What if you are asked to pay 60% tax on your Income when your effective tax liability is 30%? This may happen if there is a mismatch in the TDS credit claimed in your ITR and 26AS. If you are facing this situation, you need to go through Section 205 of the Income Tax Act, of 1961.
Section 205 of the Income Tax Act restricts the Income Tax officer from collecting the tax on the Income from which TDS is already deducted. Therefore, if a taxpayer has evidential proof that TDS is already deducted on a particular Income, then even if such TDS credit is not reflected in 26AS, the taxpayer can manually claim the TDS credit, while filing ITR.
For instance, a salaried individual received the salary after the TDS deduction. The TDS deducted by the employer from the salary of an employee is not paid to government. Consequently, the TDS returns were not filed by an employer. Now, when the employee files his Income Tax Return, the TDS deducted by an employer will not be reflected in the 26AS/AIS/TIS of an employee. In such a scenario employee will have two options: –
1) Pay the Income tax again: – If the employee doesn’t claim the TDS credit while filing the ITR, then he will have to pay the Income Tax again on the Salary Income. The employee will face a double whammy of tax; first at the time of TDS deduction and second at the time of filing ITR.
2) Claim the TDS Credit even if not reflected in 26AS: – Now, let’s say while filing the ITR, the employee claims the TDS credit manually even though it is not reflected in 26AS, AIS or TIS. In such a scenario, the employee may receive a notice from CPC, for a “mismatch in TDS credit”. The case will go to litigation before the tax authorities. During the course of litigation, the taxpayer will have to submit conclusive evidence that TDS is deducted from the Income sought to be taxed. For instance – salary slips and claim the remedy under section 205 of the Income Tax Act.
There are various judgements issued by Income Tax Authorities, wherein, the tax officers were directed to collect the Income Tax from the TDS deductor rather than collecting the Tax from an employee or Income recipient (who earned the income after the TDS deduction). The CBDT has also issued OFFICE MEMORANDUM F.NO.275/29/2014-IT(B), DATED 11-3-2016 directing the Income Tax officers not to recover tax when TDS is deducted on a particular Income.
Recently in January 2023, the Hon’ble Pune Tribunal in the case of Chandrashekhar Sadashiv Potphode v. Deputy Commissioner of Income-tax, held that once the tax liability of the taxpayer is discharged by the indirect method of TDS, then the rule of estoppel by virtue of provisions of section 205 of the Act comes into play. It invariably puts an embargo on the department from enforcing the recovery of taxes from the taxpayer’s income from which TDS is deducted.
Back in January 2000, Hon’ble Gauhati High Court in the case of Assistant Commissioner of Income-tax v. Om Prakash Gattani, held that deduction of tax at source is only one of the modes of recovery of tax. Once this mode is adopted, by virtue of the statutory provisions the tax recovery should be done from the person who deducted the TDS. The taxpayer should not be subjected to other modes of recovery of tax by recovering the amount once again to satisfy the tax liability. In nutshell, the taxpayer cannot be doubly saddled with tax liability.
It’s been known for a very long time that the department cannot recover tax from the taxpayer in case the TDS deductor is the defaulting party. On the contrary, the software techniques implemented by Income Tax Portal are such that if there is a mismatch in TDS credit as per ITR and 26AS, the system will automatically generate the notice and demand the tax liability. In such a scenario, the taxpayer is left with no option but to undergo the process of litigation.
The taxpayer should check their 26AS/AIS/TIS in the last week of May or the first week of June to verify the TDS deduction details of the previous financial year. If there are discrepancies in the details of TDS credits, then the taxpayer should do the following things to fortify himself during the course of litigation: –
1. Request the TDS deductor to pay or rectify the TDS return for the due date of filing the Income Tax Return.
2. Gather the documentary evidence to prove that the TDS is deducted from the Income offered for tax purposes. In the case of an employee, salary slips issued by the employer can be evidence to prove that the TDS is deducted on the
3. If possible, an email confirmation should be obtained from the TDS deductor to prove that TDS is deducted from his Income.
4. During the course of the hearing, request the relevant Income Tax officer to recover the Taxes from the TDS deductor who defaulted in tax payment.
5. During the course of the hearing, the taxpayer can rely on the judgement issued by the High Court of Gauhati in the case of Assistant Commissioner of Income-tax v. Om Prakash Gattani, High Court of Bombay in the case of Yashpal Sahni v. Rekha Hajarnavis, Assistant Commissioner of Income-tax, High Court of Gujarat in case of Kartik Vijaysinh Sonavane v. Deputy Commissioner of Income-tax, Circle-8.