The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that an individual cannot claim credit for tax deducted at source (TDS) where the corresponding income has been offered to tax by a partnership firm.
While upholding the denial of TDS credit to the individual assessee, the bench of Prashant Maharishi (Vice President) directed the Assessing Officer (AO) to consider granting the credit to the partnership firm through rectification proceedings, ensuring that the tax deducted is ultimately credited to the correct taxpayer.
The appeals arose from orders of the Commissioner of Income Tax (Appeals) concerning Assessment Years 2017-18 and 2018-19. The assessee, a senior citizen, had been carrying on business as the sole proprietor of a customs clearing and forwarding concern, Cargo Links. With effect from October 1, 2015, the proprietary concern was converted into a partnership firm, with the assessee becoming one of its partners.
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Following the conversion, clients were informed that future payments and TDS deductions should be made in the name and PAN of the partnership firm. While many clients complied, several continued to deduct TDS using the assessee’s individual PAN because of their longstanding business relationship and administrative reasons. Consequently, although the business receipts were accounted for and taxed in the partnership firm’s return, the TDS appeared in the assessee’s individual Form 26AS.
For AY 2017-18, the assessee claimed TDS credit exceeding ₹6.15 lakh. However, the Central Processing Centre (CPC) allowed credit of only about ₹1.24 lakh and denied credit of approximately ₹4.91 lakh due to a mismatch between the TDS claimed and the income reported in the assessee’s return. A similar dispute involving TDS credit of ₹2.29 lakh arose for AY 2018-19.
The CPC and the Commissioner (Appeals) held that Section 199 of the Income-tax Act and Rule 37BA permit TDS credit only to the person in whose hands the corresponding income is assessable. Since the receipts against which tax had been deducted were offered to tax by the partnership firm and not by the individual assessee, the authorities concluded that the individual could not claim the credit. They also observed that the statutory procedure under Rule 37BA, including filing the necessary declarations with deductors, had not been followed.
Before the Tribunal, the assessee contended that the situation arose solely because some clients failed to update their records after the business transitioned from a proprietorship to a partnership. Although repeated requests were made to deductors to revise their TDS returns by correcting the PAN, many refused, citing cumbersome internal procedures. The assessee argued that the income had already been subjected to tax in the hands of the partnership firm and relied on the Delhi High Court’s decision in Commissioner of Income Tax v. RELCOM, where TDS credit had been allowed despite procedural irregularities.
The Revenue maintained that one taxpayer cannot claim TDS credit for income taxed in the hands of another entity and submitted that the assessee should have ensured correction of the deductors’ TDS statements.
The Tribunal observed that the legal position under Section 199 is clear: TDS credit is intended to be granted to the person who has offered the corresponding income to tax. Since the partnership firm had earned the income and disclosed it in its return, the individual assessee could not claim the associated TDS credit merely because the tax had been deducted using his PAN.
The Bench held that the CPC and the Commissioner (Appeals) were justified in rejecting the assessee’s claim, emphasizing that “income offered by one entity cannot give rise to a TDS credit claim by another entity.”
The Tribunal examined the Delhi High Court’s judgment in CIT v. RELCOM, where TDS credit was allowed despite an incorrect PAN being quoted by the deductor. While acknowledging the principles laid down in that decision, the Tribunal adopted a different approach suited to the facts of the present case.
It held that the TDS credit should ultimately benefit the entity that has offered the income to tax. Therefore, instead of granting the credit to the individual assessee, it ruled that the partnership firm should receive the benefit after appropriate verification by the tax authorities.
Recognising that the tax deducted should not remain uncredited merely because of a procedural mismatch, the Tribunal directed the assessee to file applications under Section 154 of the Income-tax Act in the name of the partnership firm for both assessment years. It further directed the Assessing Officer to examine those applications and, if the firm is found entitled to the credit after verification, grant the corresponding TDS credit to the partnership firm. The departmental representative also agreed to this course during the hearing.
The ITAT dismissed the assessee’s claim for TDS credit in his individual capacity but allowed both appeals for statistical purposes by directing the Revenue to examine the partnership firm’s entitlement to the disputed TDS credit through rectification proceedings.
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