A recent decision by the Delhi High Court has brought much-needed relief to a Non-Resident Indian (NRI) who was facing a significant tax demand due to an error in the filing of the TDS return by a property buyer. The court not only acknowledged the genuine hardship caused by procedural lapses but also directed the Income Tax Department to correct its records and compute the appropriate refund, if any, due to the NRI.
This case is a crucial precedent for NRIs involved in property transactions in India and highlights the importance of correct TDS compliance.
Delhi High Court Grants Relief to NRI in Capital Gains Tax Dispute Over Property Sale
Background of the Case
A Non-Resident Indian (NRI) living in the USA faced a tough time after selling a property in Pune worth ₹2 crore. Even though the buyer deducted and deposited 20% TDS (₹18.68 lakh), a small but critical mistake created a big tax problem.
A Non-Resident Indian (NRI) residing in the United States recently won a major relief from the Delhi High Court in a case related to capital gains tax on property sale in India. Despite a tax demand of ₹46 lakh, the High Court ruled in favor of the NRI and directed the Income Tax Department to correct its records and compute a refund if applicable.
This issue arose due to a procedural error in TDS form filing by the property buyer, which led to the non-reflection of deducted tax in the NRI’s tax records. Below is a detailed summary of the case with key date-wise developments.
Here is a detailed chronological timeline of events, as recorded in the Delhi High Court’s final order dated May 27, 2025:
📅 Date-Wise Timeline of Events
- 1998: The NRI, while residing in the USA, acquired a residential property in Pune, Maharashtra.
- March 18, 2015: A prospective buyer, a medical professional, approached the NRI with a purchase offer for the Pune property for ₹2 crore, which was accepted by the NRI.
- September 5, 2015: The buyer informed the NRI that under income tax laws applicable to NRIs, 20% TDS would be deducted from the sale consideration. Accordingly, the buyer deducted ₹18,68,177 as TDS and paid the balance amount of ₹1,81,31,823 to the NRI. The deduction was made under Section 195 of the Income Tax Act, applicable to payments made to non-residents.
- October 27, 2015: The NRI voluntarily deposited ₹1,91,780 as advance tax after computing his tax liability from the transaction. Subsequently, he repatriated the sale proceeds to the USA. However, he did not file an Income Tax Return (ITR) for that year.
- March 4, 2023: The Income Tax Officer issued a notice under Section 148(b) on the grounds that income had escaped assessment. The notice was triggered by data suggesting the sale of immovable property.
- April 15, 2023: In response, the NRI furnished all required details, including the advance tax challan. However, the officer proceeded to pass an order under Section 148A(d), justifying the reopening of assessment under Section 148.
- October 30, 2024: A fresh notice under Section 142(1) was served, seeking additional documents and clarifications, to which the NRI responded appropriately.
- March 4, 2025: A draft assessment order was passed under Section 147, and a tax demand of ₹46,81,013 was raised. Simultaneously, penalty proceedings under Section 270A were initiated on the grounds of underreporting of income.
- March 2025: The NRI filed a detailed reply pointing out that the TDS of ₹18.68 lakh was already deducted and deposited by the buyer, but the amount was not reflecting in the AIS or Form 26AS due to the buyer erroneously using Form 26QB (meant for resident sellers) instead of Form 27Q (mandated for non-resident sellers).
⚖️ Legal Issue: Wrong TDS Form Triggered AIS Mismatch and Tax Demand
The core issue was that the property buyer deposited the 20% TDS using Form 26QB, which applies to transactions involving resident sellers. In the case of an NRI seller, the correct procedure requires the use of Form 27Q. Due to this clerical error:
- The TDS amount did not reflect in the NRI’s AIS or 26AS.
- The NRI could not claim TDS credit while computing his tax liability.
- This led to the entire 20% deduction (₹18.68 lakh) being ignored by the income tax system.
- The I-T Department proceeded to raise a demand of ₹46.81 lakh, including interest and penalty.
Though the buyer had documentary proof of depositing the TDS and even produced the bank challan, the systemic mismatch created an unjust liability for the NRI.
🧾 Income Tax Department’s Stand Before Delhi High Court
During the hearing, the Revenue Department’s counsel admitted that the TDS had indeed been deposited. However, they stated that as per their Standard Operating Procedure (SOP), correction of TDS form details requires:
- Consent of the buyer
- Submission of an indemnity bond
- Other supporting documentation from the deductor
When questioned by the Court about why the buyer’s consent was necessary despite no dispute regarding the TDS deposit, the Department replied:
“Although there is no dispute on the TDS deposit, the buyer’s consent is needed to prevent any future recovery attempt from the buyer and to regularize the error formally under existing procedures.”
🏛️ Delhi High Court’s Final Verdict: Relief Granted to NRI
After considering all submissions and documents, the Delhi High Court passed a favorable order for the petitioner NRI. The judgment stated:
“In the peculiar facts of this case, we consider it appropriate to direct the Revenue to correct the record and reflect the TDS deposited by the buyers to the petitioner’s credit under the return filed in Form 26QB with effect from the date of deposit. The Revenue shall further compute the amount of refund, if any, that may be due to the petitioner in accordance with law.”
The Court further clarified:
- All previous orders and communications contrary to this directive shall be treated as set aside.
- The Income Tax Department is now obligated to correct its internal systems to credit the TDS to the correct PAN.
- The Department must also process any eligible refund due to the NRI under law.
📌 Important Takeaways for NRIs and Property Buyers
- Correct TDS Form is Critical:
When buying property from an NRI, always deposit TDS using Form 27Q. Form 26QB is not applicable for non-resident sellers. - Check AIS and Form 26AS After TDS Deposit:
Sellers should ensure that TDS deducted is correctly reflected under their PAN before filing the ITR. - Advance Tax and Documentation Help in Litigation:
The NRI’s prompt advance tax deposit and clean documentation helped establish his intent and compliance. - Judicial Remedy is Available in Procedural Hardship Cases:
The case confirms that Indian courts can intervene and correct unjust tax demands caused by third-party procedural errors.
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At caalokkumar.com, we specialize in providing tailored solutions to NRIs for:
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