Tax Deducted is Income Received

Section 396 — - TAX DEDUCTED IS INCOME RECEIVED

Section 396 of the Income-tax Act, 2025 is the substantive equivalent of section 198 of the Income-tax Act, 1961. It establishes the foundational principle that for purposes of computing the income of the assessee, tax deducted at source shall be deemed to be income received. The grossing-up rule has been the bedrock of TDS jurisprudence since 1961.

STATUTORY ARCHITECTURE & RATIONALE

Section 396 ensures that the gross income (before TDS) is included in the recipient's total income for the purposes of computation. The recipient gets credit for the TDS as tax paid. This achieves the policy objective of treating the TDS portion as part of taxable income (without which the recipient would be taxed on net only and credit would be denied).

INTERPLAY WITH s. 11(3) OF 2025 (1961 s. 199)

The companion provision is s. 11(3) of the 2025 Act (s. 199 of 1961) which gives the recipient credit for TDS. Together, ss. 396 + 11(3) implement the grossing-up: gross amount goes into total income; TDS goes into tax-paid credit.

CARVE-OUT FOR EMPLOYER's TAX-ON-TAX

Tax paid by employer under s. 392(7) (1961 ss. 192(1A)/(1B)) on non-monetary perquisites is excluded from grossing-up because that tax does not reduce employee's wallet. Sub-section (2) (where present) carves out this scenario to prevent tax-on-tax loop.

PRACTITIONER PLANNING NOTES

• Recipient's books should always show GROSS receipt (TDS amount + net received) on income side; TDS shown as advance tax / pre-paid tax in the asset side.
• Form 26AS reconciliation: gross figure on which TDS was deducted = income credited to P&L; mismatch is a common audit trigger.
• Net-of-tax contracts (foreign remittances): where the contract requires the payer to bear TDS ("net-of-tax"), the gross-up is on the bearer; CIT v. Bosch Ltd. (2015) 380 ITR 359 (SC) and Transmission Corporation of A.P. line.

CASE-LAW

• Transmission Corporation of A.P. v. CIT (1999) 239 ITR 587 (SC) -- gross-up principle for foreign remittances.
• CIT v. Bosch Ltd. (2015) 380 ITR 359 (SC) -- s. 195A grossing-up of net-of-tax payments.

CROSS-REFERENCES

• s. 11 (2025) / s. 199 (1961) -- credit for TDS.
• s. 393 -- TDS framework.
• s. 392(7) -- employer's tax on perquisite carve-out.