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Facts
The assessee, an individual earning salary income, filed a return for AY 2018-19. The CPC processed the return, restricting TDS credit. The assessee's Rectification Application and subsequent appeal to CIT(A) were rejected. The grievance pertains to the restricted allowance of TDS credit, resulting in a short-credit of ₹2,21,231/-.
Held
The Tribunal found that the lower authorities had mechanically applied the 'matching principle' without factually verifying the nature of claimed exempt allowances and reimbursements. The Tribunal held that if such amounts are legally exempt, their reduction of taxable income below gross salary cannot be a ground to deny full TDS credit.
Key Issues
Whether the entire TDS credit can be denied due to a difference between gross salary and reported taxable salary, when the difference comprises legally exempt allowances and reimbursements.
Sections Cited
Section 154, Section 199, Section 139(4), Section 139(9), Section 192, Section 2(24), Section 10, Section 265, Rule 37BA, Rule 37BA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “B” MUMBAI
Before: SHRI OM PRAKASH KANT & MS. KAVITHA RAJAGOPAL
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B” MUMBAI
BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND MS. KAVITHA RAJAGOPAL (JUDICIAL MEMBER)
ITA No. 8445/MUM/2025 Assessment Year: 2018-19
Navin Vinodkumar Agarwal, DCIT 14(1)(2), Villa No. 18, Palava Golf Links Aayakar Bhavan, Churchgate, Vs. Dombivali East Thane, Mumbai-400020. Thane-421204. PAN NO. AEKPA 7396 F Appellant Respondent
: Mr. Mahesh Saboo Assessee by Revenue by : Mr. Swapnil Choudhari, Sr. DR
Date of Hearing : 17/02/2026 Date of pronouncement : 23/02/2026
ORDER PER OM PRAKASH KANT, AM
This appeal by the assessee is directed against the order dated 04.12.2025 passed by Ld. Additional/Joint Commissioner of Income-tax (Appeals)–7, Kolkata [hereinafter ‘Ld. CIT(A)’], for the Assessment Year 2018-19. The solitary grievance of the assessee pertains to the restricted allowance of Tax Deducted at Source
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(TDS) credit to the exte (TDS) credit to the extent of ₹46,49,559/- against a claim of against a claim of ₹48,70,790/-, resulting in a short , resulting in a short-credit of ₹2,21,231/ 2,21,231/-.
Briefly stated, facts of the case are that the assessee Briefly stated, facts of the case are that the assessee Briefly stated, facts of the case are that the assessee is an individual deriving income from salary. For the year under individual deriving income from salary. For the year under individual deriving income from salary. For the year under consideration, the assessee filed re the assessee filed return of income for the year under turn of income for the year under consideration consideration consideration on on on 29.03.2019 29.03.2019 29.03.2019 declaring declaring declaring total total total income income income at at at Rs.1,41,32,020/- The return was processed by the Central The return was processed by the Central The return was processed by the Central Processing Centre (CPC), Bengaluru, which restricted the TDS Processing Centre (CPC), Bengaluru, which restricted the TDS Processing Centre (CPC), Bengaluru, which restricted the TDS credit. Aggrieved the assessee filed rectification Aggrieved the assessee filed rectification application dated application dated 09.09.2022 under Section 154 Section 154 of the Income Tax Act, 1961 (the of the Income Tax Act, 1961 (the Act), seeking credit of the TDS of Rs.48,70,790/ seeking credit of the TDS of Rs.48,70,790/-, but , but was rejected without a speaking order, leading to the first appeal. without a speaking order, leading to the first appeal. without a speaking order, leading to the first appeal.
