AO not to raise direct demand against an assessee wherein TDS credit mismatch arises due to default of deductor: CBDT

The concept of TDS was introduced by the Government to collect taxes at very point of origin of income. Accordingly, the responsibility is casted on the payer (i.e., deductor) to deduct tax at specified rate while making remittance of specified income to the payee (i.e., deductee).

As per section 199, deductee is entitled to get credit of tax so deducted only if such amount is paid by the deductor to the Central Government. However, as per section 205, deductee shall not be called upon to pay the tax to the extent tax has been deducted from his income. Thus, the Act puts a bar on direct demand against the deductee where tax has already been deducted from his income by the deductor.

In this regard, grievances have been received by the CBDT from many taxpayers that Assessing Officers were denying credit of TDS in those cases where deductor failed to deposit the TDS to the Government.

Thus, the CBDT has instructed Assessing Officers not to raise coercive demand against assessee on account of TDS credit mismatch wherein such mismatch arises due to default of deductor to deposit TDS into the account of Government - INSTRUCTION NO. 275 DATED 01/06/2015

No denial of TDS credit on its non-appearance in ITD system of department if Form No. 16A was issued by payer

Where deductor had issued Form No. 16A after deducting tax at source, its credit could not be denied to deductee solely on ground that such credit does not appear on ITD system of department and/or same does not match with ITD system of department.

The issue that arose before the High Court was as under:

Whether deductee could claim credit of TDS on the basis of Form No. 16A issued by the deductor even if such credit did not appear or did not match with the ITD system of the department?

The High Court held in favour of assessee as under:

1)Section 204 of income tax Act (‘the Act’) imposed liability to deduct tax at source upon the employer/deductor. It is clearly stated under section 205 of the Act that the assessee (i.e., deductee) shall not be called upon to pay the tax himself to the extent to which tax has been deducted by the deductor.

2)Considering the Sections 204 and 205 of the Act, it can be said that deductee shall be entitled to claim credit of TDS when the deductor who was liable to deduct the tax at source deducted it and issued Form No.16A to the deductee.

3)Credit of TDS could not be denied to the deductee even if after deducting the tax at source, the same had not been deposited in the account of the government by the deductor. In such a case the department had to recover the said amount from the deductor instead of denying credit to the deductee.

4)Hence, a deductee was not supposed to do anything in the whole transaction except that he had to accept the payment of the reduced amount after TDS. It was observed that on the amount being deducted the deductee got a certificate to that effect from the person responsible to deduct the tax and credit for the same could not be denied solely on the ground that such credit did not appear or did not match with ITD system of department.- SUMIT DEVENDRA RAJANI V. ASSISTANT CIT [2014] 49 taxmann.com 31 (Gujarat)