Credit of TDS to be allowed for salaries even if the same is not deposited with the exchequer

The ITAT, Pune in Mukesh PadamchandSogani v. ACIT, [ITA No.29/PUN/2022 dated January 30, 2023] has overturned the order passed by the Revenue Department for disallowing the Tax Deducted at Source ("TDS") to be provided to the assessee for the income under the head 'salaries'. Held that, the requirement is only for the amount of TDS, and not the amount eventually deposited with the government after the deduction and since the Employer had deducted TDS from the salary of the assessee, the TDS has to be allowed in intimation under Section 143(1) of the Income Tax Act, 1961 ("the IT Act") notwithstanding the fact that it was not deposited.

Facts

Mukesh PadamchandSogani("the Appellant") is the employee of the firm M/s. Earth Water Limited ("the Employer"). The Appellant declared the total income of INR 38,57,500 /- under the head 'Salaries' and claimed credit for TDS of INR 9,04,632/-. However, after processing the return under Section 143(1) of the IT Act, TDS from salary only tuned to INR 83,483/- was allowed and the remaining TDS of INR 8,21,149/- was not allowed due to a "Mismatch".
Subsequently, an appeal was preferred before the Revenue Department ("the Respondent"). The Appellant contended that, the Employer deducted TDS from the salary but failed to deposit the same from May, 2018 onwards and further, had not paid salary from October 2018. The Respondent confirmed the intimation under Section 143 of the IT Act, not allowing the credit for INR 8,21,149/- because of Form No. 26 AS not reflecting the same vide order dated December 9, 2021("the Impugned Order").

Being aggrieved, this appeal has been filed.

Issue

Whether the disallowance of TDS by the Respondent is sustainable?

Held

The ITAT, Pune in ITA No.29/PUN/2022 held as under:

• Observed that, the Employer had deducted the TDS from the Appellant's salary throughout the year, but did not deposit it, and as it was not reflected on the Form No. 26AS the processing of return u/s.143(1) did not allow the credit for such amount.
• Noted that, insolvency proceedings against the Employer are in progress and till date no salary for the period October, 2018 onwards has been paid.
• Analysed Section 15 of the IT Act, and noted that any salary due from an employer, whether paid or not, is chargeable to tax under the head 'Salaries', which indicates that the salary income becomes chargeable to tax at the time of either receipt or becoming due, whichever is earlier.
• Further observed that, if the salary became due and was offered by the Appellant in accordance with Section 15 of the IT Act, but it was not paid for the last six months. There is no corresponding provision in the IT Act that exempts an employee from getting a deduction of such salary, which was included in the total income on a due basis but remained unpaid.
• Analysed Section 143 (1) of the IT Act and noted that the word "paid" is absent in the context of TDS, which means that credit for TDS is allowed only when it is deducted, and there is no further stipulation of payment. The benefit of TDS has to be allowed to the deductee, irrespective of its subsequent deposit or non-deposit by the deductor.
• Further analysed Section 234B of the IT Act, and noted, that when a deductor has duly deducted TDS but not paid the same to the exchequer, and the gap between "tax which would be deductible" as per section 209(1)(d) of the IT Act and "TDS" as per section 143(1)(c) still persists.
• Stated that, the requirement is only for the amount of TDS, and not the amount eventually deposited with the government after the deduction.
• Held that, since the Employer had deducted TDS of INR 8,21,149/- from the salaries of the Appellant, the TDS has to be allowed in intimation under Section 143(1) of the IT Act notwithstanding the fact that it was not deposited.
• Overturned the Impugned Order.

Relevant Provisions:

Section 143(1) of the IT Act:

"Assessment

Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:-

(a) the total income or loss shall be computed after making the following adjustments, namely:-

(i) any arithmetical error in the return;
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;
(iv)disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return;
(v) disallowance of deduction claimed under section 10AA or under any of the provisions of Chapter VI-A under the heading "C.-Deductions in respect of certain incomes", if the return is furnished beyond the due date specified under sub-section (1) of section 139; or
(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made;

Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;

(b) the tax , interest and fee, if any, shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax , interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under section 89, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax, interest or fee;

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax interest or fee is payable by, or no refund is due to, him:

Provided further that no intimation under this sub-section shall be sent after the expiry of nine months from the end of the financial year in which the return is made.

Explanation.-For the purposes of this sub-section,-

(a) "an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an entry, in the return,-

(i) of an item, which is inconsistent with another entry of the same or some other item in such return;
(ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or
(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

(b) the acknowledgment of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a)."