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Facts
The assessee's return for AY 2022-23 was processed under Section 143(1), allowing only partial TDS credit. A subsequent rectification order disallowed a significant portion of the claimed TDS credit. The assessee argued that the TDS was on interest income related to advances for a project under construction, which was treated as a capital receipt and reduced from 'Capital Work in Progress'.
Held
The Tribunal held that the assessee is eligible for the TDS credit. It was found that the interest income earned on advances to contractors was intrinsically linked to the construction activity and was treated as a capital receipt, thus reduced from 'Capital Work in Progress'. The Tribunal relied on judicial precedents stating that TDS credit is admissible even if the income is not directly offered for tax, as long as it's indirectly accounted for.
Key Issues
Whether TDS credit can be denied on interest income which is treated as a capital receipt and reduced from capital work-in-progress, despite appearing in Form 26AS and being indirectly accounted for by the assessee.
Sections Cited
143(1), 154, 199, 37BA, 250
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Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: SHRI S RIFAUR RAHMAN & SHRI VIMAL KUMAR
PER VIMAL KUMAR, JUDICIAL MEMBER:
The appeal filed by the appellant/assessee is against the order dated 03.07.2025 of Learned Commissioner of Income Tax (Appeals), Mumbai [hereinafter referred to as ‘Ld. CIT(A)] under Section 250 of the Income-Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of order dated 02.05.2023 of Learned Assessing Officer/Centralized Processing Centre, Bangaluru (hereinafter referred to as “Ld. AO") passed under section 154 of the Act for AY 2022-23.
Brief facts of the case are that assessee filed return of income for AY 2022-23 on 22.09.2022. The said return of income was processed under Section 143(1) of the Act vide intimation order under Section 143(1) of the Act dated 02.03.2023 wherein TDS credit only to the tune of Rs.3,485/- has been allowed, instead of credit of Rs.5,65,923/- as appearing in Form 26AS. No prior intimation/communication of proposed adjustment under Section 143(1)(a) of the Act was issued to the Assessee. The assessee filed a rectification application under Section 154 of the Act against Section 143(1) order. The rectification order was passed on 02/05/2023 sustaining the disallowance of TDS credit of Rs.5,62,438/-, however, vide the rectification order the CPC reduced the interest granted under Section 244A of the Act from Rs.12,528/- (i.e. for 12 months) to Rs. 3,133/- (i.e. for 3 month) in the said rectification order and raised demand of Rs.9400/-.
Against order dated 02.05.2023 of Ld. AO, the appellant/assessee filed appeal before Ld. CIT(A) which was partly allowed vide order dated 03.07.2025.
Being aggrieved, the appellant/applicant filed present appeal with following grounds:
“1. On the facts and circumstances of the case, the order passed by the leamed Commissioner of Income Tax (Appeals), (hereinafter referred to as (CIT(A))) is bad both on facts and in the eye of law 2. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in confirming the action of AO(CPC) in disallowing the credit of TDS of Rs.5,62,438/-claimed by the assessee in the return of income. (ii) That the above said credit of TDS has been denied despite the fact that the amount of TDS is appearing in Form 26AS uploaded on the income tax portal.
On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in denying the TDS credit, ignoring the assessee's contention that, since the project is under completion, the corresponding receipts on which TDS has been deducted have been duly accounted for as income by reducing the same from 'Capital Work in Progress' reflected in the balance sheet and hence the TDS claimed by the assessee cannot be denied.
On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in confirming the action of the AO ignoring the various judicial precedents brought on record by the assessee to justify that the TDS credit is allowable to the assessee.
On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in denying the TDS credit by misinterpreting the provisions of section 199 and Rules 37BA of the Income Tax Rules.
On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in confirming the action of the AO (CPC) in disallowing the TDS credit, despite the fact that no prior intimation was given to the assessee for such adjustment, thereby violating the conditions laid down in the proviso to Section 143(1)(a) of the Income Tax Act.
