rs. 100 in respect of
which deductor deducted and deposited TDS of Rs. 10. Accordingly, the assessee
would offer an income of Rs. 10 and claim TDS of Rs. 10. However, in the
opinion of the Revenue, the assessee would not be entitled to credit of the
entire TDS of Rs. 10, but would be entitled to proportionate credit of Re. 1
only. Now let us assume that Rs. 90 was never paid to the assessee by the
deductor. In such circumstances, Rs. 9 which was deducted as TDS by the
deductor would never be available for credit to the assessee though the said
sum stood duly deposited to the account of the Central Government. Therefore,
as per the Tribunal, Rule 37BA(3) could not be interpreted so as to say that
TDS deducted at source and deposited to the account of the Central Government,
though it was income of the assessee, but was not eligible for credit of tax in
the year when such TDS was offered as income.
The Tribunal also
placed reliance upon the decisions of the Visakhapatnam bench in the case of ACIT
vs. Peddu Srinivasa Rao Vijayawada [ITA No. 234 (Vizag.) of 2009, dated
03.03.2011] and of the Ahmedabad bench in the case of Sadbhav
Engineering Ltd. vs. Dy. CIT [2015] 153 ITD 234. In these cases, it was
held that the credit of tax deducted at source from the mobilisation advance
adjustable against the bills subsequently was available in the year of
deduction, though it was not considered while computing the income of the
assessee.
Accordingly, the
Tribunal held that the assessee would be entitled to credit of the entire TDS
offered as income in the return of income.
SURENDRA S. GUPTA’S
CASE
A similar issue
recently came up for consideration before the Mumbai bench of the Tribunal in
the case of Surendra S. Gupta vs. Addl. CIT [2018] 170 ITD 732 .
In this case, the assessee, following cash system of accounting, did
not offer consultancy income of Rs. 83,70,287 to tax, since the same was not
received during the relevant A.Y. 2010-11. However, he offered corresponding
TDS to tax in respect of the same, amounting to Rs. 8,41,240, and claimed the
equivalent credit thereof in the computation of income. The Assessing Officer, applying Rule 37BA(3)(i),
restricted the credit to proportionate TDS of Rs. 84,547, against income of Rs.
8,41,240 offered to tax by the assessee, and disallowed the balance credit of
Rs. 7,56,693.
The assessee contested the denial of TDS credit before the CIT (A),
who upheld the order of the Assessing Officer, and directed that credit for the
balance amount should be given in the subsequent years in which income
corresponding to such TDS is received.
On the basis of
several decisions of the co-ordinate bench on the issue, the Tribunal noted
that there were two lines of thought on the issue; one which favours grant of
full TDS credit in the year of deduction itself, and the other which, following
strict interpretation, allows TDS credit in the A.Y. in which the income has
actually been assessed / offered to tax. Reference was made to the following
decisions wherein the former view was taken –
(i). Chander
Shekhar Aggarwal vs. ACIT (supra)
(ii). Praveen Kumar Gupta vs. ITO [IT Appeal No.
1252 (Delhi) of 2012]
(iii). Anil Kumar Goel vs. ITO [IT Appeal No. 5849
(Delhi) of 2011]
The Tribunal found
that in none of the above cases was the decision of the Kerala High Court in
the case of CIT vs. Smt. Pushpa Vijoy [2012] 206 Taxman 22 considered by
the co-ordinate bench. In this case, the Kerala High Court had held that the
assessee was entitled to credit of tax only in the assessment year in which the
net income, from which tax had been deducted, was assessed to tax. Following
this decision, the Tribunal rejected the claim of the assessee to allow the
full credit of TDS.
OBSERVATIONS
There are two
aspects to the issue – the year in which the amount of TDS should be regarded
as income of the assessee chargeable to tax (the year of deduction, or the year
in which the net income is received by the assessee), and accordingly accounted
for under the cash system of accounting; and secondly, to what extent credit of
the TDS is available against such income.
Therefore, it
becomes imperative to analyse the impact of the provisions of section 198 with
respect to the assessment of the income of an assessee who is following cash
system of accounting. Section 198 provides 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.
