The Hindu Business Line : Equitable timing of TDS credit

Most of the provisions in Sections 192 to 195 have covered a wide compass of payments as a result of which most of business payments are subject to TDS at rates ranging from 2 per cent to 30 per cent. Disputes have arisen when tax is deducted at source and TDS certificate is issued as to whether credit for TDS is to be taken in the year in which the income is actually assessed to tax or the year in which it is assessable as per law.

This issue came up for discussion in the Stallion Securities Ltd vs ITO (2004 91 ITD 338 Hyderabad) case.

Facts, issues

The assessee-company had received dividends from another company, which was declared on August 22, 1994, and offered to be taxed in the assessment year (AY) 1994-95 on accrual basis. This was accepted by the assessing officer (AO).

However, the assessee claimed credit for TDS in the AY 1995-96 when the dividend was declared.

The AO as well as the Commissioner (Appeals) refused to give credit for TDS on the ground that the income was not assessed to tax in the AY 1995-96 but was assessed in AY 1994-95. The matter reached the Tribunal.

The issue for consideration was whether credit for TDS is to be given in the year in which income is actually been determined and assessed, namely, AY 1994-95, or when TDS certificate was received by the receiver of dividend, namely, AY 1995-96.

Provisions explained

Section 199 of the Income-Tax Act, 1961, which deals with the manner and method of providing credit for TDS, reads thus:

Credit for tax deducted: "Any deduction made in accordance with (the foregoing provisions of this Chapter) and paid to the Central Government shall be treated as a payment of (tax) on behalf of the person from whose income the deduction was made, or of the owner of the security [or depositor or owner of property or of unit-holder] or of the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of the certificate furnished under Section 203 in the assessment [made under this Act for the assessment year for which such income is assessable."

In the case of dividend, Section 8 of the Act mandates that dividend is to be taxed in the previous year in which it is declared, distributed or paid as the case may be. This is with reference to final dividend declared at the annual general meeting (AGM).

As far as interim dividend is concerned, it shall be deemed to be the income of the previous year in which such dividend is unconditionally made available to the shareholder.

Invariably, a situation arises where the receiver of the dividend may offer the same to tax in an earlier year on the basis of the accrual principle of accounting.

The company declared the dividend may do so during the succeeding year and the TDS certificate will also be dated subsequently. Hence, the confusion and controversy.

Tribunal decision

The Hyderabad Bench of the Tribunal held, notwithstanding the fact that assessee was following the accrual principle of accounting and had accounted dividend in AY 1994-95 itself, that credit for TDS can be given in the succeeding AY 1995-96.

The Tribunal reasoned as follows:

"Section 8(a) of the Act, in no certain terms, provides for bringing to tax dividend income only in the year in which the dividend is declared, distributed or paid. In the instant case, it is not in dispute that by applying Section 8(a) of the Act, the dividend income is assessable to tax only in the assessment year 1995-96.

"Section 199 of the Act provides for giving credit to the assessee for the amount of tax deducted at source for the amount of tax deducted at source by the company declaring the dividend.

"The Legislature in its wisdom has amended Section 199(1) with effect from 1-6-1987 whereby the expression `assessable' was used to decide the year in which the credit has to be given. The words `assessable' and `assessed' are not synonymous to each other.

"The word `assessable' speaks of the legal position in which an income has to be brought to tax, whereas the word `assessed' speaks of the factual position in which the income is assessed to tax.

"Since the Legislature has guardedly used the word `assessable', it is the duty of the courts to assign proper meaning to that word, in which the event the credit for TDS amount has to be given only in the year in which the dividend income is assessable and not in the year in which the dividend income is assessed to tax.

"In view of the plain language of the sections referred to above, and also on equitable consideration, we are of the firm view that though the dividend income was assessed to tax in the preceding assessment year, going by the legal position with regard to the year of assessability of dividend income, the assessee is entitled to claim credit for the TDS in terms of Section 199 of the Act in the assessment year 1995-96. The AO is directed accordingly."

The tribunal, thus, gave relief to the assessee company.

TDS management and paperwork have consumed precious time and energy over the years. With the advent of e-filing of TDS returns, notwithstanding initial teething problems, much of the issues will get sorted out. The dichotomy of offering income in a particular year and utilising credit to the related TDS in the subsequent years persists.

Clearly, the language employed in Section 199 has created sufficient confusion particularly in the context of dividends.

As long as the income has been offered to tax there should be some flexibility to utilise credit of the related TDS in the future up to, say, two years.

(The author is a Chennai-based chartered accountant.)

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