Allowing TDS Credit to a Person Other Than the Recipient

Allowing TDS Credit to a Person Other Than the Recipient

Need for Allowance of TDS Credit in the Hands of a Person Other Than the Recipient: Section 199 of the Income Tax Act, 1961, read with Rule 37BA of the Income Tax Act, 1961of the Income Tax Rules, stipulates that Tax deduction at source credit should be given to the person to whom the payment is made or credited. There are scenarios where the payment is made to one individual, but the income is taxable in the hands of another. The following examples illustrate such situations:

• Joint Property Ownership: In cases where property is jointly owned by a couple, but the entire cost of acquisition has been borne by one spouse (e.g., the husband), the capital gain from selling this property would be clubbed in the hands of the husband. However, Tax deduction at source might have been deducted in both names, leading to a potential mismatch in claiming the Tax deduction at source credit.
• Minor’s Investments: Shares may be held by parents on behalf of their minor child. If a dividend is credited to the minor’s bank account, the Tax deduction at source is typically deducted in the child’s name, even though the income is taxable in the hands of the parent under the clubbing provisions.

What is Necessity application of for Rule 37BA?

In such cases, it is essential that Tax deduction at source credit is allowed in the hands of the person who is liable to pay tax on the income, ensuring that there is no mismatch in tax credit claims and income reporting. The provision under Rule 37BA of the Income Tax Act, 1961is crucial for ensuring that Tax deduction at source credits are accurately aligned with the person who is ultimately responsible for the tax on the income. By allowing the transfer of Tax deduction at source credit through a formal declaration process, the rule prevents mismatches and ensures that tax compliance is both accurate and efficient.

Process for Allowance of TDS Credit to a Person Other Than the Recipient:

Role of Proviso to Rule 37BA(2): The proviso to Rule 37BA(2) of the Income Tax Act, 1961addresses these situations by allowing the transfer of Tax deduction at source credit to the person in whose hands the income is taxable, even if the payment was made to or credited in the name of another person.

Rule 37BA: Credit for Tax Deducted at Source

• The taxation of dividends has undergone significant changes over the years, with the most notable being the taxation of dividends in the hands of shareholders, effective from April 1, 2020. This change means that companies paying dividends must Tax deduction at source, if the amount paid to a single shareholder exceeds INR 5,000 in a FY.
• However, complications can arise in situations where the dividend income is taxable in the hands of someone other than the individual in whose name the Tax deduction at source has been deducted. For example, if shares are held by a parent on behalf of a minor child, and the dividend is credited to an account opened for the benefit of the minor, but Tax deduction at source is deducted in the child’s name, the income is usually clubbed and offered by the parent in their return of income under the clubbing provisions.
• To address such issues, Rule 37BA of the Income Tax Act, 1961, provides guidelines for crediting Tax deduction at source to the correct person.

• Understanding Rule 37BA of the Income Tax Act, 1961:

  • Rule 37BA of the Income Tax Act, 1961states that Tax deduction at source credit should typically be given to the individual (referred to as the “deductee”) to whom the payment is made or credited. However, if the income on which Tax deduction at source has been deducted is assessable in the hands of someone other than the deductee, the credit for the Tax deduction at source can be transferred to that other person, provided certain conditions are met.
  • Rule 37BA of the Income Tax Act, 1961 provides a mechanism to transfer Tax deduction at source credit to the correct person when the income is assessable in someone else’s hands.
  • Declaration Process: The process requires a declaration from the deductee, reporting by the deductor, and annual submission of this declaration.
  • Practical Considerations: It is essential to ensure compliance with the declaration process to avoid issues when claiming Tax deduction at source credit during the filing of the income tax return.
  • This rule ensures that tax credits align with the actual taxpayer’s income, preventing mismatches and ensuring that tax is paid by the correct individual or entity.

Conditions for Transfer of TDS Credit:

• Declaration by Deductee: The deductee (the person in whose name Tax deduction at source was deducted) must file a declaration with the deductor (the entity making the payment and deducting TDS). This declaration should specify the name, address, PAN of the person who is to receive the Tax deduction at source credit, and the reason for giving credit to such a person.
• Reporting by Deductor: The deductor must report the Tax deduction at source in the name of the person mentioned in the declaration. The deductor is then required to issue the TDS certificate in the name of the person who is to receive the credit.
• Declaration Requirements: To facilitate this, the recipient of the payment (deductee) must furnish a declaration to the deductor containing details of the person to whom the Tax deduction at source credit should be transferred. This ensures that the deductor issues the Tax deduction at source certificate in the name of the correct person.

• Required Details in Declaration: The declaration must include the following information:
  • Name, address, and PAN of the person to whom the Tax deduction at source credit is to be given.
  • Details of the payment or credit in relation to which the Tax deduction at source credit is being transferred.
  • Reasons for giving the Tax deduction at source credit to this person instead of the original recipient.
• Deductor’s Responsibility: The deductor is required to retain the declaration securely and issue the Tax deduction at source certificate in the name of the person mentioned in the declaration. This process ensures that the correct individual can claim the Tax deduction at source credit when filing their income tax return.

Procedure for Filing Declaration:

Filing with Deductor: The declaration must be submitted to the deductor and include the necessary details, such as the name, address, Permanent Account Number of the person who will receive the Tax deduction at source credit, and the reason for this arrangement. While there is no specific format prescribed by the Income Tax Act or Rules, the declaration must include the minimum details mentioned above. It is advisable to check with the Registrar and Transfer Agent (RTA) for the preferred format, as each RTA may have its own requirements.

• Record Keeping by Deductor: The deductor must retain the declaration securely and issue the TDS certificate in the name of the person designated in the declaration.
• Annual Requirement: The declaration should be filed at the beginning of each financial year to ensure that the person who offers the income in their return can claim the corresponding Tax deduction at source credit.