TDS Credit Rulings: Timing Differences and Sister Concern Credits

I. TDS Credit Follows the Income (Cash vs. Mercantile System)

Issue:

How should TDS credit be handled when an assessee follows the Cash System of accounting (taxable on receipt), but their clients follow the Mercantile System (deducting TDS on accrual)?

Facts:

The Mismatch: Clients deducted TDS in Year 1 (when they booked the expense). The CA firm (assessee) only offered the income to tax in Year 2 (when they received the payment).
The Conflict: The Assessing Officer (AO) denied the credit in Year 2 because the TDS certificates were dated for Year 1.

Decision:

Matching Principle: The Tribunal held that under Section 199, the credit for TDS must be given in the assessment year in which the corresponding income is assessable.
Timing Difference: If the income is offered to tax in the year of receipt (under the cash system), the TDS credit must be allowed in that same year, regardless of the date on the TDS certificate.

II. TDS Credit in the Name of a Sister Concern

Issue:

Can an assessee claim TDS credit if the TDS certificate (Form 26AS) mistakenly reflects the name/PAN of a sister concern, but the underlying income is actually assessed in the assessee’s hands?

Facts:

The Error: Clients erroneously deposited TDS against the PAN of a sister concern instead of the assessee firm.
The Denial: The AO refused the credit on the technical ground that the TDS did not appear in the assessee’s Form 26AS.

Decision:

Substance Over Form: The Tribunal ruled that once the Department has assessed the income in the hands of the assessee, they cannot deny the corresponding TDS credit on a purely technical ground.
Remand with Conditions: The matter was remanded to the AO to allow the credit, provided:
1. The income belongs to the assessee.
2. The sister concern has not claimed or availed of the same TDS credit in its own return.

Key Takeaways

For Professional Firms: If you follow the cash system, you can carry forward TDS credits to the year you actually receive the fee. Ensure your ITR reflects the “TDS brought forward” correctly to avoid automated CPB (Centralized Processing Center) adjustments.
Correcting PAN Errors: If a client deposits TDS on the wrong PAN, you are not necessarily forced to ask for a revised TDS return from the client. As long as you can prove the income is yours and the other party hasn’t claimed the credit, you can claim it during assessment based on these precedents.
Rule 37BA: These rulings align with Rule 37BA(2), which allows TDS credit to be granted to a person other than the deductee if the income is assessable in that other person’s hands.

IN THE ITAT CHENNAI BENCH ‘A’

Deloitte Haskins & Sells

Deputy Commissioner of Income-tax^*

SS VISWANETHRA RAVI, Judicial Member
and Ms. Padmavathy S., Accountant Member

IT Appeal Nos. 2467, 2526, 2527, 2656, 2657, 2668, 2684 (Chny) OF 2025
[Assessment years 2017-18, 2020-21to 2022-23 and 2024-25]

DECEMBER 31, 2025

S.P. Chidambaram, Adv. for the Appellant. Ms. Latchana, JCIT for the Respondent.

ORDER

1. These appeals by the assessee are against the separate orders of the Commissioner of Income Tax (Appeals)/Addl./JCIT(A)-1, Delhi (in short “FAA)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) for Assessment Years (AYs) 2017-18, 2020-21, 2021-21, 2022-23 and 2024-25. The common issue contended by the assessee in all these appeals pertain to credit for TDS denied by the lower authorities. The impugned order of FAA is arising out of the orders of the AO passed under section 143(1) of the Act for AY 2017-18, 2020-21, 2021-21, 2022-23 and 2024-25, order u/s.154 of the Act for AY 2017-18 and order u/s.143(1) against the revised return for AY 2024-25. For the purpose of adjudication, appeal pertaining to A.Y 202122 is taken as lead case.

2. The assessee is the firm of Chartered Accountants. The assessee filed the return of income for A.Y 2021-22 on 14.03.2022 declaring a total income of Rs. 23,93,08,890/-. In the return of income, the assessee had claimed credit for TDS to the tune of Rs. 5,31,78,024/-. The return was processed u/s. 143(1) of the Act and in the intimation dated 02.06.2022, the A.O restricted the TDS credit to Rs.4,32,98,687/-. The assessee preferred further appeal before the FAA against the short granting of TDS by the A.O. The assessee submitted before the FAA that it is following the cash system of accounting and the income is accounted for and offered to tax in the year of receipt. The assessee further submitted that the clients, who are following mercantile system of accounting, deduct TDS on accrual basis and therefore, there may be a timing difference in the deduction of tax and the year in which the credit is claimed. The assessee accordingly submitted that the credit for TDS is claimed in the year in which the corresponding income is received and offered to tax in accordance with Section 199 of the Act. The assessee also submitted that it belongs to group of entities and the clients may sometimes deduct and remit the tax pertaining to the assessee inadvertently in the name of other sister concerns. The assessee therefore prayed before the FAA that credit for TDS need to be given considering the unique facts as submitted before him. The FAA vide order dated 15.07.2022 directed the A.O to consider the credit for TDS in the year in which the income is offered to tax. The FAA however rejected the plea of the assessee towards credit of TDS against tax deducted in the name of sister concerns. The assessee is in appeal before the Tribunal against the order of FAA.

3. The Ld. A.R submitted that the assessee filed a rectification petition for the year under consideration before the A.O with regard to short credit of TDS in the intimation u/s 143(1) of the Act. The Ld. AR further submitted that the assessee preferred an appeal before the CIT(A) against the rejection of petition for rectification u/s. 154 of the Act. The Ld. AR also submitted that the CIT(A) vide order dated 14.12.2022 had directed the A.O as under:

allow the TDS credit in the year in which receipts were offered to tax.

ii.

allow credit for TDS which is inadvertently appearing in group entity Form 26AS due to reporting mistake made by the client provided assessee’s sister concern had not availed benefit of such TDS certificates.

The ld. AR accordingly submitted the present appeal arising out of the intimation u/s. 143(1) of the Act needs to be considered keeping in mind the above decision of the CIT(A) in the appeal against the order u/s.154 of the Act.

4. The ld. Departmental Representative (DR), on the other hand, supported the order of the A.O.

5. We have heard the both the parities, perused the material available on record. We notice that CPC while processing the return of the assessee u/s. 143(1) of the Act has restricted the TDS credit to the assessee for the reason that the TDS certificate does not pertain to the relevant A.Y in which the credit is claimed and that the TDS certificate is not in the name of the assessee as per Form 26AS. We notice that the CIT(A) in the appeal against the rectification order passed u/s.154 has directed the AO to consider both the plea of the assessee and allow the same. It is a settled position of law that the credit for TDS is to be allowed in the year in which the corresponding income is offered to tax. In the present case, the assessee is following cash system of accounting and the clients who are following mercantile system of accounting may deduct tax on accrual basis. Therefore, there is merit in the arguments of the assessee that there would be a timing difference between the year in which the tax is deducted by the client and the year in which the assessee is offering the income to tax. Therefore, we see no infirmity in the direction of the CIT(A) to allow the TDS credit in the year in which the receipts were offered to tax. Accordingly, we direct the FAA to give credit to the assessee in the year in which the receipts were offered to tax.

6. With regard to the TDS inadvertently appearing in the name of the sister concern, we notice that the CIT(A) in the order dated 14.12.2022 i.e. order against the order of rectification u/s.154, has relied on the decision of Hon’ble Delhi High Court in the case of CIT v. Relcom (Delhi), where it has been held that:

” Having heard the submissions made on behalf of the revenue and after a perusal the orders passed by the CIT(A) and the ITAT, we are of opinion that the said orders do not call for any interference and were warranted and justified in the facts and circumstances of the case. Before we proceed to elaborate on our reasons for the same, a perusal of Section 199 of the Act is necessary. Section 199 reads as follows:

“199. Credit for tax deducted.

(1) 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 the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.

(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.”

