Income Booked Earlier, TDS Reflected Later: ITAT Sets Aside Addition and Key Lessons for Taxpayers
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) addressed a common taxpayer grievance where income was recognized in one financial year but TDS credit appeared later, leading to disputes. The tribunal restored the matter for verification, preventing automatic taxation and highlighting procedural fairness.
Understanding the Core Issue: Mismatch Between Income Recognition and TDS Reflection
Taxpayers often face challenges when income is booked on an accrual basis in one financial year, but the corresponding Tax Deducted at Source (TDS) is deducted or reflected in Form 26AS in a subsequent year. This timing mismatch creates discrepancies during income tax return (ITR) filing, potentially triggering additions to taxable income by assessing officers.
In the case highlighted by TaxGuru, the assessee explained that the income and TDS were recognized in different financial years due to standard accounting practices. Despite this, the assessing officer made an addition, assuming unexplained credits or mismatches. Such scenarios are prevalent in sectors like services, freelancing, or delayed payments where deductors deposit TDS belatedly.
- Accrual basis accounting books income when earned, not received.
- TDS may reflect later due to deductor’s delay in filing returns or revisions.
- Form 26AS, the taxpayer’s TDS credit statement, lags behind actual deductions.
This mismatch not only delays refunds but can lead to scrutiny notices, demands, and penalties under sections like 234B or 234C for perceived shortfalls.
ITAT’s Intervention: Restoration for Limited Verification
The ITAT intervened decisively, setting aside the addition made by lower authorities. The tribunal accepted the assessee’s explanation and remanded the matter back for limited verification, barring any automatic taxation without proper inquiry. This decision underscores that tax authorities must consider timing differences rather than treating later TDS reflections as unexplained income.
Key aspects of the ruling include:
- Recognition of different financial year treatments for income and TDS.
- Directive for AO to verify documents without presuming tax evasion.
- Precedent against mechanical additions based on Form 26AS timing alone.
This approach aligns with broader CBDT guidelines and judicial precedents emphasizing substance over form in tax assessments.
Solutions and Relief: Form 71 and Best Practices for Taxpayers
To mitigate such issues, the Central Board of Direct Taxes (CBDT) introduced Form 71 via notification dated August 30, 2023, under new Rule 134. This form allows taxpayers to claim TDS credit for income declared in earlier years, even if TDS appears in Form 26AS later.
Key Features of Form 71
- Applicable for mismatches where income was accrued earlier but TDS deducted/deposited later.
- Can be filed online within 2 years from the end of the FY in which TDS was deducted.
- Works with revised, belated, or updated ITRs; simplifies refund claims without chasing deductors.
Steps to file Form 71:
- Log into the e-filing portal.
- Download and fill Form 71 with PAN, assessment year, income details, and TDS proof.
- Submit to the Assessing Officer for rectification of intimation or assessment order.
Preventive Measures Against TDS Mismatches
Beyond Form 71, taxpayers should:
- Reconcile Form 16/16A with Form 26AS before ITR filing.
- Request deductors for timely TDS return corrections (possible within 6 years).
- File rectification requests online if discrepancies arise post-ITR processing.
- Maintain bank statements, salary slips, and challan proofs for disputes.
Penalties for unresolved mismatches include interest under Sections 234A/B/C and fines up to 300% under Section 271C, making proactive steps essential. Recent updates as of 2025 emphasize digital reconciliation to avoid scrutiny.
Implications for Businesses and Individuals
This ITAT ruling and Form 71 provide much-needed relief, reducing litigation and compliance burden. Businesses on accrual basis benefit most, as it validates deferred TDS claims. Tax professionals recommend annual TDS audits and using AIS (Annual Information Statement) for early detection.
In summary, while timing mismatches persist, tools like Form 71 and judicial safeguards ensure fair taxation. Taxpayers must stay vigilant, document everything, and leverage these mechanisms to claim rightful credits without undue hardship.