That the appellant craves leave to add, amend or alter any of the grounds of appeal
.”
5. Learned Authorized Representative for the appellant/assessee submitted that Ld. CIT(A) failed to appreciate that disallowance of TDS credit is not covered in any of the limbs envisaged in section 143(1)(a) of the Act and hence, 3 cannot be disallowed in the Intimation issued under Section 143(1) of the Act. 5.1 During the year under consideration, the assessee company is engaged in the construction/development of a project, and accordingly, all the expenses incurred during the construction phase are capitalised under the head capital work-in-progress (CWIP). Certain advances are also given by the assessee to the contractors for incurring the project expenses, on which incidental interest income is also earned by the assessee. Since such interest on advances to contractors is inextricably linked to the construction activity, therefore, it is a Capital Receipt and the same is credited/deducted from the said CWIP itself. Thus, interest earned has been taken into consideration while computing income of the year under consideration (PB Page 134 & 138), Thereby, TDS deducted by the contractor while making payment of such interest to the assessee is claimed as refund in the income tax return filed by the assessee. As per the provisions of section 199(3) of the Act, credit for TDS shall be given in accordance with the rules framed by CBDT in this regard.
5.2 Provisions of Section 199 read with rule 37BA(4), provides that two fundamental prerequisites are required to be satisfied in order to claim TDS credit:
Information relating to such deduction shall be fumished by the deductors to the income tax authority-In the instant case, this condition has been satisfied, as the entire amount of TDS credit is duly appearing in Form 26AS of the assessee company. (PB Pg. 155-157).
Such information has been disclosed in the return of income (PB Page 44-45)- In the instant case, even this condition has been satisfied as TDS credit appearing in Form 26AS have been duly disclosed/reported in return of income filed by the assessee. (PB Page 100-101). 5.3 The assessee shall be entitled for credit of such TDS while computing the tax liability for the period irrespective of the fact that the assessee considered that he is not liable to tax in respect of the income. Even otherwise, the interest income has been deducted from the cost of project due to it being a Capital Receipt and inextricably linked to the construction activity (PB Page 134 & 138).
5.4 Reliance was placed on judgement of Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Bokaro Steel Ltd. - 236 ITR 315 (SC)-dated 18.12.1998. ITAT Delhi judgement in the assessee's group case entity, namely, Power Grid Mithilanchal Transmission Limited, ITA No:- 68/Del/2023, Dated-30.11.2023.
Learned Authorised Representative for Department of Revenue relied on order of Ld. CIT(A).
From examination of record in the light of aforesaid rival contentions, it is crystal clear that the assessee company engaged in construction/development projects had given advances to contractors for incurring project expenses on which incidental interest was earned. Such interest of advances of contractor is in intrinsically linked of the activities, therefore, it is capital receipt and the same was credited/deducted from head of capital work in progress (referred page nos. 134 & 138 of the papers books is important). TDS deducted by contractor while making payment of such interest to assessee is claimed as refund in the ITR by the assessee (page nos. 44 & 45 of the papers books).
Co-ordinate Bench of ITAT, Delhi in titled as “Power Grid mithilanchal Transmission Ltd. dated 30.11.2023 has held as under:
“3. The only issue to be decided in this appeal is as to whether the Ld. CIT(NFAC) was justified in confirming the denial of TDS credit of Rs. 10,80,720/- in the facts and circumstances of the instant case. Page 2 of 8 ITA No.-68/Del/2023 Power Grid Mithilanchal Transmission Ltd.
