The Revenue cannot make a “protective addition” permanent without first determining the actual owner of the income.
The Dispute
The assessee sold a property registered in his wife’s name, offered the capital gains in his own return, and claimed the Section 54F exemption (reinvestment in a residential house).
The AO’s Error: The Assessing Officer made a “protective addition” (a temporary tax claim) in the husband’s hands but never made a “substantive assessment” in the wife’s hands.
The CIT(A)’s Error: The Commissioner (Appeals) tried to turn this temporary claim into a permanent (substantive) tax demand without actually proving who the true owner of the property/income was.
The Verdict
The court remanded the matter, stating:
An addition cannot remain “protective” forever. The AO must conclusively decide who the “correct person liable to tax” is based on the flow of funds and ownership.
The exemption under Section 54F (now Section 86) cannot be denied merely because the asset was in the spouse’s name, provided the assessee is the real owner and has made the reinvestment.
II. TDS Credit: Mismatch of PAN (Section 199 / 390)
Crux: TDS credit follows the income. If the husband pays the tax on the income, he gets the credit, even if the TDS certificate is in the wife’s name.
The Dispute
TDS of ₹1.67 lakhs was deducted, but the certificates (and Form 26AS) were in the wife’s PAN. The husband offered the underlying income to tax in his return and claimed the TDS credit. The Revenue denied it due to the “PAN Mismatch.”
The Verdict
The court ruled in favour of the assessee, establishing:
Nexus Principle: The primary rule of Section 199 (now Section 390) is that credit for TDS shall be given to the person in whose hands the income is assessable.
Procedural vs. Substantive: A “procedural mismatch of PAN” is not a valid reason to deny credit if the nexus between the income and the TDS is proven. If the government has received the tax, they cannot keep it twice by denying credit to the person who is actually paying the tax on that income.
Transition to the Income-tax Act, 2025
Under the new law effective as of April 2026:
Section 86 (New Act): Replaces Section 54F. The requirement to invest in a “residential house” remains, but the 2025 Act has stricter digital tracking of “Cost of Improvement.”
Section 390 (New Act): Replaces Section 199. It codifies the “Matching Principle,” where TDS credit is synchronized with the year the income is reported.
Rule 37BA (Income Tax Rules): This rule already provides a mechanism where the person in whose name TDS was deducted can file a declaration to “transfer” that credit to the actual earner of the income. This judgment reinforces that this rule must be applied liberally by the AO.
Key Takeaways for Taxpayers in 2026
Property in Spouse’s Name: If you sell a property held in your spouse’s name but the “Benami” or “Real Ownership” lies with you, you can claim the exemption, but ensure you have a clear fund flow statement showing who paid for the original purchase.
Correcting TDS Mismatches: If a tenant or buyer deducts tax in your spouse’s PAN by mistake, do not simply claim it. Under the 2026 rules, use the “TDS Credit Transfer” declaration under Rule 37BA at the time of filing to avoid an automated 143(1) mismatch notice.
Protective Additions: If an AO issues an order on a “protective basis,” it is technically an incomplete assessment. You can challenge its finality if the Department has not initiated proceedings against the “substantive” owner.
IN THE ITAT CHENNAI BENCH ‘A’
Sundararaman Narayanan
v.
DCIT*
Manu Kumar Giri, Judicial Member
and S. R. RAGHUNATHA, Accountant Member
and S. R. RAGHUNATHA, Accountant Member
IT Appeal No. 140 (Chny) of 2026
[Assessment year 2015-16]
[Assessment year 2015-16]
APRIL 7, 2026
S. Sridhar and S. Girish Kumar, Advs. for the Appellant. R. Raghupathy, Addl. CIT for the Respondent.
ORDER
S. R. Raghunatha, Accountant Member.- The present appeal is filed by the assessee against the order dated 11.11.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as “ld.CIT(A)”), dismissing the appeal filed by the assessee against the assessment order dated 21.05.2020 passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by the DCIT, Circle 1, Thiruchirappalli., (hereinafter referred to as “AO”), pertaining to Assessment Year (A.Y.) 2015-16.
2. The brief facts as per the records is that the assessee is an individual and filed his return of income for the impugned A.Y.2015-16 on 30.06.2016 admitting a total income of Rs.24,31,780/- under the head house property, Capital gain and other sources by claiming refund of Rs.1,76,632/-. The assessee’s wife has sold her house property for a consideration of Rs.75.00 Lakhs during the financial year 2014-15. The return of income filed by the assessee, the capital gain towards the property sold by the assessee’s wife was worked out at Rs.47,05,747/- and the same was claimed by the assessee as exemption u/s.54F of the Act.
