ITAT Ahmedabad Ruling: TDS Credit Cannot Be Claimed in Incorrect Assessment Year Pending Original Refund Dispute

The alignment of tax deducted at source with the corresponding assessment year remains a fundamental pillar of the Indian taxation framework. A recent judicial pronouncement by the Income Tax Appellate Tribunal (ITAT) has reinforced the strict adherence to this matching principle. In the matter of Lakhmanbhai Maru Vs ITO, the ITAT Ahmedabad evaluated a complex procedural anomaly where an assessee attempted to claim a tax refund in a subsequent assessment year after failing to declare the underlying receipt in the correct, preceding year.

This comprehensive analysis delves into the factual matrix, the statutory interpretations surrounding Section 154, the applicability of the newly introduced Section 155(20) read with Rule 134, and the tribunal's rationale for dismissing the appeal for the incorrect year while safeguarding the assessee's substantive right to pursue the refund in the appropriate year.

The Genesis of the Dispute: Compulsory Acquisition and Tax Deduction

The controversy originated from the compulsory acquisition of land belonging to the assessee. Pursuant to an order passed by the Pr. Senior Civil Judge, Junagarh, dated 17-01-2014, the assessee was awarded compensation for the expropriated property.

On 23 March 2023, the assessee received a total compensation amount of ₹21,70,630. At the time of this disbursement, a tax deduction at source amounting to ₹1,83,045 was executed. Consequently, this deducted amount was duly populated in the assessee's Form 26AS, securely mapped against their Permanent Account Number (PAN) for the Assessment Year (AY) 2023-24, which corresponds to the Financial Year (FY) 2022-23.

The core of the assessee's substantive legal argument rested on the nature of the acquired property. The assessee maintained that the land in question was rural agricultural land. Under the provisions of the Income Tax Act, 1961, specifically Section 2(14), rural agricultural land is explicitly excluded from the definition of a "capital asset." Because it falls outside this definition, any capital gain arising from its transfer or compulsory acquisition is not chargeable to tax. Following this logic, the assessee contended that since the principal compensation of ₹21,70,630 was entirely exempt from taxation, the corresponding tax deduction of ₹1,83,045 was unwarranted and ought to be refunded in full.

The Procedural Misstep: A Timeline of Tax Returns

While the substantive claim regarding the tax-exempt nature of the rural agricultural land appeared straightforward, the procedural execution of claiming the refund created a convoluted legal entanglement.

The Omission in the First Year

The assessee filed the initial return of income for AY 2023-24 on 8 September 2023. However, during this filing, the assessee completely omitted the receipt of the ₹21,70,630 compensation. Because the underlying receipt was not disclosed in the return, the corresponding claim for the refund of the ₹1,83,045 tax deduction was also left out. The return was processed under Section 143(1) without the benefit of this specific credit.

The Erroneous Claim in the Subsequent Year

Realizing the omission, the assessee attempted a corrective measure in the subsequent financial cycle. While filing the return of income for AY 2024-25 on 30 July 2024, the assessee embedded the claim for the ₹1,83,045 tax credit.

Predictably, the Centralized Processing Centre (CPC) did not grant this credit, as the tax deduction was anchored to FY 2022-23 and did not reflect in the Form 26AS for AY 2024-25.