NISAR EBRAHIM OOKABHOY ,MUMBAI vs. ITO WARD 16(3)(1), MUMBAI

The captioned appeal is filed by the ASSESEE, directed against the order of Addl. / Joint Commissioner of Income Tax (Appeals)-1, Surat [for short “ld. CIT(A)”] dated 19.08.2025 for the AY 2020-21, which in turn arises from the assessment order passed under section 143(1) of the Income Tax Act, 1961 (the Act) dated 25.11.2021 for Assessment Year (AY) 2020-21, issued by the CPC, Bangaluru.

The grounds of appeal raised by the assessee in the present appeal are culled out as under:

Briefly stated, the assessee during the year under consideration had let out his ownership flat to M/s Kyta Hospitality Pvt. Ltd. under a leave and license agreement dated 05.10.2018 for 36 months. According to the terms of said agreement the assessee was entitled to a license fee of Rs. 1,20,000/- p.m. from 6th October 2018 to 5th October 2019, Rs. 1,26,000/- from 6th October Nisar Ebrahim Ookabhoy 2019 to 5th October 2020 subject to tax deduction of source @10%. The assessee received the License fee after deduction of the tax from licensee for Rs. 13,28,000 [1,20,000 x 6 + 1,26,000 x 6 = 14,76,000 – 1,47,600 (TDS 10%)]. As per bank statement of the assessee and details of License Fee received by the assessee (licensor), the Licensee though had deducted the withholding tax of Rs. 1,47,600/- but had deposited only Rs. 36,000/- from the amount deducted in exchequers account, remaining amount was not deposited for Rs. 1,11,600/-, so the same was not reflected in form 26AS of the assessee.

Matter carried by way of an appeal before the Ld. CIT(A), who did not doubted the facts of the case but have rejected the claim of assessee, stating that the dispute needs to be settled between the Licensee and Licensor, thus the assessee is liable to be pay legitimate taxes even if it was on account of failure of the deductor / licensee.

Ld AR to support the aforesaid contention further has placed his reliance on the decision of ITAT Mumbai in the case of Naik Naik and Co. Vs. CIT(A) dated 30.09.2025, where in the relevant observation of the Tribunal interpreting the issue, are as under:

Reference was also made to Office Memorandum dated 11.3.2016, which reiterated the position and once again directed officers not to enforce demands created due to nonpayment of TDS by deductors. The Board cautioned that despite the earlier instruction, field officers were continuing to enforce demands against deductees, and it was once again clarified that assessees shall not be called upon to pay where tax has already been deducted from their income.

The assessee fortified his submissions by reliance on judicial precedents. In Yashpal Sahni v. Rekha Hajarnavis [2007] 293 ITR 539 (Bom), the jurisdictional High Court held that once tax has been deducted at source, the bar of section 205 squarely applies and the deductee cannot be asked to pay again, even if the employer or payer has failed to deposit the tax or issue TDS certificates.

The Bombay High Court in Pushkar Prabhat Chandra Jain v. UOI [2019] 103 taxmann.com 106 reiterated that the Revenue cannot refuse credit or raise demand against the deductee when tax has already been withheld at source but not deposited by the purchaser. The responsibility is of the deductor, and coercive measures must be directed only against him.

The Delhi High Court in Incredible Unique Buildcon (P.) Ltd. v. ITO [2023] 153 taxmann.com 179 has also held that where the payer has deducted tax but not deposited it, theRevenue cannot both refuse credit and simultaneously demand the same sum from the deductee. Section 205, it was held, places a complete embargo on such recovery.

Support was also drawn from the Supreme Court’s rulings in UCO Bank v.

We have carefully considered the rival submissions and perused the material placed on record, including the return, the CPC intimation, the invoices raised on clients, the bank statements evidencing net receipts after deduction of tax at source, the party wise reconciliation filed by the assessee, the CBDT Instruction dated 1 June 2015 and the Office Memorandum dated 11 March 2016, and the authorities cited at the Bar.

The case turns on a simple but significant proposition. When tax has in fact been deducted at source from the assessee’s receipts, can credit be denied merely because the deductor has not deposited the tax or has not correctly reported it and, therefore, the credit does not surface in Form 26AS. In our opinion the Nisar Ebrahim Ookabhoy answer must be in the negative. Section 205 of the Act erects a clear bar against making a direct demand on the assessee to the extent tax has been deducted at source from his income. The moment deductionis shown on the strength of primary evidence, the embargo of section 205 attaches and the deductee cannot again be called upon to bear the burden.

