2007 (4) TMI 294 - AT - Income Tax

Credit For Tax Deducted - commission agent in hosiery yarn - cash system - difference of opinion between the Members of the Bench - Third Member Order - Whether the credit for the tax deducted at source in the previous year is to be allowed in the assessment year relevant to the year in which deduction has been made or in the year in which the income is assessable to tax? - Assessee is maintaining accounts on cash basis. Order Ld AM - HELD THAT - In the instant case the TDS has been deducted from the income of the assessee in the financial year 2002-03 and the credit for the same shall be given to the assessee in the regular assessment. Regular assessment in this case relates to assessment year 2003-04 so, any tax paid by the assessee in the form of advance tax or deducted by other parties in the form of TDS in the previous year 2002-03 shall be considered only for the assessment year 2003-04. In other words, TDS cannot be adjusted on pro rata basis even if the income is shown by the assessee on cash basis but the TDS has been deducted by the payer on the basis of expenses incurred by him on mercantile basis. We, therefore considering the totality of the facts, set aside the order of Ld. CIT(A) and direct the Assessing Officer to allow the claim of the assessee in respect of TDS on the basis of TDS certificate furnished by him. Order Ld JM - HELD THAT - In my considered view, as per provisions of section 199, the assessee is entitled to the credit in respect of tax deducted at source in the year in which the income is assessable and not in the assessment year relevant to previous year in respect of which tax has been deducted at source. This ground of appeal raised by the assessee in this regard is accordingly dismissed. Order Third Member - HELD THAT - I am unable to agree with the ld AM that tax deducted at source is advance tax and credit for the same is to be given to the assessee in terms of section 219 of the Income-tax Act. The above section, as rightly pointed out by the learned Vice President, has no application in this case. There is a specific section i.e. section 199 of the Income-tax Act under which credit has to be allowed to the assessee of tax deducted at source when certificate is furnished u/s 203 of the Income-tax Act. It is clear that the assessee will not be entitled to have benefit or credit for the amount though mentioned in the certificate for the assessment year if income relatable to the amount is not shown and is not assessable in that assessment year. If instead of entire income referable to amount of tax deducted, only a portion of income is found assessable the benefit has to be allowed only on the portion shown. If balance income, on account of system of accounting followed by the assessee or for some other reason is found to be assessable in future, then the credit for the balance TDS can be allowed only in future when income is assessable. Credit allowed on pro rata basis in the year in which the certificate is issued and also in future where balance or such income is found to be assessable is as per the mandate of provision of section 199. Any amount which has not been assessed in any year but referred in the TDS certificate, cannot be claimed under section 199 of the Income-tax Act. The CBDT Circular also supports the view that where tax is deducted from the amount which is liable to be assessed and spread over more than one financial year, credit shall be allowed for TDS on pro rata basis and in the same proportion in which such income is offered for taxation in different assessment years. Benefit for the tax deducted at source is to be allowed as per statutory provisions contained in section 199 of the Act. It has nothing to do with the system of accounting followed by the assessee. Further there is no dispute that the Revenue should have a consistent approach but the above principle of law has no application where interpretation of statutory provisions is involved. If in a particular year a statutory provision was wrongly interpreted and applied, the Revenue can correct the error as income is required to be computed by correctly applying and enforcing law. Error cannot be perpetuated. Therefore on correct interpretation of section 199 and for the reasons given above, I am of the view that the Assessing Officer was right in allowing credit for tax deducted at source on pro rata basis. The credit for the balance amount mentioned in the certificate is to be allowed in the year in which such income is disclosed or is otherwise found to be assessable by the Revenue. Thus, I fully agree with the order proposed by the learned Vice President (JM).

Summary

Issues Involved:
1. Credit of TDS
2. Addition on account of low household withdrawals
3. Disallowance of electricity, telephone, and motor car expenses

Detailed Analysis:

1. Credit of TDS:
The primary issue concerns the credit of Tax Deducted at Source (TDS). The assessee, maintaining accounts on a cash basis, claimed credit for TDS deducted by various parties amounting to Rs. 15,030. However, the Assessing Officer (AO) allowed only Rs. 4,279 on a pro rata basis, adhering to Section 199(1) of the Income-tax Act, which stipulates that credit for TDS should be given for the amount assessable in the relevant year. The CIT(A) upheld the AO's decision, noting that the corresponding income for which TDS credit was claimed was not shown as income in the relevant year. The assessee argued that the full TDS credit should be allowed based on the certificates furnished, irrespective of the income being reported on a cash basis. The ITAT, after considering the provisions of Section 199 and Section 219, concluded that TDS credit should be given in the year the income is assessable, not on a pro rata basis. The dissenting opinion, however, held that credit should be allowed only to the extent of income declared, with the balance credit allowable in subsequent years when the income is assessed.

2. Addition on Account of Low Household Withdrawals:
The AO added Rs. 47,000 to the assessee's income, estimating household expenses at Rs. 8,000 per month, which was higher than the Rs. 49,000 claimed by the assessee for the entire year. The CIT(A) upheld this addition. The ITAT, upon review, found the AO's estimate to be on the higher side due to lack of concrete basis and reduced the estimated household expenses to Rs. 6,000 per month, thereby sustaining an addition of Rs. 23,000 and granting relief of Rs. 24,000 to the assessee.

3. Disallowance of Electricity, Telephone, and Motor Car Expenses:
The AO disallowed a portion of electricity, telephone, and motor car expenses, assuming personal use. The CIT(A) confirmed these disallowances. The ITAT noted that while personal use could not be ruled out, the disallowances made were excessive and without a clear basis. The ITAT directed the AO to disallow 1/6th of the expenses, considering it a fair estimate for personal use by the assessee and his family.

Conclusion:
The appeal was partly allowed. The ITAT directed full credit for TDS based on certificates, reduced the addition for household expenses, and moderated the disallowances for electricity, telephone, and motor car expenses. The dissenting opinion on TDS credit emphasized adherence to Section 199, allowing credit only for the income declared in the relevant year. The matter was referred to the President under Section 255(4) due to differing opinions, and the Third Member concurred with the view that TDS credit should be allowed on a pro rata basis, aligning with the income declared.