You have stated in The Hindu dated November 23, 2009, that banks need not deduct tax where no credit is made in the account of the depositor. Banks are only following the mandate of Sec. 198, which requires deduction even for a provision for interest made in the accounts.
As regards the right of the taxpayers to choose the cash system of accounting and offer the income in the year of receipt, receipt should be inferred to the extent of the amount specified in the tax credit certificate so that income proportionate to the tax credit amount would any way require to be offered. Thus, for example, if a tax of Rs. 10,000 is deducted from the interest accrued on say Rs. 1 lakh then, Rs. 10,000, which is covered by tax credit certificate, should be shown as income received in the year of TDS itself. Credit of TDS of Rs. 1,000 can be claimed in that year. The balance of Rs. 90,000 can be shown in the year of maturity and credit for TDS of Rs. 9,000 can be claimed in that year.
Coming to the grievance of the taxpayers that they are made to wait till the year of maturity to claim credit for TDS, evidently, banks cannot take into account the method of accounting followed by thousands of its depositors.
But the taxpayers are not without remedy. Under Sec. 197, they can approach the assessing officer for a lower rate of TDS or no TDS at all, justifying their case to the satisfaction of the assessing officer with reference to their total income.
The above letter is from G. Muthuramakrishnan, Ombudsman for the Income-tax Department.
The comment made in these columns was not on the mandatory nature of Sec. 198, but pointing out that tax deduction should match the income receivable by the deductee and that the provision, which requires tax deduction even without credit of such interest to the depositor's account at a time when he has no right to draw the same, needs review. What was required was the change of law or a reasonable interpretation.
As regards the view illustrated by an example that the amount in TDS certificate received by a holder of the fixed deposit is bound to be offered as income received for availing proportionate credit, such a view is controversial, if not erroneous, because the tax credit certificate by itself can not be put on a par with cash or even cheque, since such credit can be availed only subject to conditions under Sec. 199, especially in the light of the expectation (though wrong) that tax credit can be availed only if corresponding income is offered for tax. I do hope that the view expressed by the Ombudsman is not the official view.
As regards the suggestion for approaching the assessing officer for deduction of tax at lower rate under Sec. 197, Ombudsman should certainly be aware how effectively and promptly the system of response to Sec. 197 functions, even in a case where no tax is required to be deducted. The solution offered is only theoretical.