TDS Credit Must Be Granted to the Assessee Who Offers the Income to Tax.

Issue

Can a legitimate claim for TDS credit be disallowed by the Centralized Processing Centre (CPC) merely because of a mismatch in Form 26AS, which occurred due to the deductor’s error of quoting the PAN of a predecessor entity, even when the assessee has correctly included the corresponding income in its return?

Facts

An assessee-company took over a hospital business from a partnership firm.
While making payments, certain insurance companies (deductors) inadvertently deducted and reported TDS against the PAN of the erstwhile partnership firm, despite being provided with the new company’s PAN.
The assessee-company correctly offered the income from these payments to tax in its income tax return for the Assessment Year 2023-24.
It claimed credit for the TDS that had been wrongly deducted.
The CPC, during processing under Section 143(1), disallowed the TDS credit because the amount was not reflecting in the assessee-company’s Form 26AS.
It was undisputed that the predecessor firm had not claimed any credit for this TDS.

Decision

The High Court ruled decisively in favour of the assessee.
It held that denying the TDS credit in such a situation is contrary to the provisions of Section 199 of the Income-tax Act and Rule 37BA of the Income-tax Rules.
The court reasoned that since the income had been taxed in the hands of the assessee-company, denying the credit for tax already paid on that same income would lead to double taxation, which is abhorrent to the principles of the Act.
It concluded that the assessee cannot be penalized for a reporting error made by the deductor. The assessee was, therefore, entitled to the full credit of the tax deducted at source.

Key Takeaways

Credit Follows the Income: The fundamental principle is that the credit for TDS must be given to the person who has actually borne the tax by offering the corresponding income for assessment.
Form 26AS is a Verification Tool, Not the Final Word: A mismatch in Form 26AS is a procedural issue that can be rectified with evidence. It cannot be the sole reason to deny a substantive right to TDS credit, especially when the error is not the assessee’s fault.
Double Taxation Must Be Avoided: The judgment reinforces the core principle that the same income should not be subjected to tax twice. Denying credit for tax already paid while taxing the income would violate this principle.
Taxpayer’s Rights: An assessee should not be made to suffer a financial loss due to a mistake committed by a third-party deductor.

IN THE ITAT MUMBAI BENCH ‘F’

Upasani Super Speciality Hospital (P.) Ltd.

Income -tax Officer

Amit Shukla, Judicial Member
and Prabhash Shankar, Accountant Member

IT Appeal No. 901 (Mum) of 2025
[Assessment year 2023-24]

SEPTEMBER 30, 2025

Dharan Gandhi for the Appellant. Ms. Kavita Kaushik for the Respondent.

ORDER

Amit Shukla, Judicial Member.- This appeal by the assessee is directed against the order dated 26.08.2024 passed by the National Faceless Appeal Centre (NFAC), Delhi, in proceedings under Section 154 of the Income-tax Act, 1961, relating to the assessment year 202324.

2. The solitary grievance raised by the assessee is that the learned Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in not allowing credit of tax deducted at source (TDS) amounting to Rs. 9,88,132/-, which had been claimed in the return of income but was disallowed while processing under Section 143(1).

3. Briefly stated, the relevant facts are that the assessee company is engaged in the business of running a hospital. With effect from 15th March 2019, it had taken over the hospital business previously conducted by a partnership firm, namely Upasani Super Speciality Hospital. Consequent to this takeover, all receipts and income were duly accounted for in the books of the assessee company and were offered to tax in its return of income.

4. During the relevant previous year, certain insurance companies, while making payments, inadvertently deducted TDS in the name and PAN of the erstwhile partnership firm, notwithstanding the fact that the assessee had furnished complete documentation reflecting its own PAN. The income corresponding to these deductions was, however, recorded in the books of the assessee company and offered to tax by it. The partnership firm, though still in existence, neither carried on any business activity nor offered any income to tax, and, in its return, specifically disclosed that it had not claimed such TDS credit, acknowledging that the same pertained to the assessee company.

5. In its return of income, the assessee claimed TDS credit of Rs. 9,88,132/-. However, while processing the return under Section 143(1), the Centralised Processing Centre disallowed the claim on the ground that such credit was not reflected in the assessee’s Form 26AS.

6. Aggrieved, the assessee filed an application for rectification under Section 154. The Assessing Officer, by order dated 30.01.2024, declined to allow the credit, holding that in the absence of reflection in Form 26AS, the system did not permit the grant of such credit.