The Ld. CIT(A) sustained the action of the CPC, The Ld. CIT(A) sustained the action of the CPC, The Ld. CIT(A) sustained the action of the CPC, reasoning that while the employer’s Form 16 reflected a gross salary of while the employer’s Form 16 reflected a gross salary of while the employer’s Form 16 reflected a gross salary of ₹1,61,83,715/-, the assessee reported only , the assessee reported only ₹1,54,42,015/ 1,54,42,015/- in the return of income. The Ld. CIT(A) invoked the mandate of Section return of income. The Ld. CIT(A) invoked the mandate of return of income. The Ld. CIT(A) invoked the mandate of 199 of the Act, which stipulates that TDS credit is co of the Act, which stipulates that TDS credit is co of the Act, which stipulates that TDS credit is co-extensive with the offer of corresponding income to tax. Since the assessee the offer of corresponding income to tax. Since the assessee the offer of corresponding income to tax. Since the assessee purportedly failed to offer a differential amount of ₹7,41,700/- purportedly failed to offer a differential amount of purportedly failed to offer a differential amount of (claimed as non-taxable reimbursements), the Ld. CIT(A) held th taxable reimbursements), the Ld. CIT(A) held th taxable reimbursements), the Ld. CIT(A) held that the corresponding tax deducted on such amount could not be the corresponding tax deducted on such amount could not be the corresponding tax deducted on such amount could not be credited to the assessee. credited to the assessee. The relevant finding of ld CIT(A) is The relevant finding of ld CIT(A) is reproduced as under: :
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“5.1 I have carefully gone through the rectification order u/s 154, 5.1 I have carefully gone through the rectification order u/s 154, 5.1 I have carefully gone through the rectification order u/s 154, the grounds of appeal and submission made the grounds of appeal and submission made by the appellant in this by the appellant in this regard. Briefly stating facts of the case is that the appellant filed regard. Briefly stating facts of the case is that the appellant filed regard. Briefly stating facts of the case is that the appellant filed rectified return of income which was processed u/s 154 of the I.T. rectified return of income which was processed u/s 154 of the I.T. rectified return of income which was processed u/s 154 of the I.T. Act by CPC making certain adjustments over and above the Act by CPC making certain adjustments over and above the Act by CPC making certain adjustments over and above the returned income. The only issue invol returned income. The only issue involved in this case is that full ved in this case is that full credit of TDS as claimed in the return was not allowed by CPC in credit of TDS as claimed in the return was not allowed by CPC in credit of TDS as claimed in the return was not allowed by CPC in the impugned order u/s 154. the impugned order u/s 154. 5.2 The appellant has raised only one ground of appeal against the 5.2 The appellant has raised only one ground of appeal against the 5.2 The appellant has raised only one ground of appeal against the action of AO, CPC in not allowing credit of full TDS as claimed in action of AO, CPC in not allowing credit of full TDS as claimed in action of AO, CPC in not allowing credit of full TDS as claimed in the return of income and without assigning any reason. Facts involved return of income and without assigning any reason. Facts involved return of income and without assigning any reason. Facts involved in the issue is that the appellant is a salaried employee and filed in the issue is that the appellant is a salaried employee and filed in the issue is that the appellant is a salaried employee and filed return of income u/s 139(4) of the I.T. Act. CPC issued a defective return of income u/s 139(4) of the I.T. Act. CPC issued a defective return of income u/s 139(4) of the I.T. Act. CPC issued a defective notice u/s 139(9) of the Act in respect of the sa notice u/s 139(9) of the Act in respect of the said return. In response id return. In response to the said notice, appellant filed a rectified return of income on to the said notice, appellant filed a rectified return of income on to the said notice, appellant filed a rectified return of income on 03.08.2020 disclosing taxable income of Rs.1,41,32,020/ 03.08.2020 disclosing taxable income of Rs.1,41,32,020/ 03.08.2020 disclosing taxable income of Rs.1,41,32,020/- and claiming credit of TDS for Rs.48,70,790/ claiming credit of TDS for Rs.48,70,790/-. CPC processed the return . CPC processed the return by order u/s 154 dated 24.08.2020 ac by order u/s 154 dated 24.08.2020 accepting the returned income cepting the returned income but allowing credit of TDS to the extent of only Rs.46,49,559/ but allowing credit of TDS to the extent of only Rs.46,49,559/ but allowing credit of TDS to the extent of only Rs.46,49,559/-. Appellant filed rectification request with CPC against the said order Appellant filed rectification request with CPC against the said order Appellant filed rectification request with CPC against the said order against which another order u/s 154 dated 09.09.2020 was against which another order u/s 154 dated 09.09.2020 was against which another order u/s 154 dated 09.09.2020 was passed by CPC but without modifying passed by CPC but without modifying the earlier order dated the earlier order dated 24.08.2020. Appellant claimed that TDS of Rs.48,70,790/ 24.08.2020. Appellant claimed that TDS of Rs.48,70,790/ 24.08.2020. Appellant claimed that TDS of Rs.48,70,790/- was well reflected in Form 26AS and CPC resorted to short credit of TDS reflected in Form 26AS and CPC resorted to short credit of TDS reflected in Form 26AS and CPC resorted to short credit of TDS without assigning any reason. In order to verify the matter, the without assigning any reason. In order to verify the matter, the without assigning any reason. In order to verify the matter, the return of income (as available in appe return of income (as available in appellant's profile in e llant's profile in e- filing portal), Form 26AS and Form 16 issued by employer were portal), Form 26AS and Form 16 issued by employer were portal), Form 26AS and Form 16 issued by employer were examined. It is noted that gross salary paid by