2024 (10) TMI 172 - AT - Income Tax

Denial of TDS credit - Procedural lapses, specifically the non-reflection of TDS credit in Form 26AS and the failure to comply with Rule 37BA of the Income Tax Rules, 1962 - CIT(A) relied on the provisions of Section 205 clarifying that while this section bars the recovery of tax directly from the deductee where tax has been deducted, it does not govern the allowance of TDS credit and concluded that the assessee s non-compliance with Rule 37BA was a sufficient basis for the denial of TDS credit and dismissed the appeal - HELD THAT - It is a well-established principle of natural justice that a taxpayer should not suffer due to procedural lapses caused by third parties, especially when the taxpayer has acted in good faith and made all reasonable efforts to rectify the situation. It is consistently held on many judicial forums that the substance of compliance-namely, offering income to tax-should take precedence over procedural errors when assessing a taxpayer s entitlement to TDS credit. Section 205 protects the taxpayer from being asked to pay tax again if tax has already been deducted at source. This principle supports the argument that TDS credit, once deducted, should not be denied based on procedural failures, particularly those not attributable to the taxpayer. Rule 37BA of the Income Tax Rules provides for the mechanism of TDS credit, intending to ensure that the credit is given to the person who offers the income for taxation. The primary objective of this rule is to align TDS credit with the person who is the beneficial owner of the income. In this case, the assessee is the rightful owner of the income from Vedanta ADRs, and despite procedural errors by Citibank NA, the assessee has fulfilled the substantive requirements by declaring the income in its tax return. Denying credit due to procedural lapses by third parties contradicts the rule s purpose. From revenue perspective, allowing TDS credit to the assessee where the corresponding income has been offered does not result in any revenue loss to the exchequer. The tax has been deducted and accounted for; it is merely the credit that has been procedurally misplaced due to third-party errors. We hold that the denial of TDS credit based solely on procedural grounds is not justified. Assessee appeal allowed.

Summary

Issues Involved:

1. Validity of the Order due to lack of personal hearing.
2. Denial of TDS credit under Section 143(1) of the Income Tax Act.
3. Compliance with Rule 37BA of the Income Tax Rules, 1962.
4. Interpretation and application of Section 205 of the Income Tax Act.
5. Admission of additional evidence in appellate proceedings.

Detailed Analysis:

1. Validity of the Order:

The appellant contended that the order passed by the CIT(A) was invalid as it was issued without providing an opportunity for a personal hearing, violating the statutory mandate and the National Faceless Appeal Scheme 2021. The Tribunal did not specifically address this issue in its judgment, focusing instead on the substantive issues related to TDS credit.

2. Denial of TDS Credit:

The primary issue was the denial of TDS credit amounting to Rs. 57,28,565/- by the CPC, Bengaluru, as the TDS was not reflected in Form 26AS. The assessee argued that the income from the redemption of ADRs was correctly offered to tax, and the TDS was deducted by Citibank NA. The CIT(A) upheld the denial, emphasizing procedural non-compliance. However, the Tribunal found that the procedural lapses were beyond the control of the assessee, who had made all reasonable efforts to rectify the situation. The Tribunal held that the denial of TDS credit based solely on procedural grounds was unjustified and directed the AO to grant the TDS credit.

3. Compliance with Rule 37BA:

The CIT(A) emphasized non-compliance with Rule 37BA, which requires specific procedures for crediting TDS when the income is assessable in the hands of a person other than the deductee. The Tribunal, however, noted that the assessee had taken proactive steps to ensure the transfer of TDS credit and that the procedural delays were due to third-party actions. The Tribunal concluded that the assessee had substantively complied with the requirements, and the procedural errors should not override the substantive rights of the assessee.

4. Interpretation and Application of Section 205:

The CIT(A) relied on Section 205, which bars the recovery of tax directly from the deductee where tax has been deducted. However, it was clarified that Section 205 does not govern the allowance of TDS credit. The Tribunal emphasized the principle that a taxpayer should not suffer due to procedural lapses caused by third parties, especially when the taxpayer has acted in good faith. The Tribunal held that the substance of compliance should take precedence over procedural errors, aligning with the principles of natural justice.

5. Admission of Additional Evidence:

The Tribunal admitted additional evidence, including correspondence with Citibank NA and Credit Suisse AG, under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963. The evidence demonstrated the assessee's bona fide efforts to rectify the TDS credit attribution. The Tribunal emphasized that the admission of such evidence should align with the principles of natural justice and is crucial for the fair adjudication of the dispute.

Conclusion:

The Tribunal allowed the appeal, setting aside the order of the CIT(A) and directing the AO to grant the TDS credit to the assessee. The judgment highlighted the importance of considering substantive compliance and the taxpayer's bona fide efforts over procedural lapses, particularly when such lapses are due to third-party actions. The decision underscores the principles of fairness and natural justice in the adjudication of tax disputes.