TDS Credit Restriction Under Rule 37BA: Mumbai ITAT Sends Matter Back to Assessing Officer for Factual Verification

Case Overview

Case Name: S R Pusalkar & Co. Vs Faceless Commissioner of Income tax (Appeals) (ITAT Mumbai)
Appeal Number: ITA No. 5806/Mum/2026
Date of Order: 25/06/2026
Assessment Year: 2021-22
Forum: Income Tax Appellate Tribunal, Mumbai Bench

Background of the Dispute

A clearing and forwarding agency, operating as a partnership firm founded in 1981, found itself entangled in a TDS credit dispute for Assessment Year 2021-22 after the Centralised Processing Centre (CPC), Bangalore, restricted the TDS credit it had legitimately claimed while processing its return of income.

The assessee had filed its return declaring total income of Rs. 42,93,670/- and sought credit for tax deducted at source amounting to Rs. 6,73,371/-, as duly reflected in Form No. 26AS. However, upon processing the return under Section 143(1), the CPC granted only a restricted TDS credit of Rs. 4,10,618/- by invoking Rule 37BA of the Income Tax Rules. The basis for this restriction was an apparent mismatch between the gross receipts shown in Form 26AS and the income credited to the profit and loss account in the assessee's books.

Procedural Journey

Rectification Application Under Section 154

Aggrieved by the restriction of TDS credit, the assessee filed a rectification application under Section 154 of the Income Tax Act, 1961, seeking correction of what it considered an error apparent on the face of the record. However, this application was dismissed by the authorities.

Appeal Before CIT(A) — Dismissed for Non-Prosecution

The assessee then challenged the matter before the Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre (NFAC), Delhi. Unfortunately, the appeal was dismissed for non-prosecution, as the assessee failed to respond to the notices issued by the NFAC.

Before the Tribunal, the assessee's representative explained that the non-compliance was neither deliberate nor wilful. The firm had discontinued its business operations in 2024 due to the advanced age and incapacity of its partners. With the business closed and no staff available to monitor official email communications, the notices issued by NFAC went unnoticed, and the assessee was effectively denied the chance to present its case.

Core Issue Before the Tribunal

The principal question before the Mumbai ITAT was narrow but significant:

Whether the proportionate restriction of TDS credit under Rule 37BA was legally and factually justified, given that the apparent difference between the receipts reflected in Form 26AS and the income credited to the profit and loss account arose solely on account of reimbursement receipts — which, by their very nature, do not constitute income.

Assessee's Submissions

The assessee's authorised representative placed the following arguments before the Tribunal:

Nature of Receipts in Form 26AS

The gross receipts appearing in Form 26AS comprised four distinct components:

  1. Agency income
  2. Brokerage income
  3. Interest on fixed deposits
  4. Reimbursement of expenses received from clients