employer was examined. It is noted that gross salary paid by employer was examined. It is noted that gross salary paid by employer was Rs.1,61,83,715/ Rs.1,61,83,715/- on which TDS of Rs.48,70,790/- was deducted was deducted whereas appellant reported gross salary of only Rs whereas appellant reported gross salary of only Rs.1,54,42,015/ .1,54,42,015/- in the return of income. The appellant claimed that the shortfall of in the return of income. The appellant claimed that the shortfall of in the return of income. The appellant claimed that the shortfall of Rs.7,41,700/ Rs.7,41,700/- was non taxable reimbursement of expenses paid by was non taxable reimbursement of expenses paid by the employer. The appellant was asked by notice dated 23.11.2025 the employer. The appellant was asked by notice dated 23.11.2025 the employer. The appellant was asked by notice dated 23.11.2025 to obtain certificate from the employer tha to obtain certificate from the employer that they had paid t they had paid Rs.7,41,700/ Rs.7,41,700/- as non taxable reimbursement to the appellant. In as non taxable reimbursement to the appellant. In response to the said notice, the appellant filed reply dated response to the said notice, the appellant filed reply dated response to the said notice, the appellant filed reply dated 28.11.2025 where he submitted many other details and documents 28.11.2025 where he submitted many other details and documents 28.11.2025 where he submitted many other details and documents but did not submit any clarification from employer t but did not submit any clarification from employer t but did not submit any clarification from employer towards reimbursement. In this regard, two things are required to be reimbursement. In this regard, two things are required to be reimbursement. In this regard, two things are required to be highlighted. First, Clause 7 of Schedule S (Details of Income from highlighted. First, Clause 7 of Schedule S (Details of Income from highlighted. First, Clause 7 of Schedule S (Details of Income from Salary) of the return of income is specifically meant for reporting Salary) of the return of income is specifically meant for reporting Salary) of the return of income is specifically meant for reporting any exempt allowances included within salary. But app any exempt allowances included within salary. But app any exempt allowances included within salary. But appellant reported the same at 'nil'. Second, as to why employer will include reported the same at 'nil'. Second, as to why employer will include reported the same at 'nil'. Second, as to why employer will include any reimbursement of expenses paid to their employee within the any reimbursement of expenses paid to their employee within the any reimbursement of expenses paid to their employee within the gross salary as 'reimbursement' is not in the nature of salary. As gross salary as 'reimbursement' is not in the nature of salary. As gross salary as 'reimbursement' is not in the nature of salary. As per the provisions of section 199, credit of TDS s per the provisions of section 199, credit of TDS shall be allowed to hall be allowed to
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that taxpayer and in that year in whose name and in which year that taxpayer and in that year in whose name and in which year that taxpayer and in that year in whose name and in which year the corresponding income is offered to tax. Since the appellant failed the corresponding income is offered to tax. Since the appellant failed the corresponding income is offered to tax. Since the appellant failed to offer income to the extent of Rs.7,41,700/ to offer income to the extent of Rs.7,41,700/- to tax, corresponding to tax, corresponding TDS to the extent of Rs.2,21,231/ TDS to the extent of Rs.2,21,231/- was also not allowed credit. was also not allowed credit. There is no infirmity in the action of CPC and is upheld. The appeal There is no infirmity in the action of CPC and is upheld. The appeal There is no infirmity in the action of CPC and is upheld. The appeal is accordingly dismissed. is accordingly dismissed.” 4. Before us, the Ld. counsel for the assessee referred to the Before us, the Ld. counsel for the assessee referred to the Before us, the Ld. counsel for the assessee referred to the Paper Book page 4 which is form No. 16 Paper Book page 4 which is form No. 16, generated from the , generated from the Department’s portal nt’s portal on the basis of quarterly tax deducted at on the basis of quarterly tax deducted at source (TDS) returns filed by the deductor of tax at source. source (TDS) returns filed by the deductor of tax at source source (TDS) returns filed by the deductor of tax at source According According to to the the said said Form No. 16, total total amount amount of of Rs.1,61,83,715/- was credited as gross salary and tax of was credited as gross salary and tax of was credited as gross salary and tax of Rs.48,70,790/- was deducted. The was deducted. The assessee further referred to the assessee further referred to the Paper Book page 6, according to which gross salary of Paper Book page 6, according to which gross salary of Paper Book page 6, according to which gross salary of Rs.1,59,86,215/- was credited to the assessee and after reducing was credited to the assessee and after reducing was credited to the assessee and after reducing the tax exempt allowance like conveyance allowance (Rs.19,200/ exempt allowance like conveyance allowance (Rs.19,200/ exempt allowance like conveyance allowance (Rs.19,200/-), medical medical allowance allowance (Rs.15,000/ (Rs.15,000/-), house rent rent allowance allowance (Rs.5,10,000/-) aggregating aggregating to to Rs.5,44,200/- Rs.5,44,200/ besides other reimbursements, net salary was offered to tax. , net salary was offered to tax. It is the contention It is the contention of the assessee that the Ld. Assessing Officer and the Ld. CIT(A) has of the assessee that the Ld. Assessing Officer and the Ld. CIT(A) has of the assessee that the Ld. Assessing Officer and the Ld. CIT(A) has not considered the claim of the assessee of exempted allowance and not considered the claim of the assessee of exempted allowance and not considered the claim of the assessee of exempted allowance and restricted the credit of the TDS restricted the credit of the TDS accordingly.
