2023 (1) TMI 862 - AT - Income Tax

Disallowing credit for tax deducted at source - assessee s wife did not furnish declaration to the bank in terms of proviso to Rule 37BA(2) - HELD THAT - The crux of section 199 read with Rule 37BA(2) is that if the income, on which tax has been deducted at source, is chargeable to tax in the hands of the recipient, then credit for such tax will be allowed to such recipient. The proviso to Rule 37BA(2) is just a procedural aspect of giving effect to the mandate of section 199 for allowing credit to the other person in whose hands the income is chargeable to tax. The entire purpose of this exercise of allowing credit to the other person is to ensure that the benefit of tax deducted at source is availed once and that too, by the right person, who is chargeable to tax in respect of such income. It is just to streamline the procedure for giving effect to this intent and rule out the possibility of taking any inappropriate credit for the amount of tax deducted at source, firstly, by the recipient who is not chargeable to tax and secondly, by the person who is rightly chargeable to tax in respect of such income, that the procedural provision has been put in place in Rule 37BA(2). One needs to draw a line of distinction between substantive provision section 199 read with Rule 37BA(2) without proviso and the procedural provision proviso to Rule 37BA(2) . Adverting to the facts of the extant case, it is seen that out of total interest income credited to assessee s wife as per Form No.26AS amounting to Rs.39.26 lakh, she included interest from SBI in her total income to the extent of Rs.1,84,212/-. The assessee included the remaining interest of Rs.37.42 lakh in his income because of the applicability of section 64 - assesse and his wife claimed proportionate tax credit, which totals up to Rs.2,94,474/-. This deciphers that the total interest income received by the assessee s wife got taxed partly in her own assessment and partly in the assessment of her husband, the assessee in question, as per the mandate of section 64. The benefit of TDS has also been claimed accordingly. Merely because the assessee s wife did not furnish declaration to the bank in terms of proviso to Rule 37BA(2), the amount of tax deducted at source, which is otherwise with the Department, cannot be allowed to remain with it eternally without allowing any corresponding credit to the person who has been subjected to tax in respect of such income. As the substantive provision of section 199 talks of granting credit for tax deducted at source to the other person, who is lawfully taxable in respect of such income, we are satisfied that the matching credit for tax deducted at source must also be allowed to him. In view of the fact that the tax of Rs.2,80,656/- has actually been deducted at source on the interest income of Rs.37.42 lakh, we hold that the credit for such TDS should be allowed to the assessee, who has been subjected to tax in respect of such income. This ground is allowed.

Summary

Issues:
- Disallowance of credit for tax deducted at source amounting to Rs.2,80,456.

Analysis:
1. The appeal pertains to the disallowance of credit for tax deducted at source amounting to Rs.2,80,456. The assessee gifted an amount to his wife, who deposited it in State Bank of India, earning interest income. The assessee included the proportionate interest income in his total income under section 64 and claimed credit for tax deducted at source. However, the ld. CIT(A) disallowed the credit citing non-compliance with Rule 37BA(2).

2. Section 199(1) of the Income-tax Act provides for the treatment of tax deducted at source as payment of tax on behalf of the deductee. Sub-section (3) of section 199 empowers the Board to make rules for giving credit for tax deducted at source. Rule 37BA(2) specifies that where income on which tax is deducted at source is assessable in the hands of a person other than the deductee, credit for tax deducted at source shall be given to the other person. The proviso to Rule 37BA(2) mandates the deductee to file a declaration with the deductor for giving credit to the other person.

3. The Tribunal observed that the substantive provision of section 199, read with Rule 37BA(2) without the proviso, allows credit for tax deducted at source to the person who is chargeable to tax in respect of the income. The procedural provision, i.e., the proviso to Rule 37BA(2), ensures the correct allocation of credit. Non-compliance with the procedural provision does not negate the entitlement to credit under the substantive provision.

4. In the present case, the interest income of the assessee's wife was partly taxed in her assessment and partly in the assessment of the assessee due to section 64. The Tribunal held that the credit for tax deducted at source should be allowed to the assessee, who has been subjected to tax in respect of the income. The Tribunal emphasized that the tax deducted at source cannot be retained by the Department without corresponding credit to the person liable for the tax.

5. The Tribunal allowed the appeal, holding that the assessee is entitled to the credit for tax deducted at source of Rs.2,80,656. No other grounds were pressed by the ld. AR, and thus, the appeal was partly allowed.

This judgment clarifies the principles governing the allowance of credit for tax deducted at source and highlights the distinction between substantive and procedural provisions in tax law.