TDS credit entitlement where deductions not reflected in deductor filings; credit allowed on contemporaneous evidence and interest removed

Harmonious construction of provisions governing deduction at source and related remedy provisions requires that a deductee may claim credit for TDS when contemporaneous evidence establishes deduction even if the deduction is not reflected in the deductors filings; the assessing officer must verify reconciliation against invoices, payment advices and bank statements and allow corresponding credit. Where tax liability is thereby met through deduction at source and any shortfall arises from the deductors default, compensatory interest on the deductee for advance tax shortfall is not sustainable and must be deleted.

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Issues: (i) Whether an assessee is entitled to credit for tax deducted at source where primary evidence establishes deduction but the corresponding entries do not appear in Form 26AS; (ii) Whether interest under sections 234B and 234C can be sustained where the tax liability is met by TDS but credit was denied due to deductor's non-deposit or misreporting.

Issue (i): Whether an assessee may claim TDS credit on the basis of contemporaneous primary evidence despite absence of entries in Form 26AS.

Analysis: When tax has in fact been deducted from the assessee's receipts and the assessee has offered the corresponding income to tax, section 205 operates to bar direct recovery from the deductee to the extent of such deduction. CBDT instructions dated 1 June 2015 and Office Memorandum dated 11 March 2016 direct that mismatches caused by deductor non-compliance should not be enforced against the deductee. Primary materials such as invoices, payment advices and bank statements, together with a party-wise reconciliation, are appropriate bases for verifying that deduction has occurred where Form 26AS does not reflect the entries due to deductor default. A requirement that the deductee secure rectification of the deductor's e-TDS filings as a precondition for credit elevates form over substance and is not mandated by the statute.

Conclusion: Credit for TDS must be allowed to the extent deduction from the assessee's receipts is established by contemporaneous primary evidence; refusal to grant credit merely because entries do not appear in Form 26AS is not permissible and is against the interest of the assessee.

Issue (ii): Whether interest under sections 234B and 234C is payable where the tax liability stands met through deduction at source but credit was denied due to deductor's lapse.

Analysis: Interest under sections 234B and 234C is consequential on a taxpayer's default in meeting advance tax obligations. Where the assessed tax liability is satisfied by TDS (established by primary evidence) and denial of credit arises solely from the deductor's failure to deposit or correctly report the deduction, imposing compensatory interest on the deductee would result in unjust double payment and frustrate the protective purpose of section 205 and the Board's instructions. The proper course is to allow credit to the deductee and pursue any recovery from the defaulting deductor under applicable provisions.

Conclusion: Interest under sections 234B and 234C shall be deleted where the tax liability is shown to have been met by TDS established on primary evidence; such interest cannot be fastened on the deductee for deductor's default.

Final Conclusion: The assessee is entitled to TDS credit on the basis of contemporaneous primary evidence notwithstanding absence of entries in Form 26AS, and consequential interest charged for such disallowance must be withdrawn; the Assessing Officer is directed to verify the materials on record and grant credit, leaving the Department free to proceed against defaulting deductors.

Ratio Decidendi: Where tax has been deducted at source from a taxpayer's receipts and the deductee establishes such deduction by contemporaneous primary evidence, section 205 bars recovery from the deductee and administrative directions of the Board require that the deductee not be subjected to demand or coercive recovery merely because the deductor failed to deposit or correctly report the tax; corresponding interest charged on the deductee consequent to such denial of credit must be deleted.

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