Opinion Of Eminent Legal Luminaries On Controversial Issues

Deduction at source – Tax deducted is income received -Claim of TDS on interest income

QUERY: A tax consultant is maintaining accounts on cash basis.
During the F.Y. 2016-17 amount has been given on loan @ 15% p.a. interest. On March 31, 2017, the borrower deducted TDS @ 10% on interest income accrued and paid to Department which has been claimed by lender in his I.T. Return for Assessment Year 2017-18 but did not show interest income because books are maintained on cash basis.
Hence, the querist wishes to know –
1) Whether the Department can tax the interest income accrued and not received as TDS claimed.
2) Whether the Department can refuse to grant credit of TDS certificate as income accrued thereof is not shown taxable.
ANSWER: Section 198 reads as under:
“All sums deducted in accordance with the foregoing provisions of this chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received”.
Thus section 198 is an enabling provision treating the tax that is deducted at source as the income of the payee. This stands to reason because the assessee would get credit for the same from the Assessing Officer on his filing the return.
Merely because, tax deducted is treated as income, it does not mean that the receipt from which tax is deducted should always be taxable; i.e., where deductor may deduct tax on credit of interest in his books in favour of deductee, but deductee may be keeping his accounts on cash basis (like in present case), may be taxable only on receipt basis. So, it depends on method of accounting followed by the assessee-deductee.
The Mumbai Tribunal in ITO v. PHE Consultants [64 taxmann.com 419] in para 8 of the decision states as under:
“It is pertinent to note that the provisions of section 198 though states that the tax deducted at source shall deemed to be income received, yet it does not specify the year in which the said deeming provision applies. However, section 198 states that the income is deemed to be income received” The provision of section 145 of the Act state that the income of an assessee chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Hence a combined reading of provisions of section 198 and section 145 of the Act, in our view makes it clear that the income deemed to have been received u/s. 198 has to be computed in accordance with the provisions of section 145 of the Act, meaning thereby the TDS amount per se cannot be considered as income of the assessee by disregarding the method of accounting followed by the assessee”.
So, in this case querist maintains his books of account on cash basis, hence, TDS deducted has to be claimed when he offers the receipts of interest. Thus Department can refuse to grant credit for TDS paid till the interest income is not shown.
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