Direct Tax Alert

Background

In many instances, tax is deducted (TDS) by the payer in the year in which the income is actually paid to the taxpayer/payee. However, the taxpayer following the accrual method of accounting may have already disclosed the income in earlier Fiscal Years (FY) in its return of income. This results in a TDS mismatch since the corresponding income has already been offered to tax in the earlier FY. Therefore, the taxpayer faces the challenge of claiming the credit of TDS in the year in which tax is deducted.

In order to remove this difficulty, the Finance Act 2023 inserted Section 155(20) in the Income-tax Act, 1961 (IT Act). This section applies where any income has been included in the return of income furnished by the taxpayer for any relevant FY and TDS on such income has been deducted and paid in a subsequent FY. In such a case, the taxpayer can make an application in the prescribed Form to the tax officer within two years from the end of the FY in which such tax was deducted at source. The tax officer shall then amend the assessment order or any intimation allowing credit of such TDS in the relevant FY.

In order to give effect to these amendments, the Central Board of Direct Taxes (CBDT) has issued a notification¹ to introduce Rule 134 in the Income-tax Rules, 1962 (IT Rules) along with Form 71. We, at BDO in India, have hereunder analysed and summarised key provisions of the said notification:

• Rule 134 in the IT Rules     
  • The application pertaining to section 155(20) of the IT Act shall be made by the taxpayer by filing Form 71 electronically using a digital signature (if the return of income is required to be furnished under a digital signature) or electronic verification code.
  • Form 71 shall be furnished to the Principal Director General of Income-tax (Systems) [PDGIT(S)] or Director General of Income-tax (Systems) [DGIT(S)] or the person authorised by them.
  • The PDGIT(S) or DGIT(S) shall specify the procedure for furnishing Form 71 and be responsible for formulating and evolving appropriate security, archival and retrieval policies in relation to Form 71.
  • The PDGIT(S) or DGIT(S), as the case may be, or any person authorised by them shall forward Form 71 to the tax officer.
• Information required in Form 71
  • Basic details of taxpayer such as Name, PAN and Aadhar, residential status, Address, contact details, relevant FY and subsequent FY.
  • Details of specified income² offered to tax in relevant FY and the amount of TDS on such income in subsequent FY along with the date of deduction, rate of TDS, details of deductor etc.
  • Information about predecessor entities and legal heirs (in case applicable).
• These rules shall be effective from 1 October 2023.

BDO in India Comments

While the Finance Act 2023 had amended the provisions of section 155(20) of the IT Act, consequential changes were yet to be notified. Now that the Rules have been notified along with the Form, this will simplify the process of claiming TDS credit. Taxpayers must maintain accurate information pertaining to specified income in section 155(20) of the IT Act in order to make an application in Form 71. It is pertinent to note that application in Form 71 can be made by a successor entity as well in cases where TDS was deducted in the hands of the predecessor entity. Therefore, this will also be relevant in the case of Mergers and Acquisition transactions.

 

---

¹ Notification No. 73/2023, dated 30 August 2023

² Specified income means any income referred to in Section 155(20) of the IT Act which has been included in the return of income of relevant FY and tax is deducted and paid on such income to Central Government in a subsequent FY.