SHETH FINCAP SERVICES PRIVATE LIMITED,MUMBAI vs. THE INCOME-TAX OFFICER, DCIT 1(3)(1), MUMBAI, MUMBAI

The return was processed by the CPC under section 143(1) of the Act. The income returned by the assessee at Rs.10,21,51,610/- and the tax liability of Rs.2,57,09,517/- were accepted without variation. However, as against the TDS credit of Rs.1,38,07,273/- claimed in the return, the CPC allowed TDS credit of Rs.94,35,261/-, thereby resulting in short grant of TDS credit of Rs.43,72,012/-. Consequently, the total prepaid taxes were restricted from Rs.2,64,37,163/- to Rs.2,20,65,151/-.

The intimation records the following deductor-wise mismatch: TAN of TDS claimed TDS matched TDS not Reason deductor and allowed allowed stated in intimation MUMA54998G Rs.7,63,640/- Rs.4,35,224/- Rs.3,28,416/- Partial amount

The CPC restricted the credit in respect of three deductors to the amounts partially reflected in Form 26AS and denied the entire credit in respect of two deductors whose TDS amounts were not reflected therein. As a consequence of the short grant of TDS credit, interest under section 234B was computed at Rs.7,19,956/- as against Rs.2,64,132/- shown by the assessee, and interest under section 234C was computed at Rs.6,66,845/- as against Rs.4,46,059/- shown by the assessee. The aggregate interest was thus computed at Rs.13,86,801/- as against Rs.7,10,191/- shown in the return. The CPC accordingly determined a demand of Rs.50,31,170/- through the intimation dated 16.01.2026, which was also treated as a notice of demand under section 156 of the Act.

Aggrieved by the aforesaid intimation, the assessee instituted an appeal before the learned CIT(A). Before the learned CIT(A), the assessee submitted that the corresponding income relating to the disputed TDS had been fully disclosed and offered to tax in its return of income. It was contended that the deductors had withheld the relevant amounts from the payments due to the assessee on account of TDS and, therefore, the assessee was entitled to credit thereof as prepaid tax. According to the assessee, it had received the payments net of TDS and had no statutory authority to compel the deductors either to deposit the tax with the Central Government or to file corrected TDS returns.

The assessee invoked the protection available under section 205 of the Act and contended that, once tax had been deducted from its income, recovery of the same tax could not again be enforced against it merely because the deductors had failed to report or deposit the tax. It was further contended that the denial of credit without affording a specific opportunity to explain and reconcile the mismatches was contrary to the principles of natural justice.

The assessee also challenged the adjustment as being beyond the permissible scope of processing under section 143(1). It prayed that full credit of the disputed TDS of Rs.43,72,012/- be allowed, the consequential interest charged under sections 234B and 234C be recomputed, and the demand of Rs.50,31,170/- be stayed or quashed. The assessee further claimed consequential refund together with interest under section 244A of the Act.

The learned CIT(A) proceeded on the view that section 143(1)(a)(vi) empowered the CPC to restrict TDS credit to the amount available in Form 26AS, the Annual Information Statement or the Taxpayer Information Summary, and that mismatch-based adjustments were permissible during automated processing of the return.

The learned CIT(A) further recorded that the assessee had not produced Form 16A confirmations from the deductors or evidence demonstrating that the disputed TDS had been deposited with the Central Government. According to the learned CIT(A), the burden of establishing actual deduction and remittance of tax rested upon the assessee. It was held that the protection under section 205 could be invoked only when actual deduction of tax was established and that the assessee could not claim such protection merely on the basis of book entries or assertions. The learned CIT(A) observed that Form 26AS contained only partial entries in respect of three deductors and contained no TDS entry in respect of deductors bearing TANs AHMT07248D and AHMT04346G. It was accordingly held that neither deduction nor payment of the disputed amounts could be presumed and that the CPC was justified in restricting the credit to the amount reflected in Form 26AS.

