In the case of BDR Finvest Pvt. Ltd.[1] (Taxpayer), the two issues before Delhi High Court (HC) were (a) whether amount of taxes deducted at source (TDS) by deductor can be recovered from the taxpayer (i.e., deductee) which the deductor had failed to deposit with the Government (b) whether taxpayer can claim credit of such TDS even if not appearing in Form 26AS[2].
In facts of the case, in tax year 2018-19, the Taxpayer advanced a loan to party (N) on interest. N paid interest to the Taxpayer after deducting TDS but failed to pay such TDS to the Central Government. N was referred to corporate insolvency resolution process and a Resolution Professional (RP) was appointed by NCLT[3].
In its original return of income filed for the tax year 2018-19, the Taxpayer failed to claim TDS credit. The Taxpayer claimed such TDS credit by filing revised return. The tax authority denied TDS credit while processing the revised return of income and issued intimation to the Taxpayer raising the demand for TDS amount. The Taxpayer filed a rectification application against such denial of TDS credit. The tax authority rejected the rectification application and denied TDS credit as the deductor had not paid it to Central government. The Taxpayer filed writ petition before Delhi HC against the rejection of rectification. The Taxpayer furnished a certificate issued by RP evidencing that TDS was deducted by N.
Placing reliance on its earlier ruling in case of Sanjay Sudan v. ACIT[4], the Delhi HC allowed Taxpayer’s writ petition and held that:
- Taxpayer (i.e., deductee) cannot be called upon to pay tax on the interest income to the extent tax on interest income has been deducted by the deductor[5].
- There can be no direct and indirect recovery (i.e., adjustment of demand against future refund amount of taxpayer) as the same is barred under Income Tax laws (ITL)[6].
- TDS is one of the methods of collecting tax. TDS is deducted prior to assessment of income and only when the relevant tax year is over, total income from all sources is determined. Upon assessment of total income, amongst other credit, TDS credit is given to the taxpayer.
- TDS deducted forms part of taxpayer’s income and the gross income is offered to tax on the premise that TDS deducted is treated as tax paid on behalf of the taxpayer.
- The TDS on interest deducted by N is nothing but the income which the taxpayer has offered to tax by grossing up the interest income. If credit for such TDS is not given, it would amount to indirect recovery of TDS from taxpayer which is not permitted.
- The payer of interest who deducted tax is the agent of Government and if such agent has failed to deposit TDS, the Government should initiate recovery proceedings against such agent. The TDS amount cannot be recovered from taxpayer.
[1] [TS-697-HC-2023(DEL)]
[2] Online form generated on tax portal based on taxes deducted/collected by others
[3] National Company Law Tribunal
[4] [2023] 148 taxmann.com 329 (Delhi)
[5] Based on conjoint reading of Section (S.)205 of the ITL and Central Board of Direct Taxes instruction No. 275/29/2014-IT-(B) dated 1 June 2015
[6] S.205 of the ITL
