TDS credit cannot be denied where treaty-exempt income is accepted as not taxable in India and credit follows assessable income.

TDS credit could not be denied merely because the corresponding receipts were not offered as taxable income in the return, where the assessee claimed the income was not chargeable in India under the applicable DTAA. The return was processed accepting nil income, and the defect objection was not treated as invalidating the return. On these facts, Rule 37BA required the tax credit to follow the income to which it related and to be allowed in the year and to the person in whose hands the income was assessable. As the income itself was accepted as not taxable in India, denial of the associated TDS credit was unsustainable.

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Issues: Whether the assessee was entitled to credit of tax deducted at source despite not showing the corresponding receipts as taxable income in the return, where the income was claimed to be not chargeable to tax in India under the Double Taxation Avoidance Agreement.

Analysis: The return was initially flagged as defective because the TDS claim exceeded the income disclosed, and the assessee explained that the receipts were not taxable in India under the treaty. The return was nevertheless processed under section 143(1)(a) accepting nil income, and the defect was not treated as invalid. On these facts, the credit of TDS was required to follow the income to which it related, and Rule 37BA supported allowance of credit in the relevant year to the person in whose hands the income was assessable. Since the income itself was accepted as not taxable in India, denial of the associated TDS credit was not justified.

Conclusion: The assessee was entitled to the TDS credit of Rs. 9,01,972 and the denial of such credit was unsustainable.

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