On the other hand, due to accounting norms of accrual of income owing to the applicability of Accounting Standards, the income accrual (to the received) sometimes may precede/succeed the accrual of expense (for the payer). This would result in a scenario where the TDS could be effected in a different year and the income would be subjected to tax in a different year. Section 199 of the Income Tax read with Rule 37BA(3) mandates that credit of TDS is given to the receiver of money only in the year in which such income is subject to tax.
There was already a mechanism in the Income Tax Return (ITR) where a taxpayer could defer the TDS credit in case the TDS succeeded the accrual and taxation of income. However, in case if the income is subjected to tax in the preceding year and TDS credit is provided in a subsequent year, it used to result in a situation of impasse. This is predominantly because, unless the credit of the tax appears in Form 26AS (a cumulative statement of all the taxes withheld), it cannot be claimed in the Income Tax returns. This will result in a TDS mismatch and such a mismatch is beyond the control of the deductee as it is occurring as a result of different accounting principles or policies adopted by the diductor and deductee.
New Section 155(20)
In order to remove such difficulties and to provide a solution in the law, the Finance Act 2023, amended Section 155 and inserted 155(20) into the Income Tax Act. The new subsection provides that, in case the taxpayer declares income in ITR in a particular year and tax on such income is deducted in the subsequent year, the taxpayer can make a rectification application before the Assessing Officer within a period of two years from the end of the financial year in which such tax is deducted, allowing the TDS credit for the year in which such income is offered to tax. Based on such an application, the Tax Officer shall pass a rectification order. This section will be effective from 1st October 2023.