We have heard the rival submissions and perused the materials available on record. The assessee is a wholly owned subsidiary of Power Grid Corporation of India Ltd., a Govt. of India Enterprise. During the year under consideration, the assessee filed its return of income for Assessment Year 2019-20 on 26.08.2019 claiming refund of Rs. 10,80,720/- on account of TDS u/s 194A of the Act deducted by Tata Projects Ltd. This return was duly processed u/s 143(1) of the Act, wherein the income returned was accepted but TDS credit of Rs. 10,80,720/- was not granted by the Ld. CPC u/s 143(1) of the Act, on the ground that the same is not reflected in Form No. 26AS of the assessee. This action of the Ld. CPC was upheld by the Ld. CIT(A) / (NFAC) by observing as under: 6. During appellate proceedings, in response to the hearing notice u/s 250 dated 18.10.2022 fixed for hearing on 27.10.2022 the appellant stated in his reply dated 27.10.2022 that the reason stated is mismatch in TDS credit whereas there is no mismatch. It appears to be a technical glitch in processing and rectification application was rejected without proper application of mind. TDS credit is fully available in 26AS, but effect not given in the refund processing. The TDS claimed by the appellant as per table is reproduced as under-
TDS as per Form 16A Name of the Deductor TAN TDS claimed as per 26AS Tata projects ltd. MRTT01271E 1080720/- Total Amount of 1080720/- mismatch
From the facts of the case it transpires that the appellant assessee had sought to get the mistake rectified u/ 154, but failed. The copy of order has not been submitted. It is the duty of the appellant to substantiate the claim sought as relief. It is not obvious from the reply submitted whether the corresponding income to the relevant deduction Page 3 of 8 ITA No.-68/Del/2023 Power Grid Mithilanchal Transmission Ltd. has been subjected to case in the return filed. Since the appellant has failed to corroborate the claim, the ground fails on merit and the appeal stands dismissed. ) 5. It was submitted that the assessee company had verified the tax credit details on the Income Tax E-portal and the status is shown in respect of Tax Credit, claim is fully matched with the tax credit available in 26AS . The main grievance of the Revenue is that the assessee had not disclosed any income corresponding to TDS claim. It was submitted that the interest earned by the assessee on said advances given to the contractors which is inextricably linked with the business activity of the assessee i.e. “construction activity” was credited to other income and the same was reduced from the “Expenditure during the construction period” in the balance sheet. This was done on the ground that project of the assessee had not yet commenced and the entire expenditure incurred towards project had been routed under ‘Expenditure during the construction period’ and since the interest income earned on advances given to the contractors was inextricably linked with the business activity of the assessee, the same was duly reduced from the said project expenditure reflected in ‘Expenditure during the construction period’ in Balance Sheet. We find that there is absolutely no dispute that the interest earned on advances of the contractors were part of business receipts and since the assessee had not commenced its business, the said interest income was duly reduced by the assessee from expenditure during the construction period in this balance sheet. Page 4 of 8 ITA No.- 68/Del/2023 Power Grid Mithilanchal Transmission Ltd. It is not the case of the Revenue that the said interest income would be liable to be taxed under the head income from other sources. Hence, when there is no obligation on the part of the assessee to offer the said interest income to tax as per the provisions of the Act, and the same have been duly reflected in the books of accounts and audited balance sheet of the assessee, the TDS claimed relatable to such interest receipts cannot be denied to the assessee. We find that the CPC had denied the TDS figure only on the ground that the said TDS figure was not reflected in the Form 26AS of the assessee. We find from Page 52 of the Paper book containing the updated Form 26AS of the assessee, the very same TDS figure of Rs. 10,80,720/- is duly reflected and hence grievance of the CPC has been duly met. Hence, as per rule 37BA for the Income Tax Rules, the assessee shall be entitled for TDS credit of Rs.10,80,720/-. We further find that the similar issue came up for adjudication before the Co-ordinate Bench of Mumbai Tribunal in the case of Trikaal Mediinfotech Pvt. Ltd. vs. DCIT in ITA No.- 5989/Mum/2019 dated 21.03.2023 reported in 2023 (4) TMI 88-ITAT Mumbai. The relevant operative part of the said judgment is reproduced herein below:- 7. In the instant case it is not in dispute that TDS has been deducted in respect of sale of software patches. The credit of TDS deducted on aforesaid sale has not been to the relevant assessment year as the assessee had not disclosed the income from sale of software patches and modules and the same was instead reduced from the cost of software development. The assesses following Project Completion Method to recognize its revenue. The assesses is now claiming credit of TUS which has been earlier denied to the assessee. As per provisions of section 159 of the Act, tax deducties at source and paid to government exchequer is treated as payment of tax on behalf of the person for whom TDS was made. Rule 37BA(3) further clarifies that credit for TDS shall be given for assessment year for which such income is assessable.
