Supreme Court Sets Aside High Court’s Direction to CBDT on Software Changes in TDS Demand Cases

The Gujarat High Court granted relief to the assessee by holding that tax demand could not be enforced where credit of TDS was denied solely because the deductor failed to deposit the tax. While the Revenue accepted this relief on merits, the High Court also directed the CBDT to modify its software to ensure that similar demands are not raised in future. The Revenue challenged only this systemic direction before the Supreme Court.

Issue Before Court: Whether the High Court was justified in directing the CBDT to alter its tax software to prevent future demands, when grant of TDS credit depends on factual verification by the Assessing Officer.

SC Decided: The Supreme Court disposed of the appeal by partly interfering with the High Court order. It held that the directions issued to CBDT for making changes in the tax software were unwarranted and liable to be set aside. The Court observed that grant of TDS credit depends on factual verification by the AO, and software-based automation cannot substitute adjudication or scrutiny in all cases.

The Court noted that technology is meant to assist tax administration and not to decide disputed issues. As the Revenue had not challenged the relief granted to the assessee on merits, that part of the High Court’s judgment was left untouched.

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