ITAT Bangalore Rules on TDS Credit Mismatch Between Individual and Partnership Firm

Background and Core Issue

The Bengaluru Bench of the Income Tax Appellate Tribunal (ITAT Bangalore) examined whether an individual assessee can claim credit for TDS reflected in his Form 26AS when the corresponding income has actually been offered to tax by a partnership firm.

The dispute arose because a proprietary concern was converted into a partnership firm. Although the business, income, and tax liability shifted to the partnership firm after conversion, a few long-standing clients continued to deduct TDS in the name of the individual assessee using his PAN, instead of mentioning the PAN of the partnership firm.

As a result:

  • The income was included and taxed in the hands of the partnership firm, and
  • The corresponding TDS appeared in the individual’s Form 26AS.

The individual sought TDS credit in his personal return. The Central Processing Centre (CPC), and later the CIT(A), denied full credit on the ground that the assessee had not offered the related receipts to tax in his individual return. The matter reached ITAT Bangalore, which upheld the denial of TDS credit to the individual, but simultaneously laid down a remedial path for the partnership firm to claim such credit through rectification under Section 154.

Facts of the Case

Conversion of Proprietorship into Partnership

  • The assessee, a senior citizen, had been carrying on business as a sole proprietor under the name M/s. Cargolinks since 1998.
  • On 1 October 2015, this proprietorship was converted into a partnership firm. The assessee became one of the partners of the firm.
  • The business activity remained the same—primarily functioning as a Custom House Agent providing clearing, forwarding, and stevedoring services at Indian ports.

Communication to Clients and TDS Deduction Error

After conversion:

  1. Clients were duly informed that:

    • Payments were now to be made to the partnership firm, and
    • TDS was to be deducted under the firm’s PAN.

  2. While several customers complied, some old clients continued to:

    • Deduct TDS under the individual’s PAN,
    • Even though the income and payments were received by the partnership firm.

Consequently, there was a disjoint between:

  • The entity offering income to tax (the firm), and
  • The entity in whose PAN TDS was deducted and reported (the individual).

Return of Income and TDS Claim – AY 2017-18

For Assessment Year 2017-18:

  • The assessee filed his individual return on 16 November 2017, declaring total income of ₹8,99,750.
  • He claimed total prepaid taxes of ₹6,45,161, comprising:
    • TDS of ₹6,15,161, and
    • Advance tax of ₹30,000.
  • Against a total tax liability of ₹1,02,949, he claimed a refund of ₹5,42,210.

On processing under Section 143(1):

  • The CPC:
    • Accepted the returned income, but
    • Granted TDS credit of only ₹1,24,082,
    • Resulting in a short credit of ₹4,91,079.

The CPC’s intimation recorded a mismatch between:

  • TDS claimed in the return, and
  • TDS reported in Form 26AS in the normal validation process for the assessee.

Rectification was sought under Section 154, but the CPC again restricted the credit, maintaining denial of ₹4,91,079.

The assessee appealed before the CIT(A), contending that:

  • The receipts corresponding to the disputed TDS had already been taxed in the hands of the partnership firm, and
  • Therefore, denial of TDS credit to him was unjust when revenue had already been collected on those receipts.

Similar Issue for AY 2018-19

In the connected appeal for Assessment Year 2018-19 (ITA No. 1120/Bang/2026), an identical issue arose.

  • The CIT(A) confirmed the CPC’s action in disallowing TDS credit of ₹2,29,176 on the basis that the underlying receipts had not been offered to tax by the individual assessee.
  • Both years thus involved the same legal question: Can an individual claim TDS credit when the associated income is not taxed in his hands?

Findings of the CIT(A)

Scope of Dispute

The CIT(A) recorded that the only ground in appeal was short grant of TDS credit.

  • The assessee claimed TDS of ₹6,15,161.
  • CPC allowed ₹1,24,082.
  • Short credit: ₹4,91,079.