Having upheld the short grant of TDS credit, the learned CIT(A) also confirmed the consequential computation of interest under sections 234B and 234C. All the grounds concerning the grant of TDS credit, violation of natural justice and consequential interest were dismissed, and the demand of Rs.50,31,170/- determined through the

Aggrieved by the order of learned CIT(A), the assessee is in appeal before us and has raised the following grounds of appeal:

During the course of hearing before us, the learned Authorised Representative (AR) reiterated the facts of the case and submitted that the income corresponding to the disputed TDS had already been offered to tax by the assessee. He drew our attention to the party-wise ledger accounts and the confirmations of ledger accounts received from some of the parties. In support of the assessee’s claim, he placed reliance on section 205 of the Act. Without prejudice to the aforesaid contention, the learned AR undertook, on behalf of the assessee, to furnish the relevant ledger extracts and bank statements evidencing the net receipts to substantiate the claim of deduction of tax at source. He accordingly prayed that the relief claimed by the assessee be granted.

The learned Departmental Representative submitted that the party-wise ledger accounts relied upon by the assessee required verification with the supporting documents evidencing actual deduction of tax at source.

We have considered the rival submissions and perused the material available on record. The controversy relates to the short grant of TDS credit of Rs.43,72,012/- in respect of five deductors while processing the assessee’s return under section 143(1) of the Act. The returned income was accepted without variation. The disputed credit

The learned AR submitted that the income corresponding to the disputed TDS had already been offered to tax and drew our attention to the party-wise ledger accounts and confirmations of ledger accounts received from some of the parties. He also undertook to furnish the relevant ledger extracts and bank statements evidencing the net receipts. The learned DR submitted that the ledger accounts required verification with the supporting documents evidencing deduction of tax. Thus, the material question requiring examination is whether, and to what extent, tax was actually deducted from the amounts payable to the assessee. The inclusion of the corresponding income in the return is relevant but does not, by itself, establish actual deduction of tax. Equally, non-reflection of an amount in Form 26AS cannot, by itself, conclusively establish that no deduction took place.

The learned CIT(A) proceeded on the premise that the protection under section 205 was available only where tax had been deducted and also paid to the credit of the Central Government. This understanding does not accord with the language of section 205, which prohibits calling upon the assessee to pay tax himself to the extent to which tax has already been deducted from the relevant income. The requirement of establishing actual deduction must, therefore, be distinguished from the subsequent statutory obligation of the deductor to deposit the amount deducted.

The reliance placed by the learned CIT(A) on section 143(1)(a)(vi) is also misplaced. That provision concerns addition of income

Yashpal Sahni v. Rekha Hajarnavis, Assistant In Commissioner of Income-tax [2007] 293 ITR 539 (Bom), the Hon’ble jurisdictional High Court explained that the protection under section 205 operates upon establishment of actual deduction, notwithstanding the deductor’s failure to deposit the amount. The relevant extract from paragraph 22 reads:

The aforesaid principle applies to the present controversy, subject to verification of the foundational fact of deduction.

In the recent judgement in Manohar Ramabtar Jhunjhunwala v. Principal Commissioner of Income Tax-17, Mumbai and Others, Writ Petition No.2063 of 2025 and connected matters, decided on 05.08.2026, the Hon’ble jurisdictional High Court held in paragraph 60: 60. For all these reasons, 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. Any other view would make the deductee bear the consequences of an impossibility created by law itself and by the deductor’s default, which the statute does not contemplate. On the other hand, an entire machinery is at the disposal of the Department to compel the deductor to make payment of the TDS amount which he has deducted, including an adjudication proceeding, recovery proceeding, penalty and thereafter prosecution proceedings.

The Court also recognised alternative evidence of deduction and contemplated inquiry with the TDS officer having jurisdiction over the deductor. The relevant paras are reproduced below: 69. In contractor / professional fee / rent cases or other similar cases, the following may constitute satisfactory evidence: i. invoice or fee memo showing gross claim and bank statement showing receipt of net amount, and justifying the difference being TDS thereon with the difference approximating being the TDS amount at the TDS rate prescribed; ii. payment intimation or remittance advice issued by the client; iii. ledger accounts maintained by client or deductee showing gross amount, TDS, and net payment; iv. confirmation from payer, if any; v. contemporaneous correspondence, if any, demanding a TDS certificate or deposit of TDS.

