2024 (12) TMI 183 - AT - Income Tax

ITAT allows TDS credit as deemed income under section 198 when underlying interest remains uncertain

Deputy Commissioner of Income Tax, Central Circle – 7 (1), Mumbai Versus Rare Enterprises

The ITAT Mumbai partly allowed the Revenue's appeal regarding addition of interest accrued and receivable by the assessee and TDS credit. While the ... Addition of interest accrued and receivable by the assessee and credit for TDS - Revenue is aggrieved by the deletion of addition which has been deleted by applying real income theory - HELD THAT:- Facts being undisputed in this respect and uncontroverted by the ld. Sr. DR, we do not find any reason to interfere with the said observations and findings arrived at by CIT(A). In respect of TDS of Rs.36 lakhs done by Dharti and deposited in the government exchequer which is duly reflected in Form 26AS of the assessee in the year under consideration, needs a consideration since it forms part and parcel of amount of interest receivable of Rs.3.60 Crores. In our understanding, in the given set of facts and circumstances, when the principal amount of income which has been subjected to deduction of tax at source bears an element of uncertainty and irrecoverability then in such a situation, the tax so deducted at sources and deposited by the deductor which appears in Form 26AS of the deductee, provisions of section 198 gets attracted. Accordingly, in the present set of facts, TDS done by Dharti and deposited duly reflected in Form 26AS of the assessee for the year under consideration, is deemed to be income received by the assessee under the said section. This section deals with treating the TDS as income whenever an amount deducted becomes incapable of being adjusted or counted towards tax payable. As relying on case of Y. Rathiesh [2014 (9) TMI 2 - ANDHRA PRADESH HIGH COURT] in the present case, the amount of TDS reflected in Form 26AS of the assessee for the year under consideration in respect of TDS done by Dharti is to be treated as an item of income under the head “income from other sources” and provisions of section 198 be applied accordingly. It is important to note that once TDS is deducted, assessee cannot be permitted to use the certificate to cover other amounts while refusing to show the amount of interest in his return by resorting to difference in method of accounting system. The effect of the assessment made by the ld. AO is only that the assessee ought to desist from having the best of both the systems and discarding the one which is disadvantageous to him. If the assessee intends to take the TDS as component of tax paid by him, the corresponding income to the TDS must Form part of the return and the assessment. Thus we direct the AO to recompute the assessed total income in terms of our above observations and findings. Accordingly, grounds taken by the Revenue is partly allowed. Issues Involved:1. Whether the interest income of Rs.3,60,00,000/- claimed as not received by the assessee should be taxed.2. Whether the TDS of Rs.36,00,000/- deducted by the debtor should be treated as income received by the assessee.Issue-wise Detailed Analysis:1. Taxability of Interest Income:The core issue was whether the interest income of Rs.3,60,00,000/-, which the assessee claimed not to have received, should be taxed. The Revenue contended that the assessee failed to establish non-receipt of the interest through bank statements during both the assessment and appellate proceedings. It was argued that the debtor, M/s. Dharti Dredging & Infrastructure Ltd. (DDIL), paid TDS on the interest, indicating a capability to pay the interest despite being classified as a Non-Performing Asset (NPA) by the bank.The assessee argued that since DDIL became an NPA, there was no commercial accrual of interest, and thus, it was not accounted for. The CIT(A) supported this view, emphasizing that only real income, not hypothetical income, should be taxed. Given DDIL's financial distress and subsequent insolvency proceedings, there was no realistic expectation of recovering the interest. The CIT(A) concluded that the interest had not genuinely accrued to the assessee, and therefore, the addition of Rs.3,60,00,000/- as interest income was deleted.2. Treatment of TDS as Income:The second issue was whether the TDS of Rs.36,00,000/- deducted by DDIL should be treated as income received by the assessee. The Tribunal examined the provisions of Section 198, which states that tax deducted at source is deemed to be income received by the assessee. Given the uncertainty and irrecoverability of the principal interest amount, the Tribunal held that the TDS amount should be treated as income under the head 'income from other sources.'The Tribunal drew parallels with a similar case adjudicated by the Hon'ble High Court of Andhra Pradesh, where it was held that when TDS becomes incapable of adjustment, it acquires the character of income. The Tribunal, following this precedent, concluded that the TDS amount reflected in Form 26AS should be treated as income for the assessment year in question. The Tribunal directed the Assessing Officer to recompute the assessed total income, treating the TDS amount as income.Conclusion:The Tribunal upheld the deletion of the interest income addition by applying the real income theory, as the income had not genuinely accrued to the assessee. However, it directed that the TDS amount be treated as income, aligning with the provisions of Section 198. Consequently, the appeal by the Revenue was partly allowed, with directions for the Assessing Officer to adjust the assessed income accordingly.