The Income Tax Appellate Tribunal, Mumbai, has held that the protection under Section 205 of the Income-tax Act, 1961 operates upon establishment of actual deduction of tax at source, irrespective of whether the deductor has deposited the tax with the Central Government. The Tribunal set aside the CIT(A)'s order which had denied TDS credit of Rs.43,72,012/- solely on the ground of non-reflection or partial reflection in Form 26AS, and remanded the matter for limited verification of the foundational fact of deduction.
Background & Facts
The Dispute
The appellant, Sheth Fincap Services Private Limited, a company engaged in financial services, filed its original return of income in Form ITR-6 on 31.10.2025 for Assessment Year 2025-26, declaring total income of Rs.10,21,51,610/-. The assessee opted for taxation under Section 115BAA and disclosed a tax liability of Rs.2,57,09,517/-. It claimed total prepaid taxes of Rs.2,64,37,163/-, comprising advance tax of Rs.75,00,000/-, tax deducted at source of Rs.1,38,07,273/-, and self-assessment tax of Rs.51,29,890/-.
Key Facts
- The return was processed by the Centralised Processing Centre (CPC), Bengaluru, under Section 143(1) vide intimation dated 16.01.2026
- The returned income and tax liability were accepted without variation
- However, against the claimed TDS credit of Rs.1,38,07,273/-, the CPC allowed only Rs.94,35,261/-, resulting in short grant of Rs.43,72,012/-
- The short grant arose from five deductors with the following TAN-wise mismatches:
- MUMA54998G: Claimed Rs.7,63,640/-, Allowed Rs.4,35,224/-, Short Rs.3,28,416/- (Partial amount reflected in Form 26AS)
- MUMV07590C: Claimed Rs.9,917/-, Allowed Rs.2,625/-, Short Rs.7,292/- (Partial amount reflected in Form 26AS)
- MUMA28538G: Claimed Rs.31,94,103/-, Allowed Rs.18,41,937/-, Short Rs.13,52,166/- (Partial amount reflected in Form 26AS)
- AHMT07248D: Claimed Rs.55,000/-, Allowed Nil, Short Rs.55,000/- (Amount not reflected in Form 26AS)
- AHMT04346G: Claimed Rs.26,29,138/-, Allowed Nil, Short Rs.26,29,138/- (Amount not reflected in Form 26AS)
- Consequential interest under Sections 234B and 234C was computed at Rs.13,86,801/- (against Rs.7,10,191/- claimed)
- Total demand determined: Rs.50,31,170/-
Procedural History
- 31.10.2025: Original return filed by assessee
- 16.01.2026: Intimation under Section 143(1) issued by CPC
- 02.03.2026: CIT(A) dismissed appeal, confirming CPC's action
- 24.08.2026: Hearing before ITAT, Mumbai Bench F
- 07.09.2026: Order pronounced by ITAT
The Parties' Positions
Appellant's case: The corresponding income relating to disputed TDS was fully disclosed and offered to tax. Deductors had withheld amounts on account of TDS; assessee received net payments and had no statutory authority to compel deductors to deposit tax or file corrected returns. Section 205 protection applies once deduction is established. Denial without opportunity to reconcile violated natural justice.
Respondent's case: Section 143(1)(a)(vi) empowers CPC to restrict TDS credit to Form 26AS amounts. Assessee failed to produce Form 16A confirmations or evidence of actual deposit. Burden of establishing deduction and remittance rests on assessee. Section 205 protection available only when actual deduction and payment to Government is established.
Relief Sought
The appellant sought full credit of disputed TDS of Rs.43,72,012/-, recomputation of consequential interest under Sections 234B and 234C, quashing of demand of Rs.50,31,170/-, and consequential refund with interest under Section 244A.
The Legal Issue
The central questions were: (1) Whether TDS credit can be denied solely on the basis of non-reflection or partial reflection in Form 26AS when the corresponding income has been offered to tax; (2) Whether the protection under Section 205 requires proof of deposit of deducted tax by the deductor, or operates upon establishment of actual deduction alone; (3) Whether the adjustment made by CPC under Section 143(1) exceeded the permissible scope of prima facie processing.
Arguments Presented
For the Appellant
The learned AR contended that the CIT(A) erred in confirming the mechanical denial of TDS credit without proper verification or affording adequate opportunity. The corresponding income was offered to tax, and the assessee had no control over deductors' compliance. Reliance was placed on Section 205, which bars recovery of tax once deducted at source, regardless of deposit by deductor. The jurisdictional High Court's binding precedent in Yashpal Sahni v. ACIT (293 ITR 539) was cited, holding that the remedy lies against the deductor under Section 201, not the deductee. The recent judgment in Manohar Ramabtar Jhunjhunwala v. PCIT-17, Mumbai (WP No.2063/2025, decided 05.08.2026) was invoked, establishing that once actual deduction is proved, credit must follow and non-payment by deductor cannot defeat entitlement. The adjustment under Section 143(1) was argued to exceed permissible scope as it required verification beyond the return.
