Income Tax Query 9: Gross Receipts in ITR is less than as per TDS Claimed in ITR / Form 26AS due to Deductor following Cash System & Assessee following Mercantile System.

Scenario:: In many cases, there is a difference in Accounting Method – Mercantile (or Accrual) or Cash System followed by the Deductor and Assessee (Deductee). In such a Scenario, the Deductor following the cash system, TDS is deducted and paid at the time of payment to the Assessee. However, following accrual method, the assessee may have already disclosed this income in earlier years in their return of income. This results in TDS mismatch, since the corresponding income has already been offered to tax by the assessee in earlier years, however, TDS is only being deducted much later when actual payment is being made. The assessee cannot claim the credit of TDS in the assessment year in which tax is deducted since income / receipt is not offered to tax in that year. This results in a difficulty for the assessee to claim TDS Credit.

Moreover, if the assessee claim TDS Credit in a subsequent FY, he may receive a notice for defective return u/s 139(9) of the Income Tax Act, 1961 with the following description::

The gross receipts shown in Form 26AS are higher than the total of the receipts shown under all heads of income, on which credit for TDS has been claimed, in the return of income filed. Thus, while credit for TDS is being claimed in the return of income, the corresponding receipts are not fully disclosed in the respective income schedules. Hence, the return of income filed is regarded as defective, as per clause (a) of the Explanation under Section 139(9).

Query: What should be a probable resolution to the above issue?

Response:

The assessee, may, in addition to, any other objections it may have w.r.t invocation of Section 139(9) Defective Return may file Form 71 Application under sub-section (20) of section 155 for credit of tax deduction at source (TDS) for the original Assessment Year for which TDS Credit has been received subsequently.

The limitation period for Filing Form 71 is two years from the end of the Financial Year in which TDS is deducted.

For example, if ITR of AY 2023-24 FY ended 31/3/23 has already been filed. However, TDS on Income returned for AY 2023-24 is deducted in FY ended 31/3/24 and reflected in Form 26AS for AY 2024-25.

Form 71 will be filed for AY 2023-24 including the Form 26AS Line Items from AY 2024-25 in the Table of Form 71.

TDS Credit accordingly claimed for AY 2023-24 by Filing Form 71 will be excluded while Filing ITR for AY 2024-24 and accordingly the 139(9) notice may be accepted and response may be filed accordingly.

Attachments to Form 71 may include – ITR of AY 2023-24, Form 26AS for AY 2024-25, Reconciliation Statement (Sundry Debtors as per B/S at FY end and Payments thereof received in current FY).

Note: For TDS Deducted in FY ended 31/3/24 for AY 2023-24, Form 71 may be filed upto 31/3/26.

Impact::

There will be a refund for AY 2023-24 & tax will be paid (less refund) for AY 2024-25.

Statutory Provisions ::

Section 155 sub-section (20) of the Income Tax Act, 1961 reads as under :

155. Other amendments.

(20) Where any income has been included in the return of income furnished by an assessee under section 139 for any assessment year (herein referred to as the relevant assessment year) and tax on such income has been deducted at source and paid to the credit of the Central Government in accordance with the provisions of Chapter XVII-B in a subsequent financial year, the Assessing Officer shall, on an application made by the assessee in such form, as may be prescribed, within a period of two years from the end of the financial year in which such tax was deducted at source, amend the order of assessment or any intimation allowing credit of such tax deducted at source in the relevant assessment year, and the provisions of section 154 shall, so far as may be, apply thereto and the period of four years specified in sub-section (7) of that section shall be reckoned from the end of the financial year in which such tax has been deducted:

Provided that the credit of such tax deducted at source shall not be allowed in any other assessment year.

Explanation.—For the purposes of this section,—

(a) “additional compensation” shall have the meaning assigned to it in clause (1) of the Explanation to sub-section (2) of section 54;

(b) “additional consideration”, in relation to the transfer of any capital asset the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, means the difference between the amount of consideration for such transfer as enhanced by any court, tribunal or other authority and the amount of consideration which would have been payable if such enhancement had not been made.

Further, Rule 134 has been inserted in the Income Tax Rules, 1962

134. Application under sub-section (20) of section 155 regarding credit of tax deduction at source. —

(1) The application required to be made by the assessee under sub-section (20) of section 155 shall be in Form No. 71.

(2) Form No. 71 shall be furnished to the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) or the person authorised by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems).

(3) Form No. 71, shall be furnished electronically, — (i) under digital signature, if the return of income is required to be furnished under digital signature; (ii) through electronic verification code in a case not covered under clause (i).

(4) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall specify the procedures for furnishing Form No. 71 and shall also be responsible for formulating and evolving appropriate security, archival and retrieval policies in relation to the form so furnished.

(5) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, or any person authorised by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) shall forward Form No. 71 to the Assessing Officer.”

Form 71