Taxpayer Relief: ITAT Mumbai Strikes Down ₹1 Crore Demand Over TDS Error

A Mumbai-based taxpayer was in trouble when it was discovered that the TDS credit of Rs 96 lakh (96,12,846) was missing from his Form 26AS. He gets a tax notice demanding Rs 1 crore, which includes interest under Sections 234B and 234C, even after reporting the related income in his ITR and filing the required taxes.

The taxpayer’s Rs 96 lakh TDS credit has been rejected via the Income Tax Department’s centralised processing centre (CPC) as it has not been shown in his Form 26AS.

He reported a total income of Rs 20 crore (20,16,58,770) in his ITR, with a self-assessment tax and interest amounting to Rs 7 crore (7,12,79,941). He claimed TDS credit of Rs 4.8 crore (4,80,45,747), advance tax of Rs 2.2 crore (2,20,00,000), and self-assessment tax of Rs 12 lakh (12,34,194) to offset the same tax obligation.

However, when the CPC processed his ITR u/s 143(1) dated November 16, 2022, they rejected the TDS credit of Rs 96 lakh only because it was not included in Form No. 26AS.

It is directed to a tax demand of Rs 1 crore (1,09,01,070), which included the disallowed TDS and interest of Rs 8 lakh (8,02,776) u/s 234B and Rs 4 lakh (4,85,452) u/s 234C. The taxpayer, dissatisfied with the tax demand notice, appealed to the Commissioner of Appeals (CIT A).

The taxpayer in the appeal presented the proof, like invoices, TDS advice, and bank statements, that validated payments were received net of TDS. The deductor’s failure is attributable to deposit taxes or filing accurate e-TDS statements, due to which the mismatch with 26AS occurs.

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As per the taxpayer, Form 26 has not been made by them; it is a dynamic departmental record and must not be the mere grounds for granting credit.

The CIT(A) has kept the refusal of credit, citing that till the deduction is shown in Form 26AS, the taxpayer could not get any relief. It was recommended by the CIT(A) that taxpayers must approach the deductors to rectify their e-TDS statements and asked that the tax assessing officer (AO) can merely grant credit after the rectification is shown in the updated 26AS.

From the order of the CIT(A), the taxpayer has aggrieved and filed an appeal to the Income Tax Appellate Tribunal (ITAT) Mumbai. ITAT Mumbai (ITA No.2915/Mum/2025) dated September 30, 2025 ruled in the taxpayer’s favour, which consequence in the cancellation of the tax demand notice of Rs 1 crore.

The fact has been kept by various judicial pronouncements that when the primary materials on record specify that if the payments were obtained net of tax after deduction at source (TDS), the revenue could not press for reflection in Form 26AS as a prerequisite precedent for credit of these TDS.

However, as of now law has not been revised; these rulings shall not lessen litigation at the lower level, and the taxpayer shall carry on to dispute cases of TDS credit. In specific matters, revenue could not practically verify the genuineness of the TDS claim.

Revenue could be lost in specific cases wherein TDS is not recoverable from the deductor, and the taxpayer does not file tax based on the fact that TDS has earlier deducted before filing the payment.