2012 (3) TMI 239 - HC - Income Tax

TDS credit - claim of TDS credit without surrender of income - held that - the provisions contained in sub-sections (1) and (3) of Section 199 read with Rule 37BA of the Income Tax Rules serve a purpose because if income is not assessable in the assessment year and at the same time assessees are entitled to credit of tax recovered and remitted in respect of such income, the Department will be compelled to refund the entire tax amount every year and along with it if refund is not made within three months from filing of return, mandatory interest will also payable, as provided under Section 243(1) of the Income Tax Act which will defeat the purpose of TDS provisions in the Act. Therefore, we do not find any justification for the Tribunal to allow credit of tax based on TDS certificates without corresponding assessment of income in the assessment years concerned which is against the statutory provision. whether the assessing officer was justified in refusing to give credit for tax payments based on TDS certificates issued by the Bank for the reason that income is not returned for assessment by the assessees in the assessment year following the year in which tax is recovered and paid by the Banks - Section 199 of the Income Tax Act makes it clear that the assessee is entitled to credit based on TDS certificate only in the assessment year in which income from which tax is deducted is assessed - Decided against the assessee. If Section 145(1) is amended for assessment of income on which TDS is made in the assessment year following the year in which deduction is made irrespective of the system of accounting followed by the assessee, the same will avoid problems for the assessees and the Department. - Decided in favor of the revenue

Summary

Issues Involved:
1. Entitlement to credit for tax deducted at source (TDS) in the assessment year following the previous year of deduction and remittance.
2. Maintainability of the appeals based on the tax amount involved.
3. Interpretation and application of Section 199 of the Income Tax Act and Rule 37BA of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Entitlement to Credit for TDS:
The primary issue was whether the assessees are entitled to credit for TDS in the assessment year following the previous year in which the deduction and remittance were made by the payer, even if the income is not returned or assessed in that assessment year. The respondents-assessees held cumulative term deposits in banks, and the banks deducted TDS on the interest credited to their accounts. The assessees, following a cash system of accounting, did not return the interest income in the assessment years following the deduction but claimed credit for the TDS based on the certificates issued by the banks. The assessing officer denied credit for the TDS since the interest income was not assessed in those years.

The Tribunal, however, held that the assessees were entitled to full credit for the TDS in the assessment years concerned, irrespective of whether the income was returned or assessed. The High Court found that Section 199 of the Income Tax Act, as it stood during the relevant years, mandated that credit for TDS should be given in the assessment year in which the income is assessed. The Court emphasized that the assessees must claim credit for TDS in the year they return the income for assessment, as per the statutory provisions and Rule 37BA of the Income Tax Rules.

2. Maintainability of the Appeals:
The respondents' counsel argued that the appeals were not maintainable due to the tax amount involved being below Rs. 4 lakhs, as per the Circulars issued by the Central Board. However, the Court noted that the appeals were filed in May 2005 and September 2007, and the maintainability should be considered with reference to the Circular issued in 2005. The Court found that the appeals were maintainable since the question of law raised was of substantial importance and would apply to subsequent years and other assessees. The Supreme Court's decision in CIT v. Surya Herbal Ltd. supported the High Court's authority to decide statutory appeals on merits, ignoring the Circulars if the question involved was substantial.

3. Interpretation and Application of Section 199 and Rule 37BA:
The Court examined Section 199 of the Income Tax Act, which underwent various changes, and Rule 37BA of the Income Tax Rules. Section 199 stated that credit for TDS should be given in the assessment year in which the income is assessed. Rule 37BA(3)(i) reinforced this by specifying that credit for TDS should be given for the assessment year in which the income is assessable. The Tribunal's decision to allow credit for TDS in the assessment year following the deduction, without corresponding assessment of income, was found to be against the statutory provisions.

The Court concluded that the assessees should retain the TDS certificates and claim credit in the assessment year in which the income is returned for assessment. The Tribunal's finding that there was no provision to defer credit for TDS was incorrect, as sub-sections (1) and (3) of Section 199 read with Rule 37BA authorized the assessees to retain TDS certificates and claim credit in the appropriate year. The Court suggested that amending Section 145(1) to require assessment of income on which TDS is made in the following assessment year, irrespective of the accounting system, would avoid problems for both assessees and the Department.

Conclusion:
The High Court allowed the Departmental appeals, reversed the orders of the Tribunal and the first appellate authority, and restored the assessments denying credit for TDS in the years where the corresponding income was not assessed. The respondents-assessees were permitted to claim credit for TDS in the year the income is assessed, based on the same TDS certificates.