Reconciliation of books with 26AS for TDS credit and income reconciliation is one of the most regular and important task of any tax person in Direct tax team. This activity is not only relevant for merely computing the correct tax liability but also held significant importance during the assessments. Normal practice followed by the Income-tax Department is to provide the TDS credit only to the extent as it is appearing in 26AS and only if corresponding income is also offered to tax. Due to this, it becomes imperative to do the reconciliation of TDS receivable as per books and TDS receivable as per 26AS and identify differences to get the full credit.
Benefits of Reconciliation
Key benefits of the continuous reconciliation are as under:
Ensure correct recording of income which is due or received by the Company than what is appearing in 26AS. This further help not only in true and fair disclosure of income in financial statements but reduce one of the important scrutiny criteria of starting assessment basis income difference financial and 26AS.
Ensure in claiming of TDS which is rightfully due to the Company thereby reducing the assessment exposure of wrong claim of credit. Wrong claim of TDS credit also results in automatic initiation of penalty proceedings.
Regular TDS credit reconciliation with 26AS and actual receipt of collection after TDS helps in identification of cases of short or excess TDS and thus communication with Customer at early-stage result in resolution of all such cases. If reconciliation is not done in time, then Customer might not revert on time.
Regular reconciliations give comfort to auditor team about the correct claim of TDS in books and thereby give assurance as to balance sheet item of TDS receivable.
Regular reconciliation of TDS credit with 26AS helps in computation of correct advance tax by claiming rightful TDS credit (than excess or short TDS) and thereby minimizing impact of interest u/s 234C.
Easy to determine which TDS credit not appearing in 26AS (normally related to Q4) but actually deducted can be shown in Income-tax return for carry forward in next year.
In view of the above, it is essential to have this reconciliation done regularly.
Time of reconciliation
Normally, TDS credit is accounted in the books on accrual basis or on receipt basis. The Companies adopting mercantile system of accounting normally accounts on accrual basis as and when income is accounted. Thus, it is normally accounted by the Company before 26AS.
TDS credit in 26AS appear basis quarterly TDS return filed by the Customer as per due dates as prescribed in accordance to sub section 3 of Section 200 r.w Rule 31A of the Income-tax Rules Rule by considering the all the transactions. The due dates are prescribed as Q1 by 31st July, Q2 by 31st October, Q3 by 31st January and Q4 by 31st May unless due dates are extended. Normally, TDS credit appears in 26AS only after processing of these TDS return. Therefore, 26AS normally shows entries of respective return only on or after 3rd August for Q1, 3rd November for Q2, 3rd February by Q3 and 3rd June for Q4 unless TRACES system takes time for processing of the TDS return.
Therefore, TDS credit as per books can be checked only after 26AS reflecting such entries basis TDS return filed after TDS return due date and processing by TRACES portal. E.g. If transaction is subject to TDS is entered on 5th April 2023, then it may appear in 26AS only on or after 3rd August in 26AS (may be later than this date if due date of TDS return is extended). However, same transaction with TDS credit is recorded on 5th April 2023 itself in the book. While this is falling in same year and may match, issue arise normally for Q4. Therefore, undertaking regular reconciliation is key to resolve TDS credit issue with the Customer in timely manner. Informing to the Customer after 5th or 6th month will reduce the significance of the reducing difference and the Customer may not respond.
Reason for differences
Below are the indicative (not exhaustive) areas where difference in TDS credit as per book and 26AS appears and such differences needs urgent attention to achieve benefits as listed above.
Difference in accounting Period (Timing of reporting may be different)
Normally this difference arises when income and TDS credit is recorded in books on accrual or receipt basis in one period and reflected in 26AS in another period.
In such cases, while filing income-tax return of the Company, such TDS credit should be shown as carry forward to next year and be claimed in next year. Related income and TDS though cannot be accounted in next year, such income and TDS should be kept in reconciliation sheet along with above reason so it is possible to satisfy auditor’s and tax queries at later stage and effective reconciliation in next year.
When Customer follows net accounting (Expenses less income – normally for Utility cases) but transactions are reported by Deductor:
This type of situation normally happens for Utility cases Customer. In these cases, normally Utility customer bills to each Customer according to use of the utilities and charge by raising invoice. However, it also pay’s income on the deposit taken against providing utility services. Such income on deposit is not paid separately but adjusted against utility bill. As the Customer normally record expenses on net basis, the Customer may fail to recognise TDS credit.
In this case, though amounts of TDS credit are really small, the Company must adopt in recording of such TDS credit as and when appearing in 26AS. Also, if such credit is matching with income as per utility bill, then credit should be taken while filing Income-tax return.
