2025 (12) TMI 972 - AT - Income Tax

Section 5A overrides Rule 37BA: Goa assessee entitled to full TDS credit on community property income

The Tribunal allowed the assessee's appeal, holding that a resident of Goa governed by the Portuguese Civil Code, 1860 falls within section 5A of the ... TDS credit - assessee is Governed by Portuguese Civil Code 1860 and therefore as per section 5A of the Income Tax Act, 1961 being a resident of Goa assessee is governed by the system of Community Property - Apportionment of income between spouses governed by Portuguese Civil Code - income of husband and wife under any heads of income (other than under the head salary) apportionment - application of Section 5A - claim of the assessee that he is a resident of Goa and is governed by Portuguese Civil Code 1860 - HELD THAT:- We find that there is no reference about the tax credit to be given to the persons who are governed by the Portuguese Civil Code, 1860 and fall u/s 5A of the Act and therefore application of Rule 37BA by the CPC is not in accordance with law in the instant case. We are of the considered view that since the TDS deducted at ₹ 10,36,269 on the income other than the income under the head salary is reflecting under the name and PAN of the assessee and Rule 37BA is not applicable on the assessee who is governed by Section 5A of the Act, the credit of TDS should be given to the assessee. AO is directed to give the total tax credit for TDS claimed by the assessee which is shown in the income tax return. Grounds of appeal raised by the assessee are allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in the case of spouses governed by the Portuguese Civil Code and section 5A of the Income-tax Act, 1961, the assessee is entitled to full credit of tax deducted at source (TDS) appearing in his Permanent Account Number, including TDS on income other than salary which is required to be apportioned between spouses under section 5A. 1.2 Whether Rule 37BA of the Income-tax Rules, 1962, governing grant and apportionment of TDS credit for the purposes of section 199, can be applied to restrict TDS credit in the case of an assessee governed by section 5A. 1.3 Whether the levy and computation of interest under sections 234B and 234C are to be modified consequent upon the correct grant of TDS credit. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Entitlement to full TDS credit and applicability of Rule 37BA where section 5A applies Legal framework 2.1 The Court considered section 5A of the Income-tax Act, 1961, relating to 'Apportionment of income between spouses governed by Portuguese Civil Code,' which provides that: (a) Where husband and wife are governed by the system of community of property under the Portuguese Civil Code in force in Goa, income under each head other than 'Salaries' shall be apportioned equally and included separately in the total income of each spouse, and the remaining provisions of the Act shall apply accordingly. (b) Salary income is to be included only in the total income of the spouse who has actually earned it. 2.2 The Court also examined Rule 37BA of the Income-tax Rules, 1962, which prescribes how credit for TDS is to be given for the purposes of section 199, including: (a) Credit ordinarily to the deductee (person to whom payment is made or credit is given) on the basis of information furnished by the deductor. (b) Provision for giving credit to a person other than the deductee where income is assessable in such other person's hands, upon a declaration and appropriate reporting by the deductor. (c) Grant of credit for the assessment year in which the income is assessable, and proportionate allocation where income is assessable over multiple years. 2.3 It was specifically observed that Rule 37BA does not contain any express provision dealing with cases governed by the Portuguese Civil Code or by section 5A of the Act. Interpretation and reasoning 2.4 The assessee, an individual resident of Goa and admittedly governed by the Portuguese Civil Code and section 5A, had returned total income comprising salary income and income from other sources. TDS of Rs. 45,28,441 was claimed, consisting of: (a) TDS on salary: Rs. 35,22,412; and (b) TDS on income from other sources: Rs. 10,36,269. 2.5 The Centralized Processing Centre (CPC) restricted the TDS credit to Rs. 33,55,983 by applying a proportionate formula under Rule 37BA based on comparison of total receipts offered to tax in the return and total receipts as per Form 26AS. 2.6 The Court noted that under section 5A(2), salary income is exclusively assessable in the hands of the spouse who earns it. Consequently, TDS of Rs. 35,22,412 deducted on the assessee's salary income is directly relatable to income fully and solely taxed in his hands. Section 5A has no application to such salary income, and there was no dispute that this income was wholly included in the assessee's return. 