In the case of Supreme Renewable Energy Vs. ITO (supra) the Tribunal following the decision in the Case of CIT vs. Karnal Co- Op Sugar Mills Ltd., 243 ITR 2(SC) held that when the interest inn in the nodental to the acquisition and installation of an asset and not directly liable for tax, assessee is entitled for the credit of the TDS from the interest income which has been duly received by the Government. For the sake of completeness relevant extracts from the order is reproduced herein below. “6. .......................
Thus, it is clear from the judgment of Hon'ble Supreme Court that when `the deposit is directly linked with the purchase of machinery then the income earned on such deposit is incidental to the acquisition and installation of the said asset. Accordingly, the interest is a capital receipt and would go to reduce the asset. We are of the view that when the interest income is in the nature of capital then the assessee has rightly deducted the same from the cost of the assets and while doing so the assessee has offered the said income though capitalized for assessment. When the interest income is not directly liable for tax as the same is incidental in the acquisition and installation of the asset then the tax deducted at source from the interest income which was duly received by the Government shall be refunded to the assessee or the assessee is entitled for the credit of the same. The Government cannot benefit itself by taking advantage of legal technicalities. Even otherwise, once the income receipt has been deducted from the cost of machinery to be installed the assessee has indirectly offered the same for assessment and taxation because due to the reduction of cost of the machinery the depreciation on the said machinery would be lesser and the net result of this would be offering the same income otherwise. 7. xxxxxxxxxxxxx 8. xxxxxxxxxxx 9. From the above it is clear that when a particular income is received by the assessee after deduction of tax at source and the said TDS has been duly deposited with the Government and the assessee has received the requisite certificate to this effect, then on production of the said certificate the assessee becomes entitled for the credit of TDS even if the assessee has not directly offered the said income for tax, no the assessee considered the same was liable to tax.
In view of the above mentioned decisions of the Supreme Court and order of this Tribunal, clear position of law that when TDS is made on a particular income which is otherwise not liable for tax, the assessee is entitled for the said credit of the TOS. In the case in hand when the assessee has earned interest on deposit mandatory for acquisition on installation of machinery then the interest was earned by the assessee and is directly incidental to the acquisition in respect of machinery and therefore the same has been rightly reduced from the cost of the machinery, In this way the assessee has indirectly disclosed income and has offered for assessment. We are of the considered view that even if the income earned by the assessee has not been offered for tax being not liable for tax, the assessee is entitled for credit of TDS made in respect of that income. Accordingly, we set aside the orders of the lower authorities and hold that the assessee is entitled for credit of TDS relating to interest income of Rs. 51,21,287.”
Thus, in light of facts of the case and the decision discussed above, we are of the considered view that the assessee is eligible for TDS credit earlier not allowed to the assessee. The assessee succeeds on ground No. 1 of the appeal. 10 In the result, appeal by the assessee is allowed.”
In view of above material facts, by respectfully following judicial precedents, it is held that assessee has indirectly disclosed income and has offered for assessment. Therefore, impugned orders of the departmental authorities being unsustainable and are set aside. Grounds of appeal nos. 1 to 6 are allowed.
In the result, the appeal of assessee is allowed. Order pronounced in the open court on 07 /01/2026. Sd/- Sd/- (S RIFAUR RAHMAN) (VIMAL KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 07 /01/2026 Mohan Lal