2024 (9) TMI 1745 - AT - Income Tax

Non grant of TDS credit - CPC power to deny the TDS Credit as per section 143(1) - HELD THAT - It is well settled law that as per section 143(1) the CPC has no power to reduce the claim of TDS under the provisions of section 143(1) of the Act. On the contrary it is the duty of the CPC to give due credit of TDS reflected in Form No.26AS of the assessee. Thus CPC as well as the CIT(A) have committed error in not allowing the TDS credit to the assessee. We direct the CPC to give due credit of TDS as reflected in Form No.26AS of the assessee.

Summary

The core legal questions considered in this appeal revolve around the correct entitlement and credit of Tax Deducted at Source (TDS) claimed by the assessee in the income tax return, specifically:

1. Whether the provisions of Rule 37BA of the Income Tax Rules, 1962, can be invoked by the Central Processing Centre (CPC) under section 143(1) of the Income Tax Act, 1961, to restrict or deny the full credit of TDS claimed by the assessee as reflected in Form 26AS.

2. Whether the assessee's business activity qualifies as that of a 'Kachha Arhatia' (commission agent) or as a trader, thereby determining the applicability of TDS provisions under section 194Q or section 194J and the consequent entitlement to TDS credit.

3. The scope and power of the CPC under section 143(1) in processing returns and granting TDS credit.

Issue 1: Applicability of Rule 37BA and CPC's Power under Section 143(1) to Deny TDS Credit

The legal framework includes section 143(1) of the Income Tax Act, which mandates summary assessment and processing of returns by the CPC, and Rule 37BA of the Income Tax Rules, which restricts the credit of TDS to the extent of the turnover declared by the assessee in certain cases.

Precedents and settled principles establish that the CPC's role under section 143(1) is limited to processing returns and granting due credit of TDS as per Form 26AS, without exercising adjudicatory powers to deny or reduce TDS credit on merits.

The lower authorities, including the CIT(A), upheld the CPC's adjustment of TDS credit from Rs.86,694/- claimed to Rs.38,178/- allowed, relying on Rule 37BA to restrict credit to the turnover declared by the assessee. The CIT(A) reasoned that since the assessee was not purely a commission agent but also engaged in trading activities, the turnover for TDS credit purposes should be limited accordingly.

However, the Tribunal observed that the CPC and CIT(A) erred in applying Rule 37BA at the stage of processing under section 143(1), as the CPC lacks the authority to deny TDS credit on such grounds. The Tribunal emphasized that the CPC must grant TDS credit as reflected in Form 26AS, and any dispute regarding the genuineness or correctness of TDS credit should be resolved through proper assessment proceedings, not summary processing.

Thus, the Tribunal concluded that the CPC and CIT(A) wrongly denied the full TDS credit claimed by the assessee while processing the return under section 143(1).

Issue 2: Characterization of the Assessee's Business as 'Kachha Arhatia' (Commission Agent) or Trader

The assessee contended it was a 'Kachha Arhatia' engaged solely in commission/brokerage business, earning commission income on sales made on behalf of principals, and thus the TDS deducted under section 194O (or 194J) should be fully credited.

The CIT(A) and CPC disputed this claim, noting that the assessee's turnover and sundry debtor balances indicated trading activity rather than mere commission agency. The CIT(A) relied on Circular No. 452 dated 17/09/1986, which distinguishes between 'Kachha Arhatia' and 'Pucca Arhatia', requiring the assessee to prove its status with documentary evidence such as APMC certificates, party-wise sales, and commission percentages.

The CIT(A) found that the assessee's sundry debtors matched sales turnover rather than only commission receivables, and that TDS was deducted under section 194Q (applicable to purchase of goods) rather than section 194J (applicable to commission), indicating that the assessee acted as principal in sales transactions. This led to the conclusion that the assessee was a trader, not a commission agent.

The Tribunal, however, accepted the assessee's contention that it was engaged as a 'Kachha Arhatia' and that the business was in the nature of agency rather than principal trading. The Tribunal noted the assessee's submissions and the nature of the business, recognizing that the commission income was correctly declared and that the TDS credit claimed corresponded to such commission income.

Therefore, the Tribunal found that the characterization of the business as trading by the lower authorities was not supported by sufficient evidence to deny TDS credit on this ground.

Issue 3: Application of Law to Facts and Treatment of Competing Arguments

The CPC and CIT(A) argued that the turnover declared by the assessee included sales turnover and not just commission income, justifying the restriction of TDS credit under Rule 37BA. They also pointed to the nature of TDS deduction under section 194Q as supporting trading activity.

The assessee maintained that the turnover was restricted to commission income as per Circular No. 452 and that TDS deducted was correctly claimed as credit. The assessee also contended that the CPC had no jurisdiction to deny TDS credit under section 143(1).

The Tribunal weighed these arguments and found that the procedural limitation on CPC's powers under section 143(1) was decisive. The Tribunal held that the CPC must grant TDS credit as per Form 26AS and that substantive disputes regarding the nature of business and turnover should be adjudicated through proper assessment proceedings, not summary processing.

Consequently, the Tribunal directed the CPC to grant the full TDS credit of Rs.86,694/- as claimed by the assessee.

Significant holdings include the following verbatim excerpt encapsulating the core legal reasoning:

"It is well settled law that as per section 143(1) the CPC has no power to reduce the claim of TDS under the provisions of section 143(1) of the Act. On the contrary, it is the duty of the CPC to give due credit of TDS reflected in Form No.26AS of the assessee. Thus, in our considered opinion, the CPC as well as the Ld. CIT(A) have committed error in not allowing the TDS credit to the assessee."

This establishes the principle that the CPC's function under section 143(1) is limited to processing returns and granting TDS credit as per Form 26AS, without adjudicating disputes on the correctness of such credit.

Further, the Tribunal's acceptance of the assessee's characterization as a 'Kachha Arhatia' reinforces the requirement for proper documentary evidence and the need to distinguish between commission agency and trading activities before denying TDS credit.

The final determination was that the appeal was partly allowed to the extent of directing the CPC to grant full TDS credit of Rs.86,694/- claimed by the assessee, overruling the denial of credit by the CPC and CIT(A) under Rule 37BA during processing under section 143(1).