This statutory position is not only plain on the text of the provision but also reinforced by the Central Board of Direct Taxes. In Instruction No. 275/29/2014 IT(B) dated 1 June 2015 the Board recorded that taxpayers were being denied credit because deductors failed to deposit the tax, and directed that in such cases coercive recovery should not be enforced from the deductee. The subsequent Office Memorandum dated 11 March 2016 reiterated the same position and directed field officers not to enforce demands created on account of mismatch of credit due to non payment by the deductor. These directions are binding on the Department and are intended precisely to avoid double taxation of an innocent deductee.

The judicial current flows in the same channel. The jurisdictional High Court in Yashpal Sahni v. Rekha Hajarnavis held that once deduction of tax at source is established the bar of section 205 operates and the revenue is restrained from recovering the same amount again from the person from whose income tax has been deducted. The Court clarified that even the non issuance of a TDS certificate or the failure of the payer to deposit the tax does not undo the protection that section 205 accords to the deductee. The same High Court in Pushkar Prabhat Chandra Jain reiterated that where the purchaser deducted tax could always proceed against the defaulting purchaser, but the seller who had suffered deduction could not be asked to pay the tax again nor be denied credit.

Tested on this legal touchstone the approach of the first appellate authority does not commend acceptance. The learned CIT(A) made Form 26AS the decisive touchstone and cast upon the assessee the burden of securing rectification by the deductors. Form 26AS is a departmental statement that reflects the deductor’s compliance. It does not form part of the assessee’s books.

On facts, the assessee has demonstrated deduction of tax at source through its invoices and bank statements. The reconciliation placed on record shows, among others, deduction by Future Retail Limited of a substantial sum which was not deposited owing to the company’s financial condition. In the case of MEP Infraprojects the deposited taxis now reflected on update of 26AS, which only underscores that the mismatch was the consequence of deductor side compliance Nisar Ebrahim Ookabhoy and not any infirmity in the assessee’s claim. For the remaining parties too the Department has not disputed the services rendered or the gross receipts; its sole objection is non appearance in 26AS. That objection, in the face of section 205, the CBDT directions and the binding precedents, cannot prevail.

It is important to remember that the assessee has already brought the corresponding income to tax. Denial of credit in the assessee’s hands, because the deductor failed to deposit or mis reported the deduction, results in taxing the same income twice. Section 205 is the Parliamentary safeguard against precisely such injustice. The Board’s Instruction and Memorandum translate that safeguard into administrative practice. The High Courts have given it judicial benediction.

The learned Departmental Representative suggested that section 199 contemplates credit only on payment to the Government and hence the absence of 26AS entries should defeat the claim. Section 199 cannot be read in isolation. It must be read harmoniously with section 205. Section 199 allocates the time and manner of giving credit in the ordinary course when the deductor has discharged his obligation. Section 205 steps in to prevent a second exaction from thedeductee when that ordinary course is derailed by the deductor’s default. The harmonious reading preserves both provisions and avoids the manifest unfairness that would otherwise ensue.

In the result we hold that the assessee is entitled to credit of TDS to the extent deduction from its receipts is established on the basis of the contemporaneous material placed on record. The denial of credit by CPC and its affirmation by the first appellate authority are set aside. The Assessing Officer is directed to verify the assessee’s reconciliation with reference to the invoices, payment advices and bank statements already on record and to allow the corresponding credit of TDS.

Per contra, Ld. Addl CIT DR placed his reliance on the order of Ld. CIT(A).

We have considered the rival submissions, perused the material on record and decisions cited herein above. The assessee’s have submitted necessary evidence like copies of ITR, Computation, Statement in Form 26AS, Leave & License Agreement, Bank statement to support the facts of the case, even the revenue authorities had not doubted the facts that tax was deducted at Source but was not deposited by the deductor. Under such circumstances the issue in present matter is squarely covered by the decision of ITAT Mumbai in the case of Naik Naik and Co and various decisions as well as CBDT’s instruction No 275/90 of 2015. The sole issue qua the TDS credit mismatch due to failure of on the part of deductor in depositing the tax deducted on the income which is already offered for taxation by the assessee, thus, decided in favour of the assessee. The AO is directed to allow credit of TDS after due verification of facts on record, in terms of aforesaid observations.

In result, the appeal of assessee, stands allowed as per our observations herein above.