Commissioner of Income Tax vs Smt. Pushpa Vijoy and Another

C.N. Ramachandran Nair, J.—The question raised in the two sets of appeals filed by the Revenue against the orders of the Tribunal issued in favour of the two assessees is one and the same, i.e., whether the assessees are entitled to credit tax deducted at source in the assessment year following the previous year in which deduction of tax at source and remittance was made by the payer even though income in respect of which deduction is made is not returned or assessed in that assessment year. We have heard senior counsel Sri. P.K.R. Menon appearing for the. Revenue and the learned counsel Sri. P. Balakrishnan appearing for the respondents-assessees. The undisputed facts leading to the controversy are the following.

The respondents-assessees were holding cumulative terra deposits in banks entitling them for interest on deposits which was periodically credited by the bank in the deposit account. As required under s. 194A of the IT Act, the banks recovered tax at source on the interest credited in the deposit account of the respondents-assessees and issued TDS certificates to the respondents. Though the respondents did not return interest income from these deposits as their income of the following assessment years, they claimed credit of tax based on TDS certificates issued by the banks. The assessment years concerned are 1997-98 to 2000-01. The AO declined to give credit for the tax recovered and remitted by the banks in the name of the respondents in the following assessment years for the reason that interest income on which recovery of tax is made by the banks is not returned or assessed as income for the said assessment years.

In so far as the assessees'' claim that interest income credited by the bank is not assessable in the assessment year following the year of deduction is concerned, the respondents-assessees'' claim is that they are following cash system of accounting and so much so they are liable to pay tax on the interest income only on collection of the interest amount from the banks which is on maturity of the deposit amounts. The AO accepted the respondent''s contention that interest is assessable based on the system of accounting followed by them, i.e., cash. As a consequence of this, the AO did not assess any interest income for the assessment year following the year of deduction, but declined to give credit for the tax recovered and remitted by the banks at source at the time of credit of interest based on TDS certificates produced, probably by applying s. 199 of the IT Act.

When the assessees filed appeals before the CIT(A), the assessees raised a contention that only the tax amount covered by the TDS certificates issued by the banks is their income received in cash during the previous year relevant for the assessment year and therefore the TDS amount itself should be assessed as "income" and the assessees are entitled to refund of the balance amount. Even though the first appellate authority did not accept this contention, he held that even if interest is not assessable in the assessment years concerned, the assessees are entitled to credit of tax recovered at source in the assessment years relevant for the previous years during which recovery of tax and remittance of the same was made by the banks. On appeals filed by the Revenue, though the Tribunal did not agree with all the findings of the CIT(A), they held that the assessees are entitled to full credit of tax in the assessment years concerned, no matter interest income on which deduction has been made is not returned or assessed in those assessment years. It is against these orders that the Department has filed these appeals.

During hearing, counsel for the respondents submitted that by virtue of s. 268A of the IT Act read with circulars issued by the Board, appeals are not maintainable for the reason that tax amount involved is below Rs. 4 lakhs for maintainability of the appeal before the High Court. However, we notice that all these appeals were filed in May, 2005 and September, 2007 and therefore maintainability has to be considered with reference to the circular of the Central Board issued in 2005. Under the said circular, appeals are maintainable, if substantial question of law of importance in the case concerned or in similar cases is involved. In these cases, we notice that question of law raised is substantially important because the orders of the Tribunal will apply for subsequent years, not only in the case of these assessees but in the case of other assessees also. Moreover, we notice that the Tribunal has rendered their decision without reference to statutory provisions and no High Court judgment is cited on the issue raised. Further the Supreme Court has in the case of Commissionar of Income Tax Central-III Vs. Surya Herbal Ltd., held that the High Court can ignore the circulars and proceed to decide statutory appeals on merits, if the question involved is substantial and arises in many cases and for subsequent years. We therefore reject the objection raised on maintainability and proceed to consider the question raised in the appeals on merit.

The senior counsel for the Revenue raised the contention that tax deducted at source should be credited in the assessment for any assessment year only if the very same income from which tax is deducted is assessed for that year. On the other hand, the counsel appearing for the respondents referred to the findings of the Tribunal with specific reference to s. 143(1) of the IT Act and contended that the assessee is entitled to get credit for all payments of tax including tax recovered at source and remitted by the payers in the assessment year following the previous year in which such payment is made. He has also referred to s. 199 of the IT Act which clearly declares that the recovery of tax made and remitted by the payer is tax payment on behalf of the assessee in whose account remittance is made and such assessee is entitled to credit for tax in the assessment year following the previous year in which recovery and remittance is made by the payer.

After hearing both sides and on going through the order of the Tribunal, what we notice is that though the Tribunal has referred to s. 199 of the IT Act, they have not considered the scope of the provisions in detail. Sec. 199 of the IT Act has undergone various changes and for reference, we extract hereunder the section as it stood during the relevant assessment years, i.e., 1997-98 to 2000-01, to which these appeals relate.

Credit for tax deducted.--Any deduction made in accordance with the provisions of ss. 192 to 194, s. 194A, s. 194B, s. 194BB, s. 194C, s. 194D, s. 194E, s. 194EE, s. 194F, s. 194G, s. 194H, s. 194-I, s. 194J, s. 194K, s. 195, s. 196A, s. 196B, s. 196C and s. 196D and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or depositor or owner of property or of unit holder or of the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of the certificate furnished under s. 203 in the assessment made under this Act for the assessment year for which such income is assessable.

Provided that-

(i) in a case where such person or owner or depositor or unit holder or shareholder is a person, whose income is included under the provisions of s. 60, s. 61, s. 64, s. 93 or s. 94 in the total income of another person, the payment shall be deemed to have been made on behalf of, and the credit shall be given to, such other person;

(ii) in any other case, where the dividend on any share is assessable as the income of a person other than the shareholder, the payment shall be deemed to have been made on behalf of and the credit shall be given to, such other person in such circumstances as may be prescribed.

What is clear from the above provision is that the assessee is entitled to credit of tax paid in the assessment in which the income is assessed. In other words, the assessee should claim credit of tax based on TDS certificate in the year in which the assessee returns the income from which deduction is made for the purpose of assessment. Even after the amendment of the section through the introduction of sub-s. (3) of s. 199 of the IT Act, the Central Board was authorised to make rules for giving credit for tax deducted at source. As required under that section, r. 37BA was framed by the IT (Sixth Amendment) Rules, 2009 wherein it is specifically provided sub-r. 3(i) as follows :

(3)(i) Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.

As already stated, the Tribunal however without referring to the statutory provisions and the Rules held that the respondents-assessees are entitled to credit of tax in the assessment year following the year in which the tax is recovered and remitted by the banks based on TDS certificates issued by the banks. The Tribunal has also made reference to s. 143(1) of the IT Act wherein the assessee is entitled to credit of tax paid directly or indirectly including payments made by payers who recovered tax and remitted the same under the provisions of Chapter XVII of the IT Act. However, s. 143(1) of the IT Act is subject to s. 199 of the Act which specifically provides that tax has to be credited based on TDS certificate only in the assessment in which the income from which deduction is made is assessed to tax. So much so, s. 143(1)(c) will be subject to sub-ss. (1) and (3) of s. 199 r/w r. 37BA of the IT Rules and when taken together the effect is that the assessees can retain the TDS certificates and claim credit in the assessment for the assessment year in which assessee returns the income on which deduction of tax is made for assessment.

The respondents-assessees'' counsel rightly pointed out that the assessees are entitled to account income from interest which is the income from other sources, in accordance with the system of accounting followed by the assessees as provided under s. 145(1) of the IT Act. We do not think there can be any controversy on the issue because the entire interest income can be accounted on cash basis and the assessees need to return the income for assessment year following the year in which it is received. The Department also does not dispute this claim of the assessee and in fact the interest income in respect of which tax is recovered by the banks at the time of credit is not assessed on accrual basis.

The question to be considered is whether the AO 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. We do not think there is any justification for assessees'' claim because s. 199 of the IT 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. Therefore, when the statute makes it mandatory that credit of tax based on TDS certificate is available only in the assessment year in which the income from which tax deducted at source is assessed, we do not know-how the Tribunal can overrule the statutory provisions and allow the claim. In our view, going by the practical difficulty to retain TDS certificates for several years until the interest is returned for assessment on cash basis, prudent assessees should return income on which tax is recovered and remitted by the payer in the assessment year following the year in which such income is subject to deduction of tax and remittance by the payer. The assessees who do not do it should follow s. 199 and r. 37BA, retain the TDS certificates and claim credit in the assessment year in which such income is returned for assessment. The finding of the Tribunal that there is no provision in the IT Act or rules to defer credit of tax in assessments based on TDS certificates obtained is really incorrect because sub-ss. (1) and (3) of s. 199 r/w r. 37BA of the IT Rules specifically authorise the assessee to retain TDS certificates and to produce it and claim credit in the year in which income on which recovery of tax made is returned for assessment. As of now, the Act does not provide that assessees should return the income for assessment in the assessment year following the previous year in which tax is recovered at source and TDS certificate is issued by the payer and if so provided assessment and credit of tax will go together which will avoid botheration for the assessees as well as for the Departmental Officers. In our view, the provisions contained in sub-ss. (1) and (3) of s. 199 r/w r. 37BA of the IT Rules serve a purpose because if income is not assessable in the assessment year and at the same time assessess 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 become payable, as provided under s. 243(1) of the IT 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. We also do not find any merit in the contention of the respondents-assessees that the amount covered by TDS certificates itself should be treated as income of the previous year relevant for the assessment year concerned and the tax amount should be assessed as income by simultaneously giving credit for the full amount of tax remitted by the payer. In these cases, the entire interest credited should be assessed on maturity of the deposit and on payment by the bank, as the assessees are admittedly following cash system of accounting. However, in our view, if s. 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.

Based on the findings above, we allow the Departmental appeals by reversing the orders of the Tribunal and that of the first appellate authority and by restoring the assessments denying credit of tax in the assessments for which corresponding income is not assessed. However, since we are allowing the Departmental appeals, we leave it open to the respondents-assessees to claim credit based on the very same TDS certificates against the interest income assessed in the year in which such income is assessed.