Section 199, read with Section 198 and rule 37BA of the Income-tax Rules, 1962 – Clause (ii) of Rule 37BA(3) has no applicability where assessee follows cash system of accounting. Consequently the said assessee, following cash basis, is entitled to credit of entire amount of TDS being offered as income even though the amount in respect of which tax is deducted is not received and therefore not offered as income.
Facts
The assessee was following cash method of accounting. The assessee had declared income of about Rs. 9 crore in the return filed for the relevant assessment year. The assessee had claimed credit of tax deducted at source (TDS) of Rs. 80 lakh.
The AO allowed the credit of TDS of Rs. 71 lakh only and disallowed the credit of balance TDS even though the balance TDS was offered as income by the assessee.
The CIT-(A) upheld the order of the AO. She held that the credit of TDS was to be allowed in terms of rule 37BA(2) and as such, the credit would be allowable on pro rata basis in the year in which the certificate was issued and also in future where balance of such income was found to be assessable as per the mandate of section 199. Any amount which had not been assessed in any year but referred in the TDS certificate could not be claimed u/s. 199.
On second appeal before the Tribunal, the following was held
Held
Sub-section (1) of section 199 provides that 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 tax deduction was made. Also, section 198 provides that all sums deducted in accordance with Chapter XVII-B shall, for the purposes of computing the income of an assessee, be deemed to be income received. The admitted facts of the instant case are that the TDS has been offered as income by the assessee in his return of income.
The tax deducted by the deductor on behalf of the assessee and offered as income by the assessee in his return of income is to be allowed as credit in the year of deduction of tax. Rule 37BA provides that credit for TDS should be allowed in the year in which income is assessable. Further clause (ii) of rule 37BA(3) provides that 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. This rule is only applicable where entire compensation is received in advance, but the same is not assessable to tax in that year and is assessable in a number of years. However, such rule has no applicability, where assessee follows cash system of accounting.
This can be supported from the illustration that suppose an assessee, who is following cash system of accounting, raises an invoice of Rs. 100 in respect of which deductor deducts tax of Rs. 10 and deposits to the account of the Central Government. Accordingly the assessee would offer an income of Rs. 100 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 only. Now assume that Rs. 90 is 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 stands duly deposited to the account of the Central Government.
Rule 37BA(3) cannot be interpreted so as to say that tax deducted by the deductor and deposited to the account of the Central Government is though income of the assessee but is not eligible for credit of TDS in the year when such TDS was offered as income. This view is otherwise also not in accordance with the provisions contained in sections 198 and 199. The proposition as laid out by the Commissioner (Appeals), therefore, cannot be countenanced.
In view of the aforesaid, the assessee would be entitled to credit of the entire TDS offered as income by him in his return of income.