7. The assessee carried the matter in appeal before the learned CIT(A). Vide order dated 26.08.2024 passed under Section 250, the CIT(A), while substantially upholding the view of the Assessing Officer, observed that Rule 37BA envisages a situation where income is assessable in the hands of a person other than the deductee, in which case the TDS credit shall be allowed to such other person provided that the deductee files a declaration with the deductor and the deductor, in turn, reports the same in its TDS statements. Since no such declaration was produced in the appellate proceedings, the learned CIT(A) directed the Assessing Officer to allow the differential TDS credit of Rs. 9,88,132/- to the assessee only after verifying whether the necessary declaration had been filed with the deductor and whether the deductor had reported the same. Accordingly, the ground of appeal was treated as allowed for statistical purposes.

8. Pursuant to the appellate directions, the assessee approached the deductors, issued several communications, and even sent reminders requesting them to revise their TDS returns. Despite such efforts, the insurance companies did not carry out the correction.

9. The Assessing Officer, while giving effect to the appellate order on 06.01.2025, again declined the credit, observing that the assessee had not complied with Rule 37BA(2)(i) and that the deductors had not reported the TDS against its PAN.

10. Before us, the learned Authorised Representative for the assessee reiterated that the income in respect of which TDS was deducted had been duly offered to tax in the hands of the assessee company; that the partnership firm had not claimed the credit in its return; that the assessee’s computations and annexures (A to C) demonstrated the bona fides of its claim; and that, despite complete invoices being raised by it, the deductors, by sheer error, made the deduction in the PAN of the partnership firm. It was emphasised that the assessee should not be penalised for the deductors’ lapse, and denial of such credit would result in double taxation of the same income, a result neither sanctioned by law nor by equity.

11. The learned AR further relied on judicial precedents. Particular reliance was placed on the decision of the Hon’ble Delhi High Court in Court On Its Own Motion v. CIT 335/352 ITR 273 (Delhi), wherein it was held that once tax has been deducted and deposited with the exchequer, denial of credit to the assessee whose income has been taxed, merely because of a mismatch or fault of the deductor, amounts to unjust harassment. The Court observed that the Assessing Officer has ample powers under Sections 133 and 154 to verify the claim and issue notice to the deductor, and genuine taxpayers cannot be left remediless for no fault of theirs.

12. Reliance was also placed on the order of the Coordinate Bench in Dy. CIT v. Reliance Infrastructure Ltd. 716/202 ITD 452 (Mumbai – Trib.)/ (ITA Nos. 233 & 234/Mum/2023), where it was held that harmonious construction of Section 199 and Rule 37BA makes it clear that the legislative intent is not to deny credit where the income is assessable in the hands of a person other than the deductee. Rather, the intention is to ensure that credit of TDS follows the income and is given to the person in whose hands the income is assessed to tax. The Tribunal observed that denial of such credit results in double taxation, which is impermissible in law.

13. To buttress this contention, reference was made to the enabling provision of Section 199(1), which provides that any deduction made and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose income such deduction has been made. Further, Rule 37BA elaborates the manner of granting such credit and clarifies that where the income is assessable in the hands of a person other than the deductee, the credit must be given to that other person, provided necessary declarations are made and reported. The learned AR urged that a purposive construction must be adopted so that the beneficial intent of the provision is not defeated.

14. On the other hand, the learned Departmental Representative submitted that the statutory framework of Section 199, read with Rule 37BA, is categorical: credit of TDS can be given only when the deductor has reported it against the correct PAN, and unless and until the deductor rectifies its TDS return and the same is reflected in Form 26AS of the assessee, the Department is powerless to grant such credit. It was thus urged that the authorities below have rightly declined the claim, having acted strictly in accordance with law.

15. We have heard the rival submissions and perused the material placed on record, including the orders of the authorities below, the statutory provisions, and the judicial precedents cited. The issue before us is short yet significant— whether the assessee company, having offered income to tax, is entitled to credit of TDS amounting to Rs. 9,88,132/-, though such tax was erroneously deducted in the PAN of the erstwhile partnership firm and not reflected in the assessee’s Form 26AS.

16. At the outset, it is not in dispute that the income corresponding to the impugned TDS has been accounted for in the books of the assessee company and offered to tax in its return. It is equally undisputed that the partnership firm, though still existing in law, neither carried on business in the relevant year nor offered any such income to tax, and has categorically not claimed the credit of TDS in its return. Thus, there is no question of double claim. The controversy arises purely on account of a mismatch caused by the deductors in reporting the TDS against the wrong PAN.

17. Section 199(1) of the Act provides in unequivocal terms that any deduction of tax at source 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. The emphasis is clearly on the —person from whose income” the tax was deducted. In the present case, the income has been taxed in the hands of the assessee company, and therefore, the corresponding TDS must, in principle, be treated as payment on its behalf.

