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

The ITAT Mumbai partly allowed the Revenue's appeal regarding addition of interest accrued and receivable by the assessee and TDS credit. While the tribunal upheld CIT(A)'s deletion of the interest addition applying real income theory due to uncertainty and irrecoverability of the principal amount, it ruled that TDS of Rs. 36 lakhs deducted by the debtor and reflected in Form 26AS must be treated as income under section 198. The tribunal held that when TDS cannot be adjusted against tax payable due to the uncertain nature of underlying income, it becomes deemed income under "income from other sources." The assessee cannot claim TDS credit while refusing to show corresponding interest income, preventing selective application of accounting methods.

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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.

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