The Hon’ble Court further held that - 73. Once such a claim is made and prima facie material is produced, it becomes incumbent on the Department to satisfy itself regarding the claim. The Department may also consider making an inquiry with the deductor/TDS officer having jurisdiction over the deductor/ with the Resolution Professional/ Liquidator. It is not disputed that the Department has ample power to issue summons or notices to the directors or principal officers and get relevant information in this regard. If default is established, the Department must take action against the deductor for recovery of revenue loss, in accordance with law. 24. In the present case, the party-wise ledger accounts, confirmations referred to by the learned AR and supporting documents proposed to be furnished require factual examination. These documents must be considered together to ascertain whether the amounts claimed as TDS represent actual deductions from payments or credits in favour of the assessee. In the absence of such

Accordingly, we set aside the impugned appellate order concerning the disputed TDS credit and consequential interest and restore these issues to the file of the jurisdictional Assessing Officer for limited verification and fresh determination in accordance with the following directions. The assessee shall furnish a deductor-wise reconciliation specifying the gross amount credited or payable, the tax claimed to have been deducted, the net amount received, the credit already allowed and the balance credit claimed. The reconciliation shall be supported by the relevant ledger extracts, available confirmations, bank statements and other contemporaneous documents relied upon by the assessee. The Assessing Officer shall verify the inclusion of the corresponding income in the return for the relevant assessment year and ensure that the same TDS credit is not allowed twice.

For effective cross-verification, the jurisdictional Assessing Officer shall obtain the assistance of the ITO(TDS)/Assessing Officer having jurisdiction over the respective deductors and call for a deductor-wise verification report concerning actual deduction, deposit with the Central Government and reporting against the assessee’s PAN. The verification shall include examination of the relevant TDS statements, correction statements, challan particulars and available departmental records. It shall ascertain whether the mismatch arises from non-deposit, short deposit, incorrect PAN or other reporting particulars, or any other identifiable discrepancy.

We clarify that verification of deposit shall not become an additional condition for granting credit once actual deduction is established. Credit shall then be allowed notwithstanding the deductor’s non-deposit or non-reporting, with consequential correction of the demand and refund, if any.

If the verification discloses a default by a deductor, the matter shall be referred to the competent TDS authority for consideration of appropriate action in accordance with law. No finding concerning the liability of any deductor is being recorded in these proceedings. Such liability, if any, shall be determined independently by the competent authority after following the prescribed procedure. Relief otherwise found admissible to the assessee shall not be deferred until completion of proceedings against, or recovery from, the deductor.

Any adverse material, including a verification report obtained from the TDS authority or information received from a deductor, proposed to be relied upon shall be furnished to the assessee. The Assessing Officer shall identify the discrepancies specifically and afford a reasonable opportunity to explain them and furnish supporting evidence. Responsibility for deciding the assessee’s claim shall remain with the jurisdictional Assessing Officer, who shall pass a speaking order recording deductor-wise findings on the evidence. The assessee shall cooperate with the verification and furnish the documents undertaken to be produced.

Upon furnishing of prima facie supporting material, the corresponding disputed demand shall be kept in abeyance pending

The remand is confined to verification of the disputed TDS credit of Rs.43,72,012/- and its consequential effects. It shall not be treated as a direction to reopen the computation of income already accepted in the intimation. Interest under sections 234B and 234C shall be recomputed consequentially after determination of the admissible TDS credit. We clarify that no unconditional direction allowing the entire disputed credit or deleting the entire interest is being issued.

In view of the restoration of the substantive issue with the aforesaid directions, the grievance concerning inadequate opportunity before the learned CIT(A) does not require separate adjudication. Ground Nos.1 to 6 are accordingly allowed for statistical purposes. Ground No.7 is general and requires no separate adjudication.

In the result, the appeal filed by the assessee is allowed for statistical purposes.