2025 (6) TMI 411 - HC - Income Tax

Denial of credit of TDS to NRI Assessee - deductor has erroneously used an incorrect form which is applicable to a resident Indian instead of the one for an NRI - Revenue submits that the Revenue has been unable to correct the error as under the Standard Operating Procedure SOP the consent of the buyers is required along with an indemnity bond and other documents. HELD THAT - On a pointed query as to why the buyers consent would be required the learned counsel for the Revenue submits that the same would be necessary in order to obviate any action on the part of the buyers to recover the amount of the TDS that had been deposited. She states that although there is no dispute as to the deposit of the TDS but the petitioner s case has been withheld only on account of the documents required from the buyers. In the peculiar facts of this case we consider it apposite to direct the Revenue to correct the record and reflect the TDS deposited by the buyers to the petitioner s credit under the return filed in the Form 26QB with effect from the date the amount was deposited. The Revenue shall further compute the amount of the refund if any that may be due to the petitioner in accordance with law. All the orders and communication not in conformity with the aforesaid directions shall be treated as having been set aside.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

• Whether the Assessing Officer (AO) was justified in suo motu withdrawing a clean assessment order passed under Section 147 of the Income Tax Act, 1961, and substituting it with an order raising a demand and initiating penalty proceedings.
• Whether the petitioner, a Non-Resident Indian (NRI), was entitled to credit for Tax Deducted at Source (TDS) deposited by the buyers against the sale of immovable property, despite the TDS being deposited under an incorrect form (Form 26QB applicable to resident Indians instead of Form 27Q applicable to NRIs).
• Whether the AO's refusal to grant TDS credit on the basis of procedural errors by the deductor (buyers) was legally sustainable.
• The validity and applicability of penalty proceedings initiated under Section 270A of the Income Tax Act in the context of the facts and timeline of the case.
• The procedural requirements and legal implications of correcting the TDS credit in cases where the deductor has used an incorrect form for deposit.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Suo Motu Withdrawal of Assessment Order under Section 147

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act permits reopening of assessments in cases where income has escaped assessment. However, the power to withdraw an assessment order suo motu is not expressly provided under the statute. The Court examined whether the AO had any legal basis to withdraw a clean assessment order without statutory grounds.

Court's Interpretation and Reasoning: The Court noted that the AO initially accepted the petitioner's return and passed a clean assessment order. Subsequently, the AO issued a computation sheet raising a demand and initiated penalty proceedings without furnishing reasons or statutory justification for withdrawing the earlier order. The Court found no provisions under the law permitting such suo motu withdrawal by the AO.

Key Evidence and Findings: The impugned communications dated 04.03.2025 indicated withdrawal of the clean assessment order and substitution with a demand notice and penalty initiation. The AO's counter affidavit did not provide statutory provisions authorizing the withdrawal but admitted the procedural irregularity.

Application of Law to Facts: The Court concluded that the AO's actions were legally untenable and amounted to non-application of mind to the facts, as the demand was raised on an erroneous premise.

Treatment of Competing Arguments: The Revenue sought time to file counter affidavit but failed to justify the withdrawal under any statutory provision. The Court rejected the AO's unilateral action.

Conclusion: The withdrawal of the assessment order by the AO was not legally permissible.

Issue 2: Entitlement to TDS Credit Despite Incorrect Form Used by Deductor

Relevant Legal Framework and Precedents: Under the Income Tax Act, TDS credit is granted to the deductee when tax is deducted and deposited by the deductor. Form 26QB is prescribed for TDS on property transactions involving resident Indians, while Form 27Q applies to NRIs. The correctness of the form impacts the crediting of TDS in the deductee's account.

Court's Interpretation and Reasoning: The Court observed that the buyers deducted and deposited the full TDS amount with the Government treasury, but erroneously filed the return under Form 26QB instead of Form 27Q. This procedural error by the buyers caused the credit to be reflected incorrectly in the petitioner's Form 26AS, showing only Rs. 2,00,000/- instead of the full withheld amount of Rs. 18,68,177/-.

Key Evidence and Findings: The petitioner's bank account received Rs. 1,81,31,823/- and the balance withheld amount was deposited by the buyers. The buyers admitted the error and attempted to correct the TDS challan. The AO's own records confirmed the deposit but denied credit due to the form mismatch.

Application of Law to Facts: The Court held that since the tax was deducted and deposited, the petitioner was entitled to the credit regardless of the procedural mistake by the deductor. The AO's refusal to grant credit solely based on the incorrect form was unjustified.

Treatment of Competing Arguments: The Revenue argued that consent from the buyers was necessary to correct the record and grant credit, citing internal SOP requirements. The Court questioned the necessity of buyers' consent, especially since the tax was deposited and the petitioner was the rightful deductee.

Conclusion: The petitioner was entitled to TDS credit for the full amount deposited, notwithstanding the incorrect form used by the buyers.

Issue 3: Validity of Penalty Proceedings under Section 270A

Relevant Legal Framework and Precedents: Section 270A provides for penalty for under-reporting or misreporting of income. However, its applicability depends on the assessment year and whether the return was filed within prescribed timelines.

Court's Interpretation and Reasoning: The penalty proceedings were initiated erroneously for AY 2016-17, relating to FY 2015-16, before the effective date of the relevant amendment (01.04.2017). The AO himself acknowledged the error and dropped the penalty proceedings.

Key Evidence and Findings: The counter affidavit and AO's order dated 12.03.2025 confirmed withdrawal of penalty proceedings.

Application of Law to Facts: The Court noted the inapplicability of penalty provisions to the facts and timeline of the case.

Treatment of Competing Arguments: The Revenue accepted the mistake and withdrew the penalty.

Conclusion: The penalty proceedings under Section 270A were not sustainable and were rightly dropped.

Issue 4: Procedural Requirements for Correction of TDS Credit and Role of Buyers' Consent

Relevant Legal Framework and Precedents: The Standard Operating Procedure (SOP) for correction of TDS credits requires certain formalities including buyers' consent and indemnity bonds to rectify errors in TDS returns.

Court's Interpretation and Reasoning: The Court found the Revenue's insistence on buyers' consent to be an impediment to correcting the record, especially since the tax was deposited and the petitioner was the legitimate recipient. The Court emphasized the need to prioritize substantive tax credit over procedural formalities.

Key Evidence and Findings: The buyers had attempted to correct the TDS challan but procedural requirements delayed crediting the petitioner.

Application of Law to Facts: The Court directed the Revenue to correct the record and grant credit without undue insistence on buyers' consent, given the peculiar facts.

Treatment of Competing Arguments: The Revenue's procedural concerns were overruled in light of the petitioner's entitlement and the absence of any dispute on the deposit of TDS.

Conclusion: The Revenue was directed to rectify the TDS credit and compute any refund due to the petitioner forthwith.

3. SIGNIFICANT HOLDINGS

"A plain reading of the impugned communications indicates that they seek to withdraw an assessment order passed under Section 147 of the Income Tax Act, 1961 and to substitute the same by converting a clean assessment order into one that raises the demand and, in relation thereto, seeks to initiate penalty proceedings. Prima facie, we find no provisions under the law that could have permitted the AO to suo moto withdraw an assessment order."

"Although a demand has been raised, it is ex facie erroneous, as it is on account of non-deposit of Tax Deducted at Source [TDS]. However, the TDS was deducted and deposited by the deductor. The only ground on which credit for the TDS has been denied to the petitioner is that the deductor has erroneously used an incorrect form which is applicable to a resident Indian instead of the one for an NRI."

"This indicates a complete non-application of mind to the facts of the present case."

"In the peculiar facts of this case, we consider it apposite to direct the Revenue to correct the record and reflect the TDS deposited by the buyers to the petitioner's credit under the return filed in the Form 26QB with effect from the date, the amount was deposited. The Revenue shall further compute the amount of the refund, if any, that may be due to the petitioner in accordance with law."

Core principles established include:

• The AO cannot withdraw a clean assessment order suo motu without statutory authority.
• Tax credit for TDS must be granted where tax has been deducted and deposited, notwithstanding procedural errors in filing of TDS returns by the deductor.
• Penalty proceedings under Section 270A are not applicable retrospectively before the effective date of the amendment.
• Procedural formalities such as buyer's consent cannot be allowed to frustrate the substantive right of the deductee to claim TDS credit.

Final determinations on each issue were:

• The impugned withdrawal of assessment order and demand notice were quashed.
• The petitioner was entitled to full credit of TDS deposited by the buyers despite the incorrect form used.
• Penalty proceedings under Section 270A were dropped.
• The Revenue was directed to correct the TDS record and grant consequential refund as per law.