Tax implication for the seller

Sir,

Purchasers/buyers X and Y, acting jointly, engaged with seller S in a property transaction valued at ₹1,50,00,000 during the year 2021. Initially, the buyers deducted and deposited Tax Deducted at Source (TDS) amount of ₹75,000 each. However, the deal eventually did not go through.

During 2021, the buyers initially provided an advance payment of ₹10,00,000 through a bank transaction. Subsequently, seller S reimbursed this amount in cash. Eventually, in 2022, the property was sold by seller S to another buyer named Z.

Now that the amount of ₹1,50,000 is refelected in 26AS for the A.Y.2022-23 and still return filing is pending, what is the recourse available to S (as refund of TDS is not possible now)?

Hi Avinash,

Here's a breakdown of the tax implication and recourse available to the seller S in this case:

Situation Recap:

Buyers X & Y jointly agreed to buy property from S for ₹1.5 Cr in 2021.
Both deducted TDS of ₹75,000 each (total ₹1.5 lakh) and deposited it.
The deal did not finalize; advance ₹10 lakh was paid but reimbursed in cash by S.
Property eventually sold in 2022 to a different buyer Z.
TDS of ₹1.5 lakh is reflected in S's Form 26AS for AY 2022-23.
Seller’s income tax return for AY 2022-23 is yet to be filed.

Key Issues:

TDS deposited against non-existent sale
Since the original deal didn’t materialize, the TDS deducted by X & Y does not relate to an actual taxable transaction for S.
TDS reflected in Form 26AS
The TDS amount is reflected in seller’s 26AS for AY 2022-23, but since there was no income from that transaction, seller cannot claim it as tax credit for any income.
Refund of TDS not possible directly
Since the TDS was deducted and deposited by buyers and reported against S's PAN, S cannot get refund directly from buyers or TDS department for this amount.

What can seller S do?

File income tax return for AY 2022-23 accurately
- Disclose no income from the failed transaction.
- Since no taxable income was earned from X & Y transaction, show ₹0 income from that transaction.
- Do not claim the TDS amount as tax credit in the return, because no actual income arose on that transaction.
Claim refund of TDS via Rectification or Appeal (if applicable)
- Since TDS is credited against PAN but not due, seller can file a refund claim under section 237 of the Income Tax Act.
- This is typically done by filing a rectification application (u/s 154) or a refund claim via the Income Tax e-filing portal after filing the return.
- The refund claim should clearly explain the facts: no actual transaction, TDS wrongly deducted.
Request buyers to revise TDS return
- Buyers X & Y can file correction statement (TDS correction statement) to reverse the TDS deduction in their TDS returns.
- This may help in rectifying mismatch between seller’s and buyer’s tax records.
Maintain supporting documents
- Maintain proof of reimbursement of advance, agreement cancellation, and sale to new buyer for audit and scrutiny purposes.

Summary:

Action	Explanation
File ITR showing no income from failed transaction	No income to be declared, no TDS credit to be claimed
Claim refund of wrongly deducted TDS	File refund claim via income tax e-filing after filing return
Buyers to file correction in TDS returns	Buyers to reverse TDS to avoid mismatch
Keep documents to justify position	For any future scrutiny

If seller S has not yet filed return, he should do so ASAP with a clear explanation and claim refund of excess TDS. If already filed, rectification can be filed.