However, if transaction is not pertained to the Company, then such TDS credit should be avoided in return otherwise it will lead to Scrutiny notice for TDS credit mismatch (higher TDS credit claimed).
TDS credit is appearing in 26AS of seller when business is sold.
This situation is normally arisen when the Company sold one segment of its business to other but the Customer continues to record transaction of sold segment in the name of the Old Company while filing its TDS return.
Two treatments are possible in this case.
As this TDS credit is not related to the Old Company and hence Customer should be informed for recording the transaction in the name of the Buyer of that business segment. The Company should not claim this TDS credit nor it should be recorded in the books and also ignore income.
Alternatively, the Company should claim the credit along with offering the income and should pass on the same income and TDS to the Buyer of that business segment. Ultimately, this will result NIL impact on the Income-tax return of the Company. However, documentations should be made that this is done only as a pure agent.
Entries only appearing in 26AS but not in the books -
Other than reasons listed above, if TDS credit is only appearing in 26AS then kindly identify each entry into following.
Contract with Customer is over but 26AS showing income and TDS credit
Whether Customer contract with Customer who has reported income and TDS in the name of the Company is still in existence or it is over. If contract is over but the Customer is still showing income in your name though not belong to the Company then inform the Customer for immediate revision in TDS return by removing income and TDS credit as mentioned by them in their TDS return filing in the same period when it was earlier disclosed. Also document these reasons while doing reconciliation and the Company should not take credit of such income and also ensure that no income is considered in financials.
Customer has wrongly shown TDS in the name of the Company inadvertently instead of showing in the name of correct Taxpayer
This is possible when due to name similarity or group company or due to TAN no similarity (may change only one or 2 no/ alphabet) or due to error while filing TDS return, TDS return is filed by showing transaction in the name of the taxpayer and hence appearing in 26AS.
In this case, whenever it is comes to notice (probably only after 26AS is available for download), this should be intimated to such Deductor for removal of such entry by revising his TDS return. Further, such credit should not be claimed while computing advance tax/ self assessment tax and should not be mentioned in the return. In the return, it can be mentioned as TDS credit related to others and should be disclosed as not claimed.
Contra Entries
There could be possibility that transaction shown earlier as TDS credit in book is reversed and same with 26AS. In this case, if transaction shown is exactly reversed i.e. difference is ZERO then such contra entries should be identified and ignored for No table of contents entries found.claiming TDS credit in the income-tax return. Such credit will not have any impact on TDS receivable in book or 26AS. However, quantification of the same is necessary to prove that Contra credit has not been claimed.
Excess TDS credit reversed in book
There could be possibility that in the book, TDS credit is recorded higher but due to change in the transaction, later such credit has been reversed. At most care should be taken that credit should be taken of net amount only. If TDS is reversed but higher TDS credit is claimed then Tax Officer may not grant such excess TDS + possibility of levy of interest and penalty separately for misreporting in return.
Excess TDS credit in 26AS but books recorded correctly.
There could be possibility that in 26AS, TDS credit is appearing higher than the books. Care should be taken that credit should be taken only to the extent same is matching with books. Any excess should be ignored. If excess appearing in 26AS is pertaining to credit shown in book in last year and if same is shown in last year ITR as transfer of credit to next year then ideally such excess to the extent directly matching, can be claimed. In case excess credit in 26AS not related to the taxpayer hen taxpayer should inform to the Deductor for revision in TDS return so that such entries are removed from 26AS or else there are chances of getting income-tax notice for not recording of income. Such revised 26AS entries will be relevant during the assessment proceedings to prove that TDS credit has been claimed only to the extent credit as matching with books.
Non reporting by Deductor -
It is also possible that Deductor deducted TDS while making payment and also duly deposited TDS but fail to show in TDS return or TDS deducted but not deposited at all. In these cases, Deductor should be informed immediately upon 26AS is available for download on Income-tax portal and bring out these discrepancies. However, it is advisable not to claim TDS till same appear in 26AS. Any such TDS differences should be kept in reconciliation sheet.
Errors or omission –
It is possible that due to incorrect PAN or due to incorrect period selection or due to change in section and rate, TDS deducted on receipts is not matching with TDS as appearing in 26AS. All such differences should be informed to Deductor immediately.
Thus, continuous reconciliation of TDS as deducted by Customer vis-à-vis TDS credit as appearing in 26AS will help you to
- To monitor inflow of the receipt planned vs received. Difference should be related to TDS as matching with 26AS. If TDS amount not matching then dialogue with Customer is required
- Continuous reconciliations help in identifying what needs to be accounted or what needs to be removed.
- Help in providing effective reconciliation as required in every assessment.
- Helps in reconciliations as required for GST Returns and also as requested by Statutory auditors.
Decoding Legal Team.
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