7. The revenue relies on the phrase “shall be treated as a payment of tax on behalf of the person from whose income the deduction was made” to contend that the assessee’s TDS claim cannot be based on the receipts of M/s REPL. However, the assessee fairly admitted throughout the proceedings for its TDS claim of Rs. 1,20,73,097/- that the benefit of such claim has not been availed by M/s. REPL. Therefore, the revenue, having assessed M/s REPL’s income in respect to such TDS claim cannot now deny the assessee’s claim on the mere technical ground that the income in respect of the said TDS claim was not that of the assessee, given that M/s Relcom (the assessee) and M/s REPL are sister concerns and M/s REPL has not raised any objection with regard to the assessee’s TDS claim of Rs. 1,20,73,097/-.

8. This Court’s reasoning is supported by a ruling of the Division Bench of the Andhra Pradesh High Court in CIT v. Bhooratnam & Co. where the Court noted as follows:

“In our view, the CIT (Appeals) and the Tribunal have rightly held that the assessee is entitled to the credit of the TDS mentioned in the TDS certificates issued by the contractor, whether the said certificate is issued in the name of the Joint Venture or in the name of a Director of the assessee company. They have considered the terms of the agreement dated 12-03-2003 among the parties to the joint venture and held that credit for TDS certificates cannot be denied to the assessee while assessing the contract receipts mentioned in the said certificates as income of the assessee. The income shown in the TDS certificates has either to be taxed in the hands of the joint venture or in the hands of the individual co-joint venturer. As the joint venture has not filed return of income and claimed credit for TDS certificates and the TDS certificates have not been doubted, credit has to be granted to the TDS mentioned therein for the assessee.

The Revenue cannot be allowed to retain tax deducted at source without credit being available to anybody. If credit of tax is not allowed to the assessee, and the joint venture has not filed a return of income, then credit of the TDS cannot be taken by anybody. This is not the spirit and intention of law. “(Emphasis Supplied)

9. At this stage, it is also relevant to note the provisions of Rule 37BA of the Income Tax Rules, 1962, which envisions grant of TDS credit to entities other than the deductee (herein, M/s REPL). We must clarify that we are not oblivious of the fact that Rule 37BA is not directly applicable in the facts of this case. The reliance placed on Rule 37BA is merely to demonstrate that in not all circumstances is TDS credit given to the deductee.

10. This Court relies upon the well-settled dictum that procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice Sardar Amarjit Singh Kalra v. Pramod Gupta, [2003] 3 SCC 272. Therefore, the revenue’s contention that the assessee, instead of claiming the entire TDS amount, ought to have sought a correction of the vendor’s mistake, would unnecessarily prolong the entire process of seeking refund based on TDS credit.

11. In light of the aforesaid reasons, the question of law framed is answered against the revenue and the appeal is accordingly dismissed. “

7. The ratio laid down in the above decision of the Hon’ble High Court is that claim for TDS credit to the assessee cannot be denied on the technical ground that the TDS certificate is in the name of the sister concern after having assessed the income in the hands of the assessee. In the present case we notice that the AO has denied the credit of TDS to the assessee on the ground that in Form 26AS the TDS is against the name of the sister concerns and not in the name of the assessee. Therefore in our considered view the above ratio is applicable to assessee’s case also. In view of these discussions we are remitting the issue back to the AO to allow credit of TDS to the assessee even to those appearing in the name of the sister concerns provided assessee’s sister concern had not availed benefit of such TDS certificates. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

8. From the perusal of the grounds filed by the assessee against the impugned order emanating from the order u/s.143(1) AY 2017-18, 2020-21, 2022-23 and 2024-25 and the grounds filed by the assessee against the impugned order emanating from the order u/s.154 for AY 2017-18 we notice that the same pertain to TDS credit not granted for the reason that the same pertains to different AYs and that the TDS credit in form 26AS is not reflecting in the name of the assessee. We have while considering the identical issues for AY 2021-22 have remitted the issues back to the AO and accordingly the appeals as stated herein above are also remitted back with similar directions to the AO.

9. In result the appeal of the assessee for AY 2017-18, 2020-21, 2021-22, 2022-23 and 2024-25 are allowed for statistical purposes.