3. While processing the return of income u/s.143(1) of the Act, by the CPC, Bengaluru, TDS credit was allowed only for Rs.85,012/-, which was deducted against assessee’s own PAN (ALKPS2907H). The TDS credit claim of Rs.1,66,619/- relating to S.Gowri’s PAN (ADUPG8185B) was not given by the CPC. The application u/s.154 of the assessee was also rejected. The assessee then filed an application u/s.264 of the Act before the ld.PCIT, which was also dismissed on 19.03.2018. Further, the ld.PCIT-3, Trichy issued order u/s.264 of the Act to re-open assessment and to examine the capital gain tax exemption claimed by the assessee for the A.Y.2015-16. Accordingly, the notice u/s.148 was issued on 26.03.2019 to verify the claim made u/s.54F of the Act.
4. In the reassessment proceedings, the AO disallowed the exemption u/s.54F of the Act claimed by the assessee on the ground that the transferred asset did not come under the purview of section 54F of the Act being a residential house and also since the claim made was not verifiable as the assessee did not furnish any details / material evidence to substantiate his claim made in the return of income and made additions / disallowance of the same on protective basis. Aggrieved by the order of the AO, the assessee filed an appeal before the ld.CIT(A).
5. On perusal of the submission by the assessee, the ld.CIT(A) converted the additions from protective basis to substantive basis as per para 5.2.2 of the order and also rejected the claim of the TDS by confirming the order of the AO by passing an order dated 11.11.2025.
6. Aggrieved by the order of the ld.CIT(A), the assessee filed an appeal before us by raising the following grounds of appeal:
1. The order of the NFAC, Delhi dated 11.11.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1082462365(1) for the above-mentioned Assessment Year is contrary to law, fact and in circumstances of the case.
2. The NFAC, Delhi erred in confirming the assumption of jurisdiction under Section 147 of the Act and consequently erred in confirming the passing of the re-assessment order under Section 147 of the Act without assigning proper reasons and justification.
3. The NFAC, Delhi failed to appreciate that the re-assessment order was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
4. The NFAC, Delhi failed to appreciate that the assumption of jurisdiction under Section 147 of the Act was without sanction of law and ought to have appreciated that the consequential re-assessment order accordingly should be reckoned as bad in law.
5. The NFAC, Delhi failed to appreciate that having not followed the prescription of law/procedure for framing the re-assessment, the consequential reassessment order passed should be reckoned as nullity in law for want of jurisdiction.
6. he NFAC, Delhi erred in sustaining the action of the Assessing Officer in disallowing the claim of deduction under Section 54F of the Act to the tune of Rs. 47,65,747/- by reckoning the said claim ought to have been made in terms of Section 54 of the Act and consequently erred in sustaining the addition of such sum as income of the appellant in the computation of taxable total income without assigning proper reasons and justification.
7. The NFAC, Delhi failed to appreciate that the conditions prescribed to make a valid claim of deduction under Section 54F/54 of the Act was admittedly complied with on the facts and in the circumstances of the present case and hence ought to have appreciated that the sustenance of disallowance of the said deduction relatable to re-investment in new residential house was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
8. The NFAC, Delhi failed to appreciate that having not disputed the fact of creation of new residential house, the technical mistake in claiming deduction in terms of Section 54F of the Act as against the claim of deduction under Section 54 of the Act could not considered as fatal to the said claim, keeping in mind the purposive legislation, approving the utilisation theory.
9. The NFAC, Delhi failed to appreciate that purposive legislation in contra distinction to the technical considerations should be considered as paramount for the purpose of validating the claim of re-investment in a new residential house, there by vitiating the findings in the impugned order.
10. The NFAC, Delhi failed to appreciate that the disallowance of claim of deduction under Section 54F/54 of the Act would come into play in the event of non utilisation of capital gains for creating the new residential house and however, on the facts of the case ought to have appreciated that the creation of the new asset being not disputed, sustenance of the disallowance of the deduction under Section 54F/54 of the Act was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
11. The NFAC, Delhi failed to appreciate that in any event, having not independently examined the capital gains arising in the hands of the appellant’s wife appellant, the assessment of the entire capital gains as income of the appellant was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
12. The NFAC, Delhi erred in sustaining the claim of disallowance of credit of taxes to the extent of Rs. 1,66,619/-relatable to the appellant’s wife’s income (Capital Gains & Interest income), clubbed in the hands of the appellant and reported in the return of income filed for the assessment year under consideration without assigning proper reasons and justification.
13. The NFAC, Delhi failed to appreciate that disputed disallowance forming part of the re-assessment made on protective basis in the absence of any valid substantive assessment made elsewhere would vitiate the re-assessment order passed in its entirety.
