One of the most recurrent and technically misunderstood issues in tax practice is the denial or mismatch of TDS credit when tax has been deducted in the name of another entity—such as a head office, branch, agent, or intermediary—despite the income being offered to tax by the rightful recipient.
The Eastern Shipping case (Eastern Shipping Agency v. ITO, ITAT Mumbai) sharply illustrates how interpretation of Section 37BA of the Income-tax Act, 1961 becomes pivotal in such situations.
The Core Issue
The dispute centered around whether TDS deducted in the name of a principal or group entity could be claimed by the actual income earner—Eastern Shipping Agency—when such income was reflected in its return and accounted for in its books.
The Assessing Officer had denied TDS credit, arguing that credit must be restricted to the deductee’s name as per Form 26AS, while the assessee contended that it was the “beneficial owner of income” under Section 37BA(1) and thus entitled to the credit.
Section 37BA — The Legislative Compass
Section 37BA governs how TDS credit is to be granted. It reads:
(1) Credit for tax deducted at source and paid to the Central Government shall be given to the person from whose income the tax has been deducted.
(2) Where under any provisions of this Act, income is assessable in the hands of a person other than the deductee, credit for the tax deducted at source shall be given to such other person.
In essence, the section enshrines the principle of beneficial ownership:
credit should follow the person who is chargeable to tax on that income, not merely the name in which TDS was deducted.
Judicial Interpretation
(a) Eastern Shipping Agency v. ITO
The ITAT held that denying TDS credit to the entity offering the income violates both Section 37BA(2) and the principle of real income recognition.
It observed that once income is duly reflected and taxed in the hands of the assessee, credit of the corresponding TDS must be allowed, even if the Form 26AS shows another name—subject to substantiating the linkage between income and TDS.
(b) Tata Sponge Iron Ltd. v. CIT [(2014) 52 taxmann.com 451 (Orissa)]
The Orissa High Court emphasized that mechanical reliance on Form 26AS cannot override the substantive right to credit if the tax has indeed been deducted from the assessee’s income.
(c) Rashtriya Ispat Nigam Ltd. v. ACIT [(2016) 71 taxmann.com 193 (Hyd. - Trib.)]
The Tribunal clarified that the objective of TDS provisions is collection, not assessment, and once tax is collected and matched with declared income, credit cannot be withheld on technicalities.
Analytical Interpretation
| Principle | Legal Basis | Professional Implication |
|---|---|---|
| Substance over form | Section 37BA(2), Real Income Doctrine | The real recipient of income is entitled to TDS credit even if the deductee name mismatches. |
| Credit flows with taxability | Section 37BA(1) | If income is taxed in A’s hands, credit should be in A’s hands—even if TDS was in B’s name. |
| Procedural compliance is curable | Rule 37BA(3), CBDT Circulars | Proper declarations or rectifications can regularize credit. |
| System mismatch is not fatal | Judicial precedents | AO must verify and link credit manually before denial. |
Compliance and Documentation Strategy
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Establish income linkage:
Maintain a clear reconciliation statement between the TDS certificate (Form 16A) and income offered in books/return. -
Obtain written confirmation:
If TDS is deducted in the name of another entity (e.g., group company, principal, or branch), secure a declaration or NOC from that entity confirming that the related income belongs to your client. -
Request rectification under Section 154
In case of denial due to system mismatch, file an online Rectification Request – Type 1 through the CPC portal citing Section 37BA(2). -
Attach evidence in appeal:
If credit is still denied, attach TDS certificates, ledger extracts, and reconciliation tables before CIT(A) or NFAC. -
Preventive compliance:
For ongoing business, advise clients to instruct deductors to quote the correct PAN and deductee name prospectively.
Illustrative Example
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ABC Ltd. hires Eastern Shipping Agency for freight management.
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TDS deducted under section 194C in the name of “Eastern Shipping (Head Office)” due to older vendor records.
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Branch income ₹50 lakh is shown by “Eastern Shipping Agency (Branch A)” in its books.
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CPC denies TDS credit of ₹5 lakh as 26AS reflects the Head Office’s PAN.
Under Section 37BA(2) and the Eastern Shipping ruling, Branch A can claim TDS credit, provided the income-TDS reconciliation is demonstrated and internal transfer of gross receipts is verifiable.
The Points to remeber
Section 37BA is a curative provision—it ensures fairness in credit attribution when procedural lapses occur.
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Form 26AS is not conclusive evidence; it’s merely an indicative record.
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Advisory note: Always check for cross-entity TDS deductions before filing and adjust through declarations, rectification, or TDS mapping in CPC.
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Judicial trend: Courts lean toward substantive justice over procedural rigidity.
Conclusion
The Eastern Shipping precedent reaffirms a foundational principle of tax administration:
The right to credit follows the right to income.
When Section 37BA is interpreted purposively, TDS credit must be granted to the true earner of income, not bound by data entry errors or structural mismatches in 26AS.