It can be seen that
section 198 creates a deeming fiction by considering the amount of TDS as
deemed receipt in the hands of the deductee, though it has not been received by
him. This deeming fiction operates in a very limited field to consider the
unrealised income as realised. It appears that the legislative intent behind
this provision is to negate the probability of exclusion of the amount of TDS
from the scope of total income by the assessee, on the ground that it amounted
to a diversion of income by overriding title. It also precluded the deductee
from making a claim on the payer for recovery of the amount which had been deducted
at source in accordance with the provisions of Chapter XVII-B. But, this
section, by itself, does not create a charge over the amount of tax deduction
at source.
A careful reading
of this provision would reveal that it does not provide for the year in which
the said income shall be deemed to have been received. In contrast, reference
can be made to section 7, which also provides for certain incomes deemed to be
received. It has been expressly provided in section 7 that “the following
incomes shall be deemed to be received in the previous year….” unlike section
198. Therefore, it would not be correct to say that, once the sum is deducted
at source, it is deemed to be the income received in the year in which it has
been deducted and assessable in that year, de hors the other provisions
determining the year in which the said income can be assessed.
For instance, the
buyer of an immovable property may deduct tax at source u/s. 194-IA on the
advance amount paid to the assessee transferring that property. In such a case,
the capital gain in the hands of the transferor is taxable in the year in which
that immovable property has been transferred as provided in section 45.
Obviously, tax deducted at source u/s. 194-IA cannot be assessed as capital
gain in the year of deduction merely by virtue of section 198, if the capital
asset has not been transferred in the same year.
Similarly, in case
of an assessee who is following cash system of accounting, it cannot be said
that the amount of tax deducted at source is deemed to have been received in
the very same year in which it was deducted. Section 145 governs the
computation of income, which is in accordance with the method of accounting
followed by the assessee. The income equivalent to the amount of tax deducted
at source cannot be charged to tax de hors the method of accounting
followed by the assessee. In case of cash system of accounting, unless the
balance amount is received by the assessee, the amount of tax deducted at
source cannot be included in the income on the ground that it is deemed to be
received as per section 198. The reference to ‘sums deducted’ used in section
198 should be seen from the point of view of the recipient assessee and not the
payer. The ‘deduction’, from the point of view of the recipient, would happen
only when he receives the balance amount, as prior to that, the concerned
transaction would not be recognised at all in the books of account maintained
under the cash system of accounting.
In the context of
section 198 and the pre-amended provisions of section 199, in a Third Member
decision in the case of Varsha G. Salunkhe vs. Dy CIT 98 ITD 147, the
Mumbai Bench of the Tribunal has held as under:
“Both the sections, viz., 198 and 199, fall within
Chapter XVII which is titled as ‘Collection and recovery – deduction at
source’. In other words, these are machinery provisions for effectuating
collection and recovery of the taxes that are determined under the other
provisions of the Act. In other words, these are only machinery provisions
dealing with the matters of procedure and do not deal with either the
computation of income or chargeability of income….
Sections 198 and
199 nowhere provide for an exemption either to the determination of the income
under the aforesaid provisions of sections 28, 29 or as to the method of
accounting employed under section 145 which alone could be the basis for
computation of income under the provisions of sections 28 to 43A. Section 198
has a limited intention. The purpose of section 198 is not to carve out an
exception to section 145. Section 199 has two objectives – one to declare the
tax deducted at source as payment of tax on behalf of the person on whose
behalf the deduction was made and to give credit for the amount so deducted on
the production of the certificate in the assessment made for the assessment
year for which such income is assessable. The second objective mentioned in
section 199 is only to answer the question as to the year in which the credit
for tax deducted at source shall be given. It links up the credit with
assessment year in which such income is assessable. In other words, the
Assessing Officer is bound to give credit in the year in which the income is
offered to tax.
Section 199 does
not empower the Assessing Officer to determine the year of assessability of the
income itself but it only mandates the year in which the credit is to be given
on the basis of the certificate furnished. In other words, when the assessee produces
the certificates of TDS, the Assessing Officer is required to verify whether
the assessee has offered the income pertained to the certificate before giving
credit. If he finds that the income of the certificate is not shown, the
Assessing Officer has only not to give the credit for TDS in that assessment
year and has to defer the credit being given to the year in which the income is
to be assessed. Sections 198 and 199 do not in any way change the year of
assessability of income, which depends upon the method of accounting regularly
employed by the assessee. They only deal with the year in which the credit has
to be given by the Assessing Officer.
It could not be
disputed that according to the method of accounting employed by the assessee,
the income in respect of the three TDS certificates did not pertain to the
assessment year in question but pertained to the next assessment year and, in
fact, in that year, the assessee had offered the same to tax. Therefore, the
credit in respect of those three TDS certificates would not be given in the
assessment year under consideration, but in the next assessment year in which
the income was shown to have been assessed.”
Following this
decision, the Bilaspur bench of the Tribunal, in the case of ACIT vs. Reeta
Loiya 146 TTJ 52 (Bil)(URO), has held as under:
“It is a settled
proposition that the provisions of s. 198 are merely machinery provisions and
are not related to computation of income and chargeability of income as held by
the Bombay Tribunal in the case of Smt. Varsha G. Salunke (supra). In
the absence of the charging provisions to tax such deemed income as the income
of the assessee, the provisions of s. 198 of the Act cannot by themselves
create a charge on certain receipts.”
The Mumbai bench of
the Tribunal, in the case of Dy CIT vs. Rajeev G. Kalathil 67 SOT 52
(Mum)(URO), observed:
“It is a fact
that deduction of tax for the payment is one of the deciding facts for
recognising the revenue of a particular year. But TDS in itself does not mean
that the whole amount mentioned in it should be taxed in a particular year,
deduction of tax and completion of assessment are two different things while
finalising the tax liability of the assessee and Assessing Officer is required
to take all the facts and circumstances of the case not only the TDS
certificate.”
In the case of ITO
vs. Anupallavi Finance & Investments 131 ITD 205, the Chennai bench of
the Tribunal, while dealing with the controversy under discussion, has dealt
with the impact of section 198 as follows:
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 at the rate of 10 per cent], 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 per
cent. As such, if 30 per cent 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 per cent] and not Rs. 27 [Rs. 90 × 30 per cent]. 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 section 5 of the Act. That, to our mind, is sum and
substance of section 198.
Similar
observations have been made by the Mumbai bench of the Tribunal in the case of ITO
vs. PHE Consultants 64 taxmann.com 419 which are reproduced hereunder:
It is pertinent
to note that the provisions of sec. 198, though states that the tax deducted at
source shall be deemed to be income received, yet it does not specify the year
in which the said deeming provision applies. However, section 198 states that
the same is deemed to be income received “for the purpose of computing the
income of an assessee.” The provisions of section 145 of the Act state
that the income of an assessee chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”
shall be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee. Hence a combined reading of
provisions of section 198 and section 145 of the Act, in our view, makes it
clear that the income deemed to have been received u/s. 198 has to be computed
in accordance with the provisions of section 145 of the Act, meaning, thereby,
the TDS amount, per se, cannot be considered as income of the assessee by
disregarding the method of accounting followed by the assessee.
The Kerala High
Court has also expressed a similar view as extracted below in the case of Smt.
Pushpa Vijoy (supra), although without referring expressly to section 198.
We also do not
find any merit in the contention of the respondents-assessees that the amount
covered by TDS certificates itself should be treated as income of the previous
year relevant for the assessment year concerned and the tax amount should be
assessed as income by simultaneously giving credit for the full amount of tax
remitted by the payer.
Further, deeming
the amount of tax deducted at source as a receipt in the year of deduction and
assessing it as income of that year would pose several difficulties. Firstly,
the assessee might not even be aware about the deduction of tax at source on
his account while submitting his return of income. This may happen due to delay
on the part of the deductor in submitting the TDS statement and consequential
reflection of the information in Form 26AS of the assessee. Secondly, the tax
might be deducted at source while making the provision for the expenses by the
payer following mercantile system of accounting. For instance, tax is deducted
at source u/s. 194J while providing for the auditor’s remuneration. In such a
case, treating the amount of tax deducted at source as income of the auditor in
that year, would result into taxing the amount, even before the corresponding
services have been provided by the assessee.
Moreover, for an
amount to constitute a receipt under the cash method of accounting, it should
either be actually received or made available unconditionally to the assessee.
As held by the Supreme Court in the case of Keshav Mills Ltd. vs. CIT 23 ITR
230, “The ‘receipt’ of income refers to the first occasion when the
recipient gets the money under his own control.” In case of TDS, one can
take a view that such TDS is not within the control of the payee until such
time as he is eligible to claim credit of such TDS. That point of time is only
when he receives the net income after deduction of TDS, when he is eligible to
claim credit of such TDS.