14. The NFAC, Delhi failed to appreciate that the entire re-computation of taxable total income was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
15. The NFAC, Delhi failed to appreciate that having not adhered to the prescription of faceless regime, the consequential appellate order passed should be reckoned as bad in law.
16. The NFAC, Delhi failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.
17. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”
7. The ld.AR for the assessee reiterated the grounds of appeal and submitted that the AO has passed an order by making disallowance of deduction u/s.54F and also denying the TDS credit on protective basis. The ld.CIT(A) has confirmed the order of the AO into substantive basis without considering any of the submissions. Therefore, the ld.AR prayed for remitting the issue back to AO to assess the income in the hands of the assessee by considering in whose name the income is assessed on substantive basis.
8. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A). Before the ld.CIT(A), the assessee submitted that the deposits were made out of cash on hand as on 08.11.2016, accumulated from genuine business transactions in the course of business in textiles. On perusal of the submissions made by the assessee, the ld.CIT(A) confirmed the order of the AO by dismissing the appeal of the assessee by passing an order dated 06.10.2025.
9. Per contra, the ld.DR supported the orders of the authorities and prayed for confirming the order of the ld.CIT(A).
10. We have carefully considered the rival submissions, perused the orders of the lower authorities, and examined the material available on record. At the outset, it is an undisputed fact that the capital gains in question arise from the sale of an immovable property which admittedly stands in the name of the assessee’s wife. However, the assessee has offered the said capital gains in his return of income and claimed exemption u/s.54F of the Act. The AO, while framing the reassessment, disallowed the claim of exemption primarily on the ground that the asset transferred was a residential house and therefore outside the purview of section 54F, and further on account of failure on the part of the assessee to furnish supporting evidences. Significantly, the AO made such addition only on a protective basis, thereby indicating a lack of certainty as to the correct person in whose hands the income is liable to be assessed.
11. It is a settled position of law that protective assessment can be resorted to only in cases where there is ambiguity regarding the person liable to be taxed, and such protective addition must necessarily be accompanied by a corresponding substantive assessment in the hands of the person believed to be the real owner of the income. In the present case, there is nothing on record to demonstrate that any substantive assessment has been made in the hands of the assessee’s wife, who is the ostensible owner of the property. In such circumstances, the action of the AO in making a protective addition, without conclusively determining the real owner of the income, remains inconclusive.
12. Further, we find that the ld.CIT(A) has converted the protective addition into a substantive addition without recording any categorical finding as to why the income is assessable in the hands of the assessee and not in the hands of his wife. Such conversion, in our considered opinion, is not sustainable in law in the absence of a clear finding backed by cogent material. The appellate authority is expected to adjudicate the issue by examining the ownership of the asset, the flow of consideration, and the legal entitlement to the income. In the absence of such examination, the conversion of protective addition into substantive addition is arbitrary and cannot be upheld.
13. On the issue of exemption claimed u/s.54F of the Act, we observe that the allowability of such claim depends upon satisfaction of statutory conditions, including the nature of the asset transferred and the investment made in specified assets. The AO has rejected the claim both on legal and factual grounds, however, without bringing sufficient material on record to conclusively establish the ineligibility of the assessee. At the same time, the assessee has also failed to place adequate evidence before the lower authorities to substantiate the claim. Therefore, this issue, in our view, requires fresh examination at the level of the AO after affording due opportunity to the assessee to produce necessary evidences.
14. With regard to the denial of TDS credit amounting to Rs.1,66,619/-, we find that the same has been disallowed merely on account of mismatch of PAN, as the TDS pertains to the PAN of the assessee’s wife. It is a well-established principle that credit for TDS cannot be denied if the income corresponding to such TDS has been offered to tax, even if there is a procedural mismatch, subject to verification. The authorities below have failed to examine this aspect in its proper perspective. Therefore, this issue also warrants reconsideration by the AO with reference to the nexus between the income offered and the TDS claimed.
15. In view of the foregoing discussion, we are of the considered opinion that the issues involved in the present appeal have not been properly examined either by the AO or by the ld.CIT(A). The matter requires a comprehensive reevaluation, particularly on the question as to the correct person liable to be taxed, the eligibility of exemption u/s.54F of the Act, and the allowability of TDS credit based on factual verification.
16. Accordingly, in the interest of justice, we deem it appropriate to set aside the order of the ld.CIT(A) and restore the issues to the file of the AO for fresh adjudication in accordance with law, after providing adequate opportunity of being heard to the assessee. The assessee is also directed to cooperate and furnish all necessary evidence in support of his claims.
17. In the result the appeal of the assessee allowed for statistical purposes.