2.7 Regarding the TDS of Rs. 10,36,269 on income from other sources, it was undisputed that the underlying income is required to be, and has been, apportioned equally between the assessee and his wife in their respective returns, in accordance with section 5A(1). 2.8 The assessee contended that the wife had not claimed any part of this TDS in her return, and that the entire TDS of Rs. 10,36,269 appeared in the assessee's PAN and was claimed only by him. It was further argued that Rule 37BA, and in particular its mechanism of proportionate restriction based on receipts and Form 26AS figures, has no application to a situation covered by section 5A, since there is no statutory provision mandating apportionment of TDS corresponding to income apportioned under section 5A. 2.9 The Court, on perusal of Rule 37BA, found that it only provides a general mechanism for credit of TDS and for situations where income is assessable in a person other than the deductee (upon declaration and reporting by the deductor). It does not specifically address or override the special regime under section 5A dealing with community of property and apportionment of income between spouses governed by the Portuguese Civil Code. 2.10 The Court held that, in the instant case, application of Rule 37BA by CPC to restrict the TDS credit, by using its proportional formula, is not in accordance with law where the assessee is governed by section 5A. As there is no reference in Rule 37BA to persons covered by the Portuguese Civil Code or to the specific apportionment mechanism under section 5A, and as the TDS in question is fully reflected in the assessee's PAN, Rule 37BA cannot be invoked to deny or curtail credit. 2.11 The Court emphasized that, since salary income is wholly assessed in the hands of the assessee and TDS on such salary is directly relatable to that income, full credit for TDS of Rs. 35,22,412 on salary must be allowed in his hands without any restriction. 2.12 As to TDS on other income (Rs. 10,36,269), the Court accepted that, though the underlying income is apportioned between spouses under section 5A, the entire TDS amount was deducted under the assessee's PAN and claimed only by him. In the absence of any statutory mandate in Rule 37BA or elsewhere to split or restrict TDS in such a fact situation, and given the inapplicability of Rule 37BA's proportional restriction formula to a case governed by section 5A, the entire TDS of Rs. 10,36,269 must be credited to the assessee. Conclusions 2.13 Section 5A does not apply to salary income; therefore, full credit of TDS of Rs. 35,22,412 on salary income is allowable to the assessee. 2.14 The income on which TDS of Rs. 10,36,269 has been deducted is apportionable between spouses under section 5A, but the TDS itself stands in the assessee's PAN and is claimed only by him. 2.15 Rule 37BA, as framed for the purposes of section 199, contains no specific provision dealing with apportionment of TDS in cases governed by the Portuguese Civil Code and section 5A. Its application by CPC, through a proportionate restriction formula, to reduce TDS credit in such a case is not in accordance with law. 2.16 The assessee is entitled to full credit of the entire TDS of Rs. 45,28,441 (Rs. 35,22,412 on salary plus Rs. 10,36,269 on income from other sources) as claimed in the return, and the Assessing Officer is directed to allow this total TDS credit. Issue 3: Consequential levy of interest under sections 234B and 234C Legal framework 2.17 The Court referred to sections 234B and 234C, which provide for levy of interest for defaults in payment of advance tax and for deferment of advance tax, respectively. Interpretation and reasoning 2.18 The assessee's grievance regarding interest under sections 234B and 234C was that such interest was computed after disallowance/restriction of TDS credit in the intimation under section 143(1) and in the rectification order. 2.19 The Court found that the quantum of interest under sections 234B and 234C is directly impacted by the amount of TDS credit allowable. Since the TDS disallowance/restriction has been set aside and full TDS credit directed to be given, the liability to interest requires recomputation accordingly. Conclusions 2.20 The levy and computation of interest under sections 234B and 234C are consequential to the correct determination of tax liability after allowing full TDS credit. 2.21 The Assessing Officer is directed to recompute interest under sections 234B and 234C on the basis of the revised tax liability after granting full TDS credit of Rs. 45,28,441, while giving due opportunity of being heard to the assessee. 2.22 The appeal is allowed by directing grant of full TDS credit and consequential recomputation of interest.