Tax credit to be granted in the year in which income is assessed

M/s. Mahesh Software Systems Pvt. Ltd., v. Assistant Commissioner of Income Tax, Pune

ITA No. 1288/PUN/2017                                                                                         

Assessment Year: 2011-12

Background :

Many a times, we come across cases where the invoice has been raised close to the cut-off date, i.e. closer to the end of a financial year and the customer has accounted for and paid the invoice amount, as well as deducted and deposited the tax at applicable rates in the subsequent financial year. More often than not, a conservative stand is adopted, to get the benefit of tax credit in the subsequent year, though the invoice forms part of the turnover for the preceding year, so as to avoid disallowance during regular assessment/scrutiny by the Assessing Officer. However, this causes undue hardship to the taxpayer, by blocking of working capital due to the disallowance of credit in the preceding year, resulting in higher payment of tax in cash.

This order of Pune Tribunal, in the case of Mahesh Software Systems Pvt. Ltd., gives clear interpretation to the statutory provisions and sets a judicial precedent for such cases in future.

Facts of the case : 

• The assessee, Mahesh Software Systems Pvt. Ltd., engaged in providing software services, raised an invoice on a customer, Ashok Leyland, on 28th March, 2011.
• However, Ashok Leyland accounted for and made payment for the invoice in April, 2011.
• Consequently, the tax deducted on the invoice amount by the customer was deposited in April 2011, i.e. for previous year 2011-12 (assessment year 2012-13)
• However, the invoice being raised by the assesse-company in March, 2011, the Company considered the invoice in its sales turnover for previous year 2010-11 (assessment year 2011-12) and claimed the credit of tax in AY 2011-12.
• The Assessing Officer (AO) denied the tax credit, on the basis of Section 199 of the Income Tax Act, 1961 read with Rule 37BA of the Income Tax Rules, 1962, stating that it has been deposited for AY 2011-12, as per the information furnished by the deductor-customer and hence, the credit can be allowed only on that basis.
• The assessee appealed to the CIT (Appeals), who upheld the stand of the AO.
• Aggrieved, the assesse appealed to Pune Bench of ITAT.

Relevant Legal Provisions :

Section 199 of the Income Tax Act, 1961.

Credit for tax deducted.

199. (1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.

(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.

Rule 37BA of the Income Tax Rules, 1962.

Credit for tax deducted at source for the purposes of section 199.

37BA. (1) Credit for tax deducted at source and paid to the Central Government in accordance with the provisions of Chapter XVII, shall be given to the person to whom payment has been made or credit has been given (hereinafter referred to as deductee) on the basis of information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorised by such authority.

(2) [(i) Where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, credit for the whole or any part of the tax deducted at source, as the case may be, shall be given to the other person and not to the deductee :

Provided that the deductee files a declaration with the deductor and the deductor reports the tax deduction in the name of the other person in the information relating to deduction of tax referred to in sub-rule (1).]

(ii) The declaration filed by the deductee under clause (i) shall contain the name, address, permanent account number of the person to whom credit is to be given, payment or credit in relation to which credit is to be given and reasons for giving credit to such person.

(iii) The deductor shall issue the certificate for deduction of tax at source in the name of the person in whose name credit is shown in the information relating to deduction of tax referred to in sub-rule (1) and shall keep the declaration in his safe custody.

(3) (i) Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.

(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.

(4) Credit for tax deducted at source and paid to the account of the Central Government shall be granted on the basis of—

(i) the information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorised by such authority; and

(ii) the information in the return of income in respect of the claim for the credit, subject to verification in accordance with the risk management strategy formulated by the Board from time to time.

Findings :

• Section 199(3) empowers CBDT to formulate rules for allowing credit of tax deducted at source.
• Accordingly, Rule 37BA prescribes the basis on which tax credit be granted to the assessee and also the year in which credit is to be granted to the assesse.
• In the instant case, the AO as well as CIT (A) relied on sub-rule (1), i.e. the tax credit is to be allowed on the basis of the information furnished by the deductor-customer, and in turn, in the year in which tax has been deducted and deposited by the deductor-customer.
• However, the Ld. AO overlooked the more specific sub-rule (3), which deals with the year in which tax credit is to be allowed and relied on sub-rule (1).  
• The Ld. CIT(A), further relied on sub-rule (4), which reiterates the principle laid down by sub-rule (1).
• Clause (i) of Sub-rule (3) clearly states that the tax credit is to be allowed in the year in which the income (pertaining to which the tax has been deducted) is assessed. Since the tax credit is not visible in Form 26AS for AY 2011-12, the tax credit was denied.
• The assessee has returned the income in the AY 2011-12, and hence, tax credit needs to be granted in that AY and not in the AY relevant to the financial year in which tax has been deducted and deposited by the deductor.
• The Tribunal, considering the principle laid down by sub-rule (3) (i), allowed the appeal and granted credit of the tax to the assessee in AY 2011-12.