While Soman offered this unreported income for tax after he was sent the tax notice, the tax department did not give him credit for the tax deducted at source (TDS) for earning this income. So, it was contended that once the receipts were brought to tax, denial of credit for taxes already deducted therefrom would result in double taxation. (AI-generated picture)
Mumbai resident Manoj Kumar Soman did not file his Income Tax Return (ITR), however, the Income Tax Department noticed some receipts in the taxpayer’s name and his income was brought to tax. The assessee made an appeal in the tribunal and managed to get his tax demand reduced, despite not having filed his ITR for the year concerned. He won the case in Income Tax Appellate Tribunal (ITAT) Mumbai for statistical reasons.
The case dates over a decade back when income tax officials reopened Soman’s assessment for the financial year 2010-11 under Section 147. This was done on the basis of information in the annual information return (AIR) and Form 26AS, which showed certain receipts (income) in the individual’s hand.
While Soman offered this unreported income for tax after he was sent the tax notice, the tax department did not give him credit for the tax deducted at source (TDS) for earning this income. So, it was contended that once the receipts were brought to tax, denial of credit for taxes already deducted therefrom would result in double taxation to that extent.
On this limited issue, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled in the assesse’s favour, saying TDS cannot be denied even if ITR is not filed.
Income tax demand reduced due to TDS credit ruling
ITAT Mumbai has remanded the matter back to the Assessing Officer (AO) for recomputation of the assessee’s tax liability after due verification of his TDS credit claim. Upon such verification, AO has been directed to grant the eligible TDS credit to the assessee, Raghav Bajaj, Partner at Khaitan & Co, told ET Wealth Online.
With this, the tax demand notice issued to the assessee will also get reduced due to the TDS benefit. “In the event the TDS credit reflected in Form 26AS is found to be correct, the assessee’s tax liability shall stand reduced to that extent,” Bajaj said.
Rashi Khanna, Partner, Expert Legal Services, also added that the tribunal has correctly allowed the benefit of TDS while computing the taxable income of the assessee.
TDS credit without filing ITR: How did the taxpayer win?
In this case, the assessee had not filed his return of income, and he also did not participate in the assessment and appellate proceedings. Manoj Soman, however, made a limited plea regarding grant of TDS while computing his taxable income before the tribunal.
His appeal was contended by the Departmental Representative, who claimed that since the assessee had not filed their ITR, no valid claim for TDS was made before the AO and therefore, the AO had rightfully not granted the TDS credit.
Rashi Khanna explained that the assessee won before the ITAT by demonstrating an apparent error in the tax liability computed by the AO. While the Assessing Officer had considered all the receipts reflected in the assessee’s Form 26AS for the purpose of assessment, the corresponding credit for TDS, which was also duly reflected in Form 26AS, was not granted.
After considering the contentions raised by both the parties, ITAT Mumbai ruled that granting TDS credit is “consequential and co-terminus” with the assessment of the corresponding income. “Once the income corresponding to receipts/TDS reflected in Form 26AS has been brought to tax, grant of TDS deducted and deposited to the govt. treasury, should not be denied on technical grounds,” the ITAT order reads.
Why initiated the tax assessment in the first place?
Manoj Soman had not filed an ITR for the relevant assessment year, which is FY 10-11 in this case. Based on information available through the AIR mechanism and other departmental databases, the Income-tax Department noticed substantial cash deposits in the taxpayer’s bank account.
Consequently, the AO initiated reassessment proceedings under section 147 of the Income-tax Act, 1961 by issuing a notice under section 148. Neither did the taxpayer respond to the notices, nor did he take part in the assessment proceedings. The additions were subsequently upheld by the first appellate authority.
CA Suresh Surana explained that Soman contended never receiving the notices issued by the department and therefore was deprived of an effective opportunity to explain the source of the deposits and defend his case.
The assessment was completed ex parte and the taxpayer claimed he was unaware of the proceedings, the matter required reconsideration after giving a reasonable opportunity to the taxpayer to explain the source of the deposits and furnish supporting evidence, the tribunal observed. Accordingly, the ITAT set aside the matter and restored it to the file of the AO for fresh adjudication.
In what cases can a taxpayer get an income tax notice?
The I-T Department may issue notices based on information received through the AIR / Statement of Financial Transactions (SFT) mechanism where high-value financial transactions undertaken by a taxpayer are reported by entities like banks, mutual funds, registrars, property registrars, other financial institutions.
Such notices are generally issued where the transactions reflected in AIR/SFT do not appear to be aligned with the income disclosed in the taxpayer’s ITR or where no ITR has been filed.
“The information reported under AIR/SFT may include high-value cash deposits or withdrawals, purchase or sale of immovable property, credit card payments, MF investment, shares or bonds, fixed deposits, foreign remittances, purchase of foreign currency, large bank transactions, etc.,” Surana said.
TDS credit despite not filing ITR: What does this ruling mean for taxpayers?
According to Surana, the decision highlights that while the Income-tax Department may reopen assessments based on information relating to cash deposits or other high-value transactions, adherence to proper service of notices and observance of principles of natural justice remain essential.
The decision reinforces the principles of natural justice and highlights that reassessment proceedings should be based on proper inquiry and evidence rather than mere suspicion.
A major takeaway from this judgement is that the taxpayers should regularly file their ITRs and claim TDS credit therein otherwise the tax department may dispute and deny them the benefit of TDS withheld which may result in unnecessary litigation, Khanna added.
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