TDS mismatch can’t cost you Rs 1 crore: ITAT Mumbai quashes tax demand on Form 26AS

In a significant relief for taxpayers, the Income Tax Appellate Tribunal (ITAT) Mumbai has quashed a Rs 1 crore tax demand raised solely due to a TDS mismatch in Form 26AS, reaffirming that Section 205 of the Income Tax Act protects taxpayers from double taxation. The ruling emphasizes that TDS credit must be granted based on primary evidence, not merely on the entries reflected in Form 26AS.

The case involved a taxpayer with income exceeding Rs 20 crore and TDS claims of over Rs 4.8 crore. However, the Central Processing Centre (CPC) denied nearly Rs 96 lakh of TDS credit, claiming it did not appear in Form 26AS. This led to a tax demand exceeding Rs 1 crore, including interest under Sections 234B and 234C. The Commissioner of Income Tax (Appeals) upheld this view, asserting that TDS credit could only be allowed if reflected in Form 26AS.

ITAT Mumbai overturned this position, calling it legally unsustainable. The Tribunal clarified that the statutory framework does not mandate that TDS must appear in Form 26AS before credit is granted. Instead, it directed that primary evidence—invoices, payment advices, and bank statements—should be used to verify if tax was indeed deducted at source.

In a strongly worded observation, the bench stated: “The statute does not impose such a precondition. The deductee has neither control over nor access to the deductor’s filings. The insistence effectively makes the assessee hostage to another’s compliance and empties Section 205 of content. The more correct and lawful approach is to verify the assessee’s primary evidence of deduction and allow credit accordingly, leaving the Department free to pursue the defaulting deductors in accordance with law.”

The Tribunal relied on High Court precedents, notably Yashpal Sahni v. Rekha Hajarnavis, which held that once TDS deduction is proved, Section 205 bars the Revenue from demanding the same tax from the assessee again. The ITAT reiterated that once TDS is established through credible records, the taxpayer cannot be asked to “bear the burden twice.”

Commenting on the implications, Mihir Tanna, Associate Director at S.K. Patodia LLP, told the Economic Times: “There are various judicial pronouncements supporting that if primary materials on record clearly indicate payments were received net of tax after TDS, revenue can’t insist on Form 26AS reflection as a condition for credit. However, till the law is amended, such judgments will not fully eliminate disputes. Practically, the department may face verification challenges, and in rare cases, unrecoverable TDS could lead to revenue loss.”

The ruling also aligns with CBDT’s 2015 and 2016 instructions, which advise tax officers not to initiate coercive recovery where TDS mismatches arise from deductor lapses. ITAT Mumbai emphasized that Section 205 is a legislative safeguard against such injustice, while the Board’s instructions operationalize that protection in administrative practice.

The Tribunal concluded that the taxpayer had furnished ample evidence — bank statements, invoices, reconciliations, and ITRs — establishing legitimate TDS deduction. It criticized overreliance on Form 26AS, remarking that it merely reflects the deductor’s compliance and is not part of the assessee’s books.

Finally, ITAT Mumbai ordered the Assessing Officer to grant full TDS credit after verifying records and to delete related interest charges, stating: “Form 26AS is a departmental statement. To insist on its reflection as a precondition for credit is to elevate form over substance. The statute does not so provide.”