Assessing Officer must issue section 154(3) notice before rejecting TDS credit rectification application

The ITAT Jaipur set aside the CIT(A)'s order regarding TDS credit denial. The assessee was denied rectification under section 154 for TDS credit difference for AY 2019-20 without being given opportunity of hearing. The tribunal found that the ITO failed to issue mandatory notice under section 154(3) before rejecting the rectification application. Since the department had already allowed TDS credit recognizing its initial mistake and the appeal had become infructuous, the subsequent letter denying rectification was improper. The tribunal directed the Assessing Officer to give effect to the earlier rectification order granting TDS credit.

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Issues Involved:
1. Denial of TDS credit under Rule 37BA.
2. Rectification application under Section 154 of the Income Tax Act.
3. Violation of principles of natural justice.
4. Actions of the Assessing Officer and the CIT(A).

Detailed Analysis:

1. Denial of TDS Credit under Rule 37BA:

The assessee-company challenged the order dated 22.02.2024, which dismissed its appeal against the intimation under Section 143(1) of the Income Tax Act, 1961, dated 24.12.2020. The intimation restricted the TDS credit based on Rule 37BA of the Income Tax Rules. The computation was as follows:
- Total receipts offered to tax: Rs. 51,04,38,875
- Total receipts as per Form 26AS: Rs. 58,16,24,657
- Credit of TDS claimed: Rs. 1,16,89,928
- TDS credit allowable as per Rule 37BA: Rs. 1,02,59,183

The CIT(A) confirmed the denial of TDS credit, stating that the assessee was required to declare the corresponding income or TDS claim in the corresponding years as per Rule 37BA.

2. Rectification Application under Section 154:

The assessee filed a rectification application under Section 154, resulting in an order dated 18.01.2023, which found merit in the assessee's contention and granted TDS credit of Rs. 14,49,047. However, subsequently, on 23.01.2023, the same Assessing Officer informed the assessee that the rectification application could not be accepted, denying the credit difference of Rs. 14,30,745 for the assessment year 2019-20.

3. Violation of Principles of Natural Justice:

The assessee contended that the denial communicated on 23.01.2023 was issued without affording any opportunity to be heard. The Departmental Representative conceded that there was nothing in the correspondence to suggest that the assessee was heard before the issuance of the letter dated 23.01.2023. Section 154(3) mandates that an amendment enhancing an assessment or reducing a refund requires notice to the assessee and a reasonable opportunity to be heard.

4. Actions of the Assessing Officer and the CIT(A):

The order dated 18.01.2023 was passed after considering the facts and materials, granting the TDS credit. However, the same Assessing Officer, five days later, issued a letter denying the rectification without a fresh order or hearing. The CIT(A) proceeded with the appeal despite the rectification order, which rendered the appeal infructuous. The CIT(A) should have acknowledged the rectification and dismissed the appeal accordingly.

Conclusion:

The appeal is allowed, and the impugned order by the CIT(A) is set aside. The Assessing Officer is directed to give effect to the judgment and the order dated 18.01.2023, granting the TDS credit of Rs. 14,49,047. This judgment underscores the importance of adhering to procedural fairness and the principles of natural justice in tax proceedings.

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