TDS credit cannot be reduced proportionately when turnover difference stems from GST inclusion in Form 26AS

ITAT allowed the appeal, directing AO to verify TDS credit claims. Revenue had proportionately reduced TDS credit due to turnover discrepancies between books and Form 26AS. Assessee argued difference was solely due to GST inclusion in Form 26AS while books excluded GST as statutory liability. ITAT held GST cannot be considered income as it's collected for government. CPC exceeded jurisdiction under section 143(1) by making adjustments requiring detailed examination suitable for scrutiny assessment under section 143(3). ITAT directed AO to grant full TDS credit per Form 26AS if corresponding income was properly accounted in books.

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ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether the Centralized Processing Center (CPC) was justified in proportionately disallowing the TDS credit claimed by the assessee based on discrepancies between the turnover reported in the books and Form 26AS.
• Whether the CPC had the jurisdiction to make such a disallowance under section 143(1) of the Income Tax Act, 1961.
• Whether the CIT(A) correctly applied CBDT Circular No. 23/2017 regarding the non-deduction of TDS on the GST component if separately indicated.
• Whether the demand raised by the CPC was justified in light of the alleged errors in TDS deduction on the GST component by government departments.
• Whether the principles of natural justice were violated by not considering the detailed submissions and evidence provided by the assessee.

ISSUE-WISE DETAILED ANALYSIS

Erroneous/Proportionate Disallowance of TDS Credit

The relevant legal framework involves Rule 37BA of the Income Tax Act, which mandates granting TDS credit as per Form 26AS. The Court noted that the CPC disallowed Rs. 20,25,542/- of TDS credit, leading to a tax demand instead of a refund. The Court found merit in the assessee's argument that the mismatch arose due to the inclusion of GST in Form 26AS, which should not be considered part of the income. The Court emphasized that GST is a statutory liability and not revenue accruing to the assessee.

Jurisdiction of CPC under Section 143(1)

The Court examined whether the CPC had the jurisdiction to make such adjustments under section 143(1), which is meant for summary processing and not detailed verification. The Court concluded that the CPC acted beyond its jurisdiction, as the verification of TDS credit requires detailed examination, which falls under scrutiny assessment (section 143(3)) rather than summary processing.

Application of CBDT Circular No. 23/2017

The Court analyzed the application of CBDT Circular No. 23/2017, which clarifies that TDS should not be deducted on the GST component if separately indicated. The Court found that the CIT(A) failed to apply this circular correctly, as the government departments deducted TDS on the gross invoice amount, including GST.

Violation of Natural Justice

The Court considered the assessee's argument that the authorities ignored detailed submissions and evidence. The Court agreed that the CIT(A) did not independently verify whether the amounts reflected in Form 26AS were duly accounted for in the assessee's books, thus failing to uphold the principles of natural justice.

SIGNIFICANT HOLDINGS

The Court held that the assessee's claim regarding GST is prima facie correct, but further verification is necessary in cases where the percentage difference does not match 18% exactly. The Court directed the Assessing Officer (AO) to verify whether the amounts on which TDS was deducted have been duly included in the total income of the assessee. If it is established that the income corresponding to the TDS credit has been fully accounted for in the books, the AO shall grant full TDS credit as per Form 26AS.

The Court also set aside the order of the CIT(A) and restored the matter to the file of the AO for fresh verification and adjudication in accordance with the Court's directions.

The appeal of the assessee was allowed for statistical purposes, emphasizing that the demand raised by the CPC was not justified under the law, given the errors in TDS deduction on the GST component by government departments.

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