The Income Tax
Department is undergoing computerisation with an undue haste and in the process
creating chaotic situations for honest taxpayers. Initially, with effect from
1st April, 2005 the transition from manual to computerised system was planned
with respect to TDS credit. The Finance (No.2) Act, 2004 had amended the
provisions to dispense with the requirement of issuing TDS certificates by the
deductors, the requirement of submitting TDS certificates along with returns,
and provide for the issuance of Annual Tax Statement (Form 26AS), etc. Then, the
implementation of these proposals was postponed, the last postponement being
made to 1st April, 2010 by the Finance Act, 2008 — for the reason that the
information technology infrastructure of the Income-tax Department was not yet
operational at the national level. Therefore, at the time when the Finance Bill,
2008 was presented before parliament, it was hoped that the department would be
able to make its information technology infrastructure ready by 1st April, 2010.
However, immediately thereafter, Rule 37BA was introduced with effect from 1st
April, 2009 to provide that TDS credit shall be given on the basis of
information relating to deduction of tax furnished by the deductor. Therefore,
it seems that by virtue of some miracle what could not be achieved in spite of
the combined efforts of more than four years, has been achieved in just one
year! The implementation, therefore, has now been preponed by one year in an
In almost all the
cases, while processing returns u/s. 143(1), for A.Y. 2007-08 & 2008-09, TDS
credit has been denied either in part or in full for the assumed reason that the
information furnished by the assessee is not matching with the information
available with the department.
First of all, it
needs to be examined whether the Assessing Officer has a power to deny credit of
TDS for such a reason, particularly for A.Y. 2007-08 & 2008-09. Section 199, as
it existed prior to its substitution by the Finance Act 2008 with effect from
1st April 2008, provides for the credit of TDS on the basis of production of the
TDS certificate. Credit for TDS on the basis of Annual Tax Statement in Form
26AS was only for the deduction of TDS made on or after 1st April, 2008.
Therefore, for A.Y. 2007-08 & 2008-09, TDS credit should have been granted on
the production of TDS certificates.
Although it was
mandatory on the part of the assessee to attach proof of TDS claim along with
the return, as per provisions of Explanation to Section 139(9), Rule 12(2) read
with section 139C, has specifically exempted assessees from submitting proof of
TDS claimed along with the return. However, it was required to be produced
before the Assessing Officer if demanded, as specifically spelt out in section
Therefore, if at
all TDS credit was not matching with the data available with the department, it
was obligatory on the part of the Assessing Officer to call for the proof of the
TDS claim in the form of a TDS certificate, and to allow the credit if the claim
was found to be proper. This view is further supported by Instruction No.6/2008,
dated 18th June, 2008 whereby Assessing Officers were instructed that where the
aggregate TDS claim does not exceed Rs 5 lakh, and where the refund computed
does not exceed Rs 25,000, the TDS claim of the taxpayer should be accepted at
the time of processing of returns; and in all remaining returns, the Assessing
Officer shall verify the TDS claim from the deductor or assessee, as the case
may be, before processing the return (Instruction was applicable for A.Y.
considering the legal position, the Assessing Officers have resorted to denial
of TDS credit wherever there was a mismatch and that too even without explaining
as to which TDS claim is not matching as per their database!
The problem will
be further aggravated for A.Y. 2009-10 and subsequent years where the new
section 199, read with Rule 37BA, will empower Assessing Officers to deny credit
wherever there is mismatch. Even without any mistake on the part of the assessee,
the credit will be denied — may be due to some error on the part of the
deductors in filing the relevant statements or on the part of the banks in
uploading the information on the challans.
There are many
practical issues other than those caused by the errors of the deductors or
banks, which the department is not geared up yet to tackle. For example, it has
been experienced that the department has sent TDS data verification report by
email to the e-filer of the returns of A.Y. 2009-10 in which the credit has not
been granted even on account of the differences in Assessment Year, i.e., if the
assessee has claimed the TDS credit pertaining to an earlier Assessment Year on
account of his cash system of accounting, the difference has been reported to
that extent in such reports sent by the department. Therefore, in such cases,
even without any mistake on the part of any of the parties, the assessees have
had to suffer only due to the technical problems of the department.
As a result of
denial of TDS credit, either the refund is not granted to the assessee or the
demand is raised with interest. In cases where the demand has been raised due to
such denial of TDS credit, the assessee can take recourse to section 205 which
provides that where tax is deductible at the source, the assessee shall not be
called upon to pay the tax himself to the extent to which tax has been deducted.
Therefore, at least in such cases where the demand is arising due to the denial
of TDS credit, the assessee should be given an opportunity to prove that TDS has
been deducted from his income. If it is proved so by the assessee, the demand
should not be enforced against the assessee or refunds should not be adjusted
against such demands automatically.
In a scenario
where it has been accepted that the system is not yet fully operational, and
therefore, it has been made mandatory for the deductor to issue TDS certificates
till 31st March 2010, it is unfair to make provisions at the same time to
provide TDS credit merely on the basis of data available in the system, ignoring
TDS certificates. Necessary instructions should be issued by CBDT to ensure that
credit of TDS is given on production of a certificate by the ‘Deductor’.