The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has restored to the Assessing Officer a dispute concerning restriction of Tax Deducted at Source (TDS) credit where the gross receipts reflected in Form 26AS did not fully match the income credited to the assessee’s Profit & Loss Account because certain client reimbursements had been adjusted against expenses.
The bench of Judicial Member Debjani (Judicial Member Debjani) and Vikram Singh Yadav (Accountant Member) observed that there was prima facie merit in the assessee’s contention that reimbursement receipts, though not separately credited as income, had already been accounted for by reducing the corresponding expenditure and therefore would have no impact on the net profit declared by the assessee. However, holding that the matter required factual verification, the ITAT remanded the issue to the Assessing Officer for fresh examination in accordance with law.
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The appellant/assessee, a partnership firm engaged in the business of clearing and forwarding agency, had filed its income-tax return declaring total income of Rs. 42,93,670. In the return, it claimed TDS credit of Rs. 6,73,371, corresponding to the tax deducted and appearing in Form 26AS.
However, while processing the return, the Centralised Processing Centre (CPC), Bengaluru, issued an intimation under Section 143(1) and restricted the available TDS credit to Rs. 4,10,618 by applying Rule 37BA of the Income Tax Rules.
The assessee thereafter moved a rectification application under Section 154, but the application was dismissed. It consequently approached the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi.
The first appellate proceedings, however, did not result in an adjudication of the controversy on merits. The CIT(A) dismissed the appeal for non-prosecution, prompting the assessee to approach the ITAT.
The assessee contended that its failure to respond to the notices issued by the CIT(A) was neither deliberate nor intentional.
It was submitted that the partnership firm had been established in 1981 but had discontinued its business operations in 2024 because its partners were unable to continue the business due to old age.
Since the business had closed and there was no staff regularly accessing emails, notices issued by NFAC remained unnoticed. Consequently, the assessee submitted that it was deprived of an effective opportunity to present its case before the appellate authority.
The assessee argued that it had nothing to gain from deliberately remaining non-compliant and requested that the failure to participate in the NFAC proceedings be condoned in the interest of justice.
The principal controversy before the Tribunal arose from the difference between gross receipts appearing in Form 26AS and the income reflected in the assessee’s Profit & Loss Account.
The assessee explained that the receipts appearing in Form 26AS comprised different components, including agency income, brokerage income, interest on fixed deposits and reimbursement of expenses received from clients.
According to the assessee, the entire amount had been appropriately accounted for in its books. Agency income and other income items were credited to the Profit & Loss Account, whereas reimbursements received from clients were treated differently because they did not constitute income in the assessee’s hands.
Instead of showing the reimbursement as income on the credit side of the Profit & Loss Account, the assessee had reduced the reimbursed amount from the relevant expenses. It claimed that this treatment was consistent with the accounting principles followed by it.
The difficulty arose because these reimbursement receipts nevertheless formed part of the gross receipts reported in Form 26AS on which tax had been deducted at source. Therefore, a comparison of Form 26AS receipts with income credited on the face of the Profit & Loss Account resulted in an apparent mismatch. According to the assessee, it was this mismatch that ultimately led to restriction of its TDS credit.
Challenging the restriction of TDS credit, the assessee argued that the action was unsustainable both on facts and in law.
It contended that it had correctly claimed the TDS credit appearing in Form 26AS and that the underlying receipts had been duly accounted for in its books.
The Assessing Officer, according to the assessee, had effectively compared the receipts reflected in Form 26AS with income shown in the Profit & Loss Account and then granted only proportionate TDS credit by applying Rule 37BA.
The assessee argued that such an application of Rule 37BA was incorrect. It submitted that the Rule lays down the manner in which TDS credit is to be allowed where income is assessable over different years or in the hands of different persons. According to the assessee, the provision does not authorise denial of TDS credit merely because some of the underlying receipts represented reimbursement of expenses.
Accordingly, it maintained that where the receipts had been duly accounted for and the corresponding TDS was reflected in Form 26AS, proportionate denial of the credit could not be justified merely on account of the accounting treatment given to reimbursements.
The assessee also brought to the Tribunal’s attention proceedings concerning Assessment Year 2023-24, where an identical issue had allegedly arisen.
For that year too, the Assessing Officer had allowed proportionate TDS credit by applying Rule 37BA. However, the CIT(A), NFAC, after considering the matter, had allowed the appeal for statistical purposes and restored the issue to the Assessing Officer for necessary factual verification.
The assessee pointed out that the Revenue had not filed an appeal against that appellate order. It therefore requested the ITAT to adopt a similar course for AY 2021-22 and send the matter back to the Assessing Officer instead of sustaining an outright denial of part of the TDS credit.
The Departmental Representative relied upon the Assessing Officer’s order. At the same time, the Revenue fairly submitted before the Tribunal that the controversy required factual verification.
The Departmental Representative stated that if the Bench considered it appropriate, the matter could be remanded to the Assessing Officer for such verification.
After considering the rival submissions and examining the material on record, the Tribunal noted that the assessee’s claim for TDS credit was based upon tax actually deducted and reflected in Form 26AS.
The ITAT identified the limited controversy as whether the receipts offered/accounted for by the assessee and those appearing in Form 26AS could be properly reconciled.
The assessee had asserted that, except for reimbursements of expenses, the remaining receipts were fully reconcilable. As regards reimbursements, the assessee explained that they had been reduced from expenses appearing on the debit side of the Profit & Loss Account instead of being separately credited on its income side.
This accounting treatment became crucial to the Tribunal’s consideration of the dispute.
The Tribunal noted the assessee’s contention that even the reimbursement receipts had effectively been reflected in the accounts through a corresponding reduction in expenditure.
The Bench observed that this treatment would have “no impact on the net profit” declared by the assessee and recorded that it prima facie found merit in the contention advanced by the assessee’s authorised representative.
The observation assumes importance because the dispute did not concern TDS absent from Form 26AS. Rather, the controversy arose from the manner in which the underlying receipts, particularly reimbursement of expenses, had been presented in the books and whether they could be reconciled with the gross receipts reported in Form 26AS.
The Tribunal, however, did not finally adjudicate the assessee’s entitlement to the entire TDS credit merely on the basis of its explanation.
Instead, it held that the factual position required necessary verification.
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