Since the amount of
tax deducted at source cannot be charged to tax in the year of deduction merely
by virtue of section 198, no part of that income is assessable in that year, in
the absence of any receipt, in view of the cash system of accounting followed
by the assessee. The Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal (supra) has decided the whole issue on the basis of the fact
that the amount equivalent to TDS was being offered to tax by the assessee in
accordance with the provision of section 198. Since the income was assessed to
that extent, the Tribunal opined that the assessee was eligible for full credit
of TDS, notwithstanding Rule 37BA(3)(ii), which provided for allowance of
proportionate TDS credit when the income was not fully assessable in the same
year. Thus, the very foundation on the basis of which the Delhi bench of the
Tribunal has allowed the full credit of TDS to the assessee in the case of
Chander Shekhar Aggarwal (supra) appears to be incorrect.
Having analysed the provisions of section 198, let us now consider the
issue about the year in which the credit for tax deducted at source is
allowable. As per section 4, the tax is chargeable on the ‘total income’ of the
assessee for a particular previous year. When the assessee pays the income-tax
under the Act, he does not pay it on any specific income but he pays it on the
‘total income’. Thus, it cannot be said that a particular amount of tax has
been paid or payable on a particular amount of income. However, when it comes
to TDS, the erstwhile provision of section 199 expressly provided that its
credit shall be given for the assessment year in which the relevant income is
assessable. After its substitution with effect from 01.04.2008, new section 199
has authorised CBDT to prescribe the rules which can specifically provide for
the assessment for which the credit may be given. As per the mandate given in
section 199, Rule 37BA provides that the credit shall be given for the
assessment year for which the concerned income is assessable. In view of such
express provisions, the credit cannot be availed in any year other than the
assessment year in which the income subject to deduction of tax at source is
assessable.
The Delhi bench of the Tribunal took a view that Rule 37BA does not
apply where the assessee follows cash system of accounting insofar as it
provides for the year in which the credit is available. In order to support its
view, it has been pointed out that the credit would not be available otherwise
in a case where the assessee does not receive the underlying income at all.
Certainly, the law does not provide about how the credit would be given for
that amount of TDS which was deferred for the reason that the relevant income
is assessable in future but, then, found to be not assessable at all for some
reason. However, this lacuna under the law can affect both types of assessees,
i.e., assessees following cash system of accounting, as well as assessees
following mercantile system of accounting.
Circular No. 5
dated 02.03.2001 has addressed one such situation wherein the tax has been
deducted at source on the rent paid in advance u/s. 194-I and subsequently the
rent agreement gets terminated or the rented property is transferred due to
which the balance of rent received in advance is refunded to the tenant or to
the transferee. It has been clarified that in such a case, credit for the
entire balance amount of tax deducted at source, which has not been given
credit so far, shall be allowed in the assessment year relevant to the
financial year during which the rent agreement gets terminated / cancelled or
rented property is transferred and balance of advance rent is refunded to the
transferee or the tenant, as the case may be. Similarly, in a few cases, the
Courts and Tribunal have held that where income has been offered to tax in an
earlier year, but tax has been deducted at source subsequently, credit for the
TDS should be allowed in such subsequent year [CIT vs. Abbott Agency,
Ludhiana 224 Taxman 350 (P&H), Societe D’ Engineering Pour L’ Industrie Et.
Les Travaux Publics, (SEITP) vs. ACIT 65 SOT 45 (Amr)(URO)].
Therefore, in our
view, the mere probability of income not getting assessed in future cannot by
itself be the reason for not applying the express provision of the law, unless
suitable amendment has been carried out to overcome such difficulty. Taking a
clue from the CBDT’s clarification vide aforesaid Circular, it is possible to
take a view that the credit of TDS should be made available in the year in
which the assessee finds that the relevant income would not be assessable at
all due to its irrecoverablity or any other reasons.
The view taken by the Mumbai bench of the
Tribunal in the case of Surendra S. Gupta (supra) by following the
decision of Kerala High Court in the case of Pushpa Vijoy (supra)
therefore seems to be the more appropriate view. The amount of tax deducted at
source is neither assessable as income nor available as credit in the year of
deduction, if the assessee is following the cash system of accounting, and has
not received the balance amount in that year. The taxation of the entire
amount, as well as credit for the TDS, would be in the year in which the net
amount, after deduction of TDS, is received. In case the net amount is received
over multiple years, the TDS amount would be taxed proportionately in the
multiple years, and proportionate TDS credit would also be given in those
respective years.