18. Rule 37BA of the Income-tax Rules, 1962, further elaborates the procedure for granting such credit. Sub-rule (2) thereof contemplates a situation where the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee. In such cases, the Rule mandates that credit shall be given to the other person and not to the deductee, subject to compliance with procedural formalities of furnishing declarations and reporting by the deductor. The spirit of the provision, however, is unmistakable TDS credit must follow the income, so that the person in whose hands income is assessed to tax is not deprived of the corresponding credit.

19. The Hon’ble Delhi High Court, in its celebrated judgment in Court on Its Own Motion (supra), dealt extensively with the hardship caused to genuine taxpayers on account of mismatch between TDS entries and Form 26AS. The Court observed (at para 49) that denial of credit to the assessee, who has suffered tax deduction at source, despite the Revenue having received the tax, amounts to unjust harassment and inequity. The Court trenchantly noted that —denying benefit of TDS to a taxpayer because of the fault of the deductor, which is not attributable to the deductee, causes unwarranted harassment and inconvenience; the deductee feels cheated.” It was further held that the Revenue cannot —pretend helplessness and remain a silent spectator,” but must take proactive steps to ensure that genuine taxpayers are not made to suffer. The Court emphasised that the problems of mismatch particularly affect small taxpayers and senior citizens, who cannot afford endless pursuit of deductors, and therefore, the onus lies on the Department to utilise its statutory powers to secure justice.

20. Continuing in para 50, the Hon’ble High Court admonished the Revenue for merely writing letters to deductors, observing that such perfunctory steps cannot be a substitute for statutory action. It was categorically held that the Assessing Officer is empowered to issue notices under Section 133, to compel deductors to furnish correct details, and to ensure that credit is granted to the person whose income has borne the tax. The Court directed that when an assessee approaches the Assessing Officer with requisite particulars, the officer must verify whether the tax has indeed been deducted and deposited, and upon satisfaction, grant credit to the assessee. To deny credit in such cases, the Court held, would amount to treating the taxpayer unjustly and would erode faith in the fairness of the system.

21. The Coordinate Bench of this Tribunal, in Reliance Infrastructure Ltd.(supra), has harmoniously construed Section 199(1) with Rule 37BA. Section 199(1) provides that tax deducted and paid to the Central Government shall be treated as payment on behalf of the person from whose income the deduction was made. Rule 37BA(2) supplements this by prescribing that where income is assessable in the hands of a person other than the deductee, the credit shall be given to such person, provided that necessary declaration is made and reported. The Tribunal held that the true legislative intent is to ensure that credit of TDS follows the income, not the formality of the PAN against which deduction was reported. The authorities were thus directed to adopt a purposive construction and not to deny credit merely because of procedural lapses or omissions by the deductor.

22. The Tribunal, in Reliance Infrastructure (supra), further held that a harmonious reading of Section 199 and Rule 37BA makes it clear that the intention was never to deny TDS credit where the income is already taxed in the hands of another person. The purpose of the Rule is to avoid double taxation and ensure that the tax deducted is appropriately given credit against the person’s liability whose income is actually taxed. Therefore, insistence on rigid compliance with reporting formalities, when the substance of the matter is clear, would defeat both equity and legislative intent.

23. Applying these principles to the facts before us, the position becomes crystal clear. The income in question has been taxed in the hands of the assessee company; the partnership firm has not claimed credit; and the Department has already received the tax deducted at source. To deny credit in such circumstances, merely because of an error in reporting by the deductors, would not only be contrary to Section 199 and Rule 37BA but would also lead to double taxation of the same income, which is abhorrent to the scheme of the Act. The beneficial purpose of TDS provisions is to facilitate smooth collection and credit of tax, not to ensnare taxpayers in procedural entanglements.

24. In view of the foregoing discussion, and guided by the statutory framework of Section 199 read with Rule 37BA, as well as the authoritative pronouncements of the Hon’ble Delhi High Court in Court On Its Own Motion (supra) and the Coordinate Bench in Reliance Infrastructure Ltd. (supra), we are of the considered view that the assessee is entitled to credit of the tax deducted at source amounting to Rs. 9,88,132/-.

25. It is reiterated that the income has been duly taxed in the hands of the assessee company, the deductee-partnership firm has neither claimed nor is entitled to claim such credit, and the Revenue has already received the tax from the deductors. To withhold the credit in such circumstances would be tantamount to double taxation of the same income, a result not sanctioned by law, equity, or the scheme of the Act.

26. We accordingly direct the Assessing Officer to grant the assessee credit of Rs. 9,88,132/- being the tax deducted at source on the income offered and assessed in its hands. Such grant of credit shall, of course, be subject to verification that the partnership firm has not claimed the said amount, which, as noted earlier, stands already admitted in its return of income.

27. In the result, the appeal of the assessee stands allowed.