We have heard rival submission and persused the relevant 5. We have heard rival submission and persused the 5. We have heard rival submission and persused the material on record. The crux of the dispute lies in the mechanical The crux of the dispute lies in the mechanical The crux of the dispute lies in the mechanical application of the "matching principle" under Section 199 Section 199 read application of the "matching principle" under with Rule 37BA of Income of Income-tax Rules, 1962. The Revenue’s stand is tax Rules, 1962. The Revenue’s stand is
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that if a portion of the "gross salary" is not refl that if a portion of the "gross salary" is not reflected as "taxable ected as "taxable salary," the tax deducted on that portion must be forfeited. We find salary," the tax deducted on that portion must be forfeited. We find salary," the tax deducted on that portion must be forfeited. We find this interpretation to be narrow and legally flawed. this interpretation to be narrow and legally flawed.
5.1 In a salaried employment structure, tax is deducted on the In a salaried employment structure, tax is deducted on the In a salaried employment structure, tax is deducted on the estimated income under Section 192. The "income" as d estimated income under . The "income" as defined under Section 2(24) Section 2(24) includes various components, some of which includes various components, some of which may be exempt under Section 10. If the tax is deducted on the may be exempt under . If the tax is deducted on the whole of the payment, the credit cannot be denied merely because a whole of the payment, the credit cannot be denied merely because a whole of the payment, the credit cannot be denied merely because a component of that payment is legally exempt from the charge of tax. component of that payment is legally exempt from the char component of that payment is legally exempt from the char To do so would result in the State retaining tax on income that is To do so would result in the State retaining tax on income that is To do so would result in the State retaining tax on income that is admittedly not taxable, which is contrary to Article 265 Article 265 of the admittedly not taxable, which is contrary to Constitution of India. Constitution of India.
5.2 Upon a perusal of the records, we find that the lower Upon a perusal of the records, we find that the lower Upon a perusal of the records, we find that the lower authorities have failed to factua authorities have failed to factually verify the nature of the "exempt lly verify the nature of the "exempt allowances" and "reimbursements" claimed by the assessee. If these allowances" and "reimbursements" claimed by the assessee. If these allowances" and "reimbursements" claimed by the assessee. If these amounts are indeed exempt under the law, the mere fact that they amounts are indeed exempt under the law, the mere fact that they amounts are indeed exempt under the law, the mere fact that they reduce the "taxable income" below the "gross salary" reflected in reduce the "taxable income" below the "gross salary" reflected in reduce the "taxable income" below the "gross salary" reflected in Form 16 cannot be a g Form 16 cannot be a ground to deny the full credit of tax actually round to deny the full credit of tax actually deducted and paid to the credit of the Central Government. deducted and paid to the credit of the Central Government. deducted and paid to the credit of the Central Government.
5.3 However, the claim of exempt allowances requires a factual However, the claim of exempt allowances requires a factual However, the claim of exempt allowances requires a factual verification with supporting certificates, we deem it fit to set aside verification with supporting certificates, we deem it fit to verification with supporting certificates, we deem it fit to the impugned order and er and restore the matter to the file of the the matter to the file of the Assessing Officer (AO) for a fresh adjudication. The assessee is Assessing Officer (AO) for a fresh adjudication. The assessee is Assessing Officer (AO) for a fresh adjudication. The assessee is
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directed to provide a detailed reconciliation between the Gross directed to provide a detailed reconciliation between the Gross directed to provide a detailed reconciliation between the Gross Salary as per Form 26AS/Form 16 and the taxable salary reported Salary as per Form 26AS/Form 16 and the taxable salary reported Salary as per Form 26AS/Form 16 and the taxable salary reported in the return. The AO shall, after verifying the exempt nature of the AO shall, after verifying the exempt nature of the AO shall, after verifying the exempt nature of the allowances in accordance with the law, allow the consequential TDS allowances in accordance with the law, allow the consequential TDS allowances in accordance with the law, allow the consequential TDS credit.
5.4 The sole ground of appeal of the assessee is allowed for The sole ground of appeal of the assessee is allowed for The sole ground of appeal of the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee In the result, the appeal of the assessee In the result, the appeal of the assessee is allowed for statistical purposes. statistical purposes.
Order pronounced in the open Court on ounced in the open Court on 23/02/2026. /02/2026. Sd/- Sd/ Sd/- (KAVITHA RAJAGOPAL) (KAVITHA RAJAGOPAL (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 23/02/2026 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai