Full TDS Credit Allowed on Inherited Property Sale Despite Capital Gain Proportionality, Upholding Substance Over Technicality.

Issue:

Whether an assessee, who inherited a property and received the entire sale consideration in her bank account after Tax Deducted at Source (TDS), is entitled to claim full TDS credit, or whether the Assessing Officer (AO) can restrict the credit only to the proportion of capital gain offered by the assessee, based on technical grounds.

Facts:

For Assessment Year 2023-24, the assessee inherited a house property along with her children. During the year, the assessee sold this property, and the entire sale consideration was received in her bank account, after TDS deduction. The assessee subsequently claimed the entire TDS credit on the sale of the property in her income tax return. However, the Assessing Officer (AO) allowed TDS credit only in proportion to the capital gain offered by the assessee, implying a technical proportionality based on the income declared, rather than the full amount of tax borne by the assessee.

Decision:

In favor of the assessee: The court held that the denial of full TDS credit to the assessee merely on technical grounds, especially when she bore the initial tax burden and complied in substance with the law, could not be sustained. Therefore, the assessee was to be allowed credit for the entire TDS amount as claimed.

Key Takeaways:

Purpose of TDS Credit (Section 199 and Rule 37BA): The fundamental purpose of TDS is to collect tax at the source, and Section 199 along with Rule 37BA ensures that the person from whose income tax has been deducted at source gets a credit for that amount against their final tax liability.
Substance Over Form: This judgment emphasizes the principle of “substance over form.” Even if there are multiple legal heirs to a property, if the entire sale consideration, after TDS, is received by one co-owner (the assessee in this case) in her bank account, she is effectively the one from whom the tax has been deducted. Denying the full credit solely because other legal heirs might also have a beneficial interest in the property (or proportional capital gain) would be a technical denial, undermining the credit mechanism.
“Bore Initial Tax Burden”: The court specifically highlighted that the assessee “bore the initial tax burden” of the TDS. This means that the money was actually deducted from her receipts. To deny credit for tax that has actually been paid and reflected in her Form 26AS would be unjust.
Practical Implications: In situations involving co-owned properties, sometimes one co-owner manages the sale and receives the funds. If TDS is deducted in the name of that co-owner (as reflected in Form 26AS), they should generally be allowed the full credit, provided the entire sale consideration (and thus the corresponding tax burden) is traceable to their account. How the co-owners subsequently share the sale proceeds or the tax liability among themselves is an internal matter, but the credit for TDS should ideally follow where the tax was actually deducted from.
Form 26AS and Actual Deduction: Implicit in such rulings is the reliance on Form 26AS, which reflects the actual TDS deducted and deposited against a PAN. If the full TDS is reflected in the assessee’s Form 26AS, denying it requires strong justification beyond mere technical proportionality of income declared by one co-owner.

IN THE ITAT BANGALORE BENCH ‘SMC’

Baderunnisa

Deputy Director of Income-tax (CPC)

Waseem Ahmed, Accountant Member

IT Appeal No. 2572 (Bang.) OF 2024
[Assessment year 2023-24]

MAY 5, 2025

Mohammad Taher Shaikh, CA for the Appellant. Ganesh R. Gale, Standing Counsel for the Respondent.

ORDER

Waseem Ahmed, Accountant Member. – This is an appeal filed by the assessee against the order passed by the Addl/JCIT(A)-6, Mumbai dated 24/10/2024 in DIN No. ITBA/APL/S/250/2024-25/1069910241(1) for the assessment year 2023-24.

2. The effective issue raised by the assessee is that the learned CIT(A) without the considering the submission made during appellate proceeding confirmed the action of the CPC by not providing the credit of entire TDS on sale of property.

3. The relevant facts are that the assessee is an individual. The assessee, after the death of her husband, inherited a house property along with 4 sons and a daughter. As per Muslim religious practice the property was inherited in the following ratio among the legal heirs.