For the Respondent
The learned DR submitted that party-wise ledger accounts required verification with supporting documents evidencing actual deduction. The CIT(A) correctly held that Section 143(1)(a)(vi) permits restriction to Form 26AS amounts, and the burden of proving deduction and remittance rests on the assessee. Section 205 protection was contended to be available only upon establishment of both deduction and deposit.
The Court's Analysis
The Tribunal examined the interplay between Section 143(1), Section 199, and Section 205. It held that Section 143(1)(a)(vi) concerns addition of income appearing in Form 26AS but not included in returned income - it does not prescribe an absolute restriction of TDS credit to Form 26AS amounts. Moreover, the statutory proviso prohibits such adjustment for assessment years commencing on or after 01.04.2018. Section 143(1)(c) contemplates determination of payable/refundable amount after adjustment of prepaid taxes including TDS.
On Section 205, the Tribunal endorsed the Yashpal Sahni principle: the bar operates upon establishment of actual deduction, notwithstanding the deductor's failure to deposit. The language of Section 205 prohibits calling upon the assessee to pay tax to the extent tax has already been deducted from the relevant income. The requirement of establishing actual deduction must be distinguished from the deductor's subsequent statutory obligation to deposit.
The Tribunal relied on Manohar Ramabtar Jhunjhunwala (para 60): "once actual deduction of tax at source is established on facts, credit must follow. At the highest, the Department may verify whether a deduction did in fact occur, but once that foundational fact is proved, the subsequent non-payment by the deductor cannot be used to defeat the deductee's entitlement." The High Court also enumerated alternative evidence of deduction (para 69): invoices/fee memos with bank statements showing net receipt, payment intimations, ledger accounts, payer confirmations, and contemporaneous correspondence.
The Tribunal found that the party-wise ledger accounts, confirmations, and proposed bank statements required factual examination. Neither outright rejection solely on mismatch nor unconditional allowance was justified. Verification of deposit shall not become an additional condition for granting credit once actual deduction is established.
"The requirement of establishing actual deduction must, therefore, be distinguished from the subsequent statutory obligation of the deductor to deposit the amount deducted."
"Credit shall then be allowed notwithstanding the deductor's non-deposit or non-reporting, with consequential correction of the demand and refund, if any."
The Verdict
The appeal was allowed for statistical purposes. The impugned appellate order concerning the disputed TDS credit of Rs.43,72,012/- and consequential interest was set aside. The issues were restored to the jurisdictional Assessing Officer for limited verification with the following directions:
- Assessee to furnish deductor-wise reconciliation with ledger extracts, confirmations, bank statements, and contemporaneous documents
- Assessing Officer to verify inclusion of corresponding income in return and prevent double credit
- Jurisdictional AO to obtain assistance of ITO(TDS)/AO having jurisdiction over deductors for deductor-wise verification report
- Verification to cover actual deduction, deposit, reporting, TDS statements, correction statements, challan particulars
- Credit to be allowed once actual deduction established, notwithstanding deductor's non-deposit
- Any adverse material to be furnished to assessee with reasonable opportunity to explain
- Disputed demand kept in abeyance pending determination with appropriate system marking
- Interest under Sections 234B and 234C to be recomputed consequentially
- Compliance directions to be followed by Assessing Officer passing a speaking order
What This Means For Similar Cases
Form 26AS Mismatch Is Not Conclusive
- TDS credit cannot be denied mechanically solely because amounts are not fully reflected in Form 26AS
- The statutory scheme under Section 205 protects the deductee once actual deduction is established
- Practitioners must emphasise that Form 26AS is a reporting mechanism, not the source of the right to credit
Burden of Proof and Alternative Evidence
- The foundational fact of actual deduction must be verified, but the burden does not require the assessee to prove the deductor's deposit
- Ledger accounts, bank statements showing net receipts, payment intimations, and payer confirmations constitute satisfactory alternative evidence per Manohar Ramabtar Jhunjhunwala
- Once prima facie material is produced, the Department must satisfy itself and may inquire with the deductor/TDS officer
Remand Framework for Verification
- The Tribunal's detailed remand directions provide a template: deductor-wise reconciliation, cross-verification with TDS authorities, speaking order, and abeyance of demand
- Interest recomputation follows automatically upon determination of admissible credit
- Relief to assessee not deferred pending proceedings against deductor
Section 143(1) Scope Limited
- Adjustments under Section 143(1)(a)(vi) are for adding income not returned, not for restricting TDS credit
- The proviso bars such adjustments for AY 2018-19 onwards
- Verification of TDS mismatch requires examination beyond the return, exceeding Section 143(1) scope
