Taxpayer's long-term capital gain taxed in transfer year; AO must allow TDS credit next year upon Form 71 submission

ITAT (DELHI - AT) allowed the appeal and directed the AO to assess the long-term capital gain in AY 2022-23 as declared by the taxpayer, but grant TDS credit for the amount deposited by the purchaser in AY 2023-24 based on the Form 71 uploaded by the taxpayer. The tribunal held that income must be declared in the year of transfer and the AO must follow the matching principle to give TDS credit in the subsequent year upon receipt of the filed Form 71.

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ISSUES PRESENTED AND CONSIDERED

1. Whether credit for tax deducted at source (TDS) can be allowed in the assessment year in which income is assessable when the buyer/payer has deducted TDS in that year but deposited/filing of TDS return occurred in a subsequent assessment year.

2. Whether an assessee who has declared capital gains in the year of transfer is obliged to defer recognition of income to the year in which the TDS appears in Form 26AS, or whether the assessee must declare in the year of transfer irrespective of the timing of TDS filing by the deductor.

3. Whether the statutory mechanism under section 155(20) read with Rule 134 and Form 71 (and Rule 37BA / section 199 principles) requires the Assessing Officer to grant TDS credit in the year of assessment where the income is assessable once the assessee files Form 71 within the prescribed period, even though the TDS is reflected in Form 26AS in a later year.

4. Whether the Assessing Officer and appellate authority were required to follow the matching principle and amend intimation/assessment to give credit where the assessee has filed Form 71 and declared the income in the correct previous year.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Availability of TDS credit where TDS deducted in year of transfer but deposited/returned in subsequent year

Legal framework: Section 199 (and Rule 37BA) provides that credit for TDS shall be given for the assessment year for which such income is assessable; Form 26AS is the mechanism reflecting deposited TDS. Section 45 governs taxability of capital gains in the previous year of transfer.

Interpretation and reasoning: The Tribunal accepts that the sale/transfer occurred in the previous year relevant to the assessment year under appeal and that the assessee declared the capital gains in that year. The buyer deducted TDS at the time of sale, but the buyer's deposit/return was reflected in Form 26AS only in the subsequent year. The Court reasons that the statutory entitlement to credit follows the year in which income is assessable (i.e., the year of transfer) and not the year in which the deductor files the TDS return, provided appropriate statutory remedial steps (Form 71) are taken by the assessee.

Precedent treatment: No precedential authorities were cited or relied upon in the impugned order or by the Tribunal; the Tribunal decides on statutory construction and procedural compliance.

Ratio vs. Obiter: Ratio - where income is correctly assessable in a given year, and TDS was deducted by the payer in that year though reflected in Form 26AS in a subsequent year, the assessee is entitled to credit for such TDS in the assessment year in which the income is assessable after complying with the prescribed procedure (Form 71). Obiter - observations on the purchaser's procedural lapse in filing the return in subsequent year.

Conclusion: TDS credit can and should be given for the assessment year in which the income is assessable where the assessee has declared the income and the payer deducted TDS at the time of payment/transfer, even if the payer deposited or filed returns in a later year, subject to procedural compliance by the assessee.

Issue 2 - Whether income recognition must follow the year of TDS reflection in Form 26AS

Legal framework: Section 45(1) fixes the previous year of taxation for capital gains as the year in which transfer takes place; section 199 / Rule 37BA govern credit of TDS for the assessment year in which the income is assessable.

Interpretation and reasoning: The Tribunal rejects the lower authority's suggestion that the assessee should have offered the income in the subsequent year merely because the TDS appeared in Form 26AS of that later year. The Tribunal emphasizes that income from transfer is taxable in the previous year of transfer and the assessee must declare accordingly; the timing of the deductor's deposit or Form 26AS entry cannot dictate the year of taxability of the assessee's income.

Precedent treatment: None cited; the Tribunal applies statutory allocation of income to the previous year and distinguishes any approach that ties recognition to Form 26AS timing.

Ratio vs. Obiter: Ratio - income from transfer must be declared in the year of transfer regardless of the timing of the deductor's compliance; inability or delay by the deductor to deposit TDS or file returns does not justify deferring recognition of the assessee's income.

Conclusion: The assessee was correct to declare capital gains in the assessment year corresponding to the year of transfer; the TDS timing in Form 26AS cannot be a ground to force recognition in a later year.

Issue 3 - Effect and operation of section 155(20), Rule 134 and Form 71 for claiming TDS credit reflected in a subsequent year

Legal framework: Section 155(20) (process to correct intimation where tax deduction/payment is reflected in subsequent year), Rule 134 and the prescribed Form 71 enable an assessee to apply for adjustment/amendment within a statutory time frame (two years) when TDS/payment is reflected in a year different from the year in which income was offered.

Interpretation and reasoning: The Tribunal notes that the assessee filed Form 71 through the portal within the prescribed period. Given that statutory remedy, the Assessing Officer is obliged to follow the matching principle and amend the intimation/assessment to give credit for TDS in the year the income is assessable. The Tribunal directs the Assessing Officer to give credit of the TDS deposited in the subsequent year against the assessee's declared income for the correct assessment year based on the Form 71 submission.

Precedent treatment: No authorities were cited; the Tribunal applies the statutory procedure and matching principle as dispositive.

Ratio vs. Obiter: Ratio - where an assessee files Form 71 within the prescribed period under section 155(20)/Rule 134 to claim credit for TDS reflected in a subsequent year, the Assessing Officer must amend the intimation/assessment and grant the credit in the year in which the income is assessable. Obiter - procedural comments on the practical operation of matching by CPC/Assessing Officer.

Conclusion: Filing of Form 71 within time compels the Assessing Officer to grant TDS credit in the assessment year where the income was declared; denial by lower authorities was erroneous and required correction.

Issue 4 - Duty of the Assessing Officer and appellate correctness in applying the matching principle

Legal framework: Administrative and procedural principle of matching TDS to the year of assessability as per section 199/Rule 37BA and remedial provisions in section 155(20)/Rule 134/Form 71.

Interpretation and reasoning: The Tribunal finds that the Assessing Officer must follow the matching principle and give credit based on Form 71; the appellate authority erred in refusing credit despite acknowledging the factual matrix (deduction at time of sale, delay in filing by payer, and filing of Form 71 by assessee). The Tribunal directs the Assessing Officer to assess the income declared in the correct assessment year and to give credit of the TDS reflected in the subsequent year as per Form 71.

Precedent treatment: No judicial precedents discussed; decision rests on statutory mandate and administrative procedure.

Ratio vs. Obiter: Ratio - Assessing Officer is required to give credit by matching TDS to the year of assessability when Form 71 is filed; appellate confirmation of denial contrary to this obligation is unsustainable. Obiter - none beyond procedural direction.

Conclusion: The lower authorities' denial of credit was set aside; the Tribunal allowed the appeal and directed the Assessing Officer to grant TDS credit in the assessment year where income was declared, relying on the Form 71 filing and the matching principle.

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