S. No.	Name of legal heir	Relation	Ratio
1.	Baderunnisa (appellant assessee)	Wife	12.50%
2.	Mubeen Ahmed	Son	19.44%
3.	Amin Ahmed	Son	19.44%
4.	Moin Ahmed	Son	19.44%
5.	Momin Ahmed	Son	19.44%
6.	Firdose Ziauddin	Daughter	9.74%

4. During the year under consideration, the impugned house property was sold for a consideration of Rs. 2 crores. The appellant assessee claimed that entire sale consideration was received in her bank account only after deduction of TDS amounting to Rs. 2 Lakh only in her name only. As per the assessee, she computed the capital gain on the sale of the property along tax liability and the liability was distributed among the legal heirs in their inheritance ratio. Accordingly, individual tax liability was paid through payment of advance tax. The other legal hiers made full payment of their tax liability without claiming the credit of TDS. Therefore, the entire TDS credit was claimed by her in the return of income filed as on 03-07-2023.

5. The return of income of the assessee was processed by the CPC and the intimation order under section 143(1) of the Act was generated as on 12-01-2024 where the CPC accepted the returned income but allowed the claim of TDS credit only to the proportion of capital gain offered by the assessee. Thereby, the CPC disallowed the claim of TDS credit for Rs. 1,73,516/- only.

6. The aggrieved assessee preferred an appeal before the learned CIT(A) who dismissed the assessee’s appeal by holding as under:

4.3 It is seen from the submission that though the deductor had deducted the TDS in the name of the appellant however, the income to the extent of 87.5% of sale consideration was assessable in the hands of other co-owners. As reproduced above, Rule 37BA(2) specifically provides for such kind of scenario. As the total deduction has been incorrectly made in the name of the appellant, she was required to file a declaration with the deductor for issuing the certificates in the name of the correct deductees. Furthermore, section 199 read with Rule 37BA specifically provides for giving credit for the tax deducted at source to the extent the corresponding income is offered to tax. As the AO, CPC has restricted the TDS credit in accordance with provisions of section 199 r.w.r. 37BA, I found no infirmity in the order of the AO, CPC. This ground of appeal is therefore, dismissed.

7. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before the Tribunal.

8. The learned AR before me filed paper book running from pages 1 to 81 and inter alia submitted that the Deputy Director of Income-tax, CPC, Bengaluru (“the AO”) erred in restricting the credit of TDS on the sale consideration of the immovable property to the extent of the assessee’s share, without appreciating that the other legal heirs had paid advance tax on their respective capital gains.

9. The learned AR further argued that the learned CIT(A) also erred in confirming the denial of full TDS credit. The ld. AR contended that the assessee had received the entire sale consideration in her bank account as a condition of sale by the buyer, who accordingly deducted TDS under section 194IA of the Act and issued the TDS certificate in her name. The assessee had computed the capital gains on the property and paid advance tax on behalf of other legal heirs as well. The remaining net amount after tax was distributed to each legal heir. Based on these facts, the AR asserted that the appellant rightly claimed the credit for the entire TDS amount against her tax liability, and the same should be allowed in full, since the entire transaction and tax responsibility initially rested with her before being equitably settled among the heirs.

10. The learned DR, on the other hand, before me argued that the property in dispute was owned by the family members jointly. Therefore, the credit of TDS amount should also be given jointly in their respective name instead of one single party. The ld. DR vehemently supported the order of the authorities below.

11. I have heard the rival contentions of both the parties and perused the materials placed on record. It is an undisputed fact that the entire sale consideration was deposited into the bank account of the assessee, and the TDS was deducted and reflected in her name alone. This arrangement was in consequence of the buyer’s condition, and the deduction of TDS was appropriately made under section 194-IA of the Act. The assessee, in turn, discharged the capital gains tax liability in full, not only for herself but also on behalf of the other legal heirs, followed by appropriate distribution of the net proceeds. The advance tax payments were made by the co-owners towards their respective shares, clearly evidencing that the income has been duly offered to tax in accordance with their respective ownership ratios. Rule 37BA(2) read with section 199 of the Act, while governing the apportionment of TDS credit, also mandates that the credit shall be given to the person in whose name the deduction is made, provided the income is assessed accordingly. In the instant case, the revenue has not disputed the correctness of income offered or the tax paid by the other legal heirs. In such a scenario, the denial of full TDS credit to the assessee merely on technical grounds, especially when she bore the initial tax burden and complied in substance with the law, cannot be sustained. I, thus, find merit in the plea of the assessee and direct the department to allow the credit for the entire TDS amount as claimed. Accordingly, the order of the ld. CIT(A) is set aside, and the ground of appeal of the assessee is allowed.

12. In the result appeal of the assessee is allowed.