Facts of the Case

The assessee Shyamala Navlaha, an individual, filed her return of income for Assessment Year 2018-19 declaring income from house property and other sources. The assessee had let out a property and received rental income from the tenant.

The tenant deducted Tax Deducted at Source (TDS) amounting to ₹1,21,800 from the rent payments. However, the tenant failed to deposit the deducted TDS with the Government.

During processing of the return under Section 143(1), the Central Processing Centre (CPC) denied the credit of TDS claimed by the assessee since the amount was not deposited by the deductor in the Government account.

The assessee challenged the adjustment before the Commissioner of Income Tax (Appeals) [CIT(A)], but the appeal was dismissed. Subsequently, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench. 

Issues Involved

  1. Whether the assessee is entitled to credit of TDS when the deductor has deducted tax but failed to deposit it with the Government.
  2. Whether denial of TDS credit during processing under Section 143(1) is legally valid.
  3. Whether the assessee should be held liable for the failure of the deductor to deposit the deducted tax. 

Petitioner’s Arguments

The assessee contended that:

  • The tenant had deducted TDS from the rent paid to the assessee, and therefore the assessee should be entitled to claim credit of such TDS.
  • The failure of the deductor to deposit the TDS should not prejudice the rights of the deductee.
  • The assessee relied on judicial precedents where courts held that the deductee should not suffer for the default of the deductor.
  • It was argued that disallowance of TDS credit under Section 143(1) involves a debatable issue and should not be adjusted during processing of return.

Respondent’s Arguments

The Revenue authorities argued that:

  • TDS credit can be allowed only when the deducted tax is actually deposited into the Government account.
  • Since the tenant failed to deposit the deducted amount, the credit of TDS could not be granted to the assessee.
  • Therefore, the adjustment made by the CPC under Section 143(1) was correct. 

Court Order / Findings

The Income Tax Appellate Tribunal (ITAT), Delhi Bench examined the facts and submissions of both parties.

The Tribunal noted that a co-owner of the same property had already filed a similar appeal on identical facts, where the Tribunal had earlier ruled on the same issue.

Following the earlier decision, the Tribunal held that it cannot direct the Assessing Officer to grant TDS credit when the deductor has not deposited the tax in the Government account.

Accordingly, the Tribunal dismissed the appeal of the assessee. However, considering the CBDT circulars and the interest of justice, the Tribunal directed the Assessing Officer not to initiate recovery proceedings for the outstanding tax liability arising due to denial of TDS credit. 

Important Clarification

The Tribunal clarified that:

  • Credit of TDS is generally linked with the actual deposit of tax by the deductor in the Government account.
  • However, in cases where the deductor fails to deposit the tax, the department should consider appropriate relief measures and follow CBDT instructions regarding recovery proceedings.

Link to download the order – https://itat.gov.in/public/files/upload/1703658205-548-2023-G-SY+CNP-Shyamala